Rajan gives markets a pleasant surprise
Dec 18 2013 , Mumbai
Holds policy rate on hazy inflation outlook
It kept the rate at which it lends money to banks (or the repo rate) unchanged at 7.75 per cent and the cash reserve ratio (CRR) at 4 per cent. CRR is the portion of deposits that banks must keep with RBI as a reserve requirement.
Banks are expected to hold their interest rates until RBI starts softening policy rates. The gap between core inflation and headline inflation is widening.
Raghuram Rajan, RBI governor, said in a press conference, “In the past when RBI cut rates, the cuts were not transmitted. There seems be a certain amount of lag in the system or a lack of response. But going forward, we will have to calibrate policy to the circumstances. We will not react to every spike in vegetable prices. Monetary policy transmission happens with a lag. That vegetable price inflation is coming down sharply comes out in a sample survey that RBI did in the metros. We are looking through spikes and seeing the longer- term momentum.”
Shailendra Bhandari, MD and CEO of ING Vysya Bank, welcomed the “pragmatic approach that brings us closer to the peak of the current interest rate cycle.”
RBI’s decision to hold interest rates also buoyed rate sensitive stocks. Sensex and Nifty gained over 1.20 per cent. Minutes after the RBI announcement Sensex rose by 305.43 points to 20,917.57.
It later lost some of the gain and closed 247 points up at 20,859.86. Nifty closed 78.10 points up at 6,217.15. Bank, realty, auto and capital goods stocks rallied. The S&P BSE bankex index gained 1.40 per cent, auto 1.73 per cent, capital goods 2.61 per cent and realty 3.51 per cent.
Foreign institutional investors (FIIs) were net buyers of equities worth Rs 1,198.60 crore, while domestic institutions were net sellers of equities worth Rs 413.01 crore on Wednesday.
Gaurang Shah, assistant vice-president of Geojit BNP Paribas Financial Services, said the RBI policy came as a surprise to a large section of the market. “The market responded with an immediate rally that was spearheaded by banking, capital goods and auto sector stocks. What was more surprising about this decision was that it came just before the US Fed quantitative easing.”
The G-sec yield softened. The new benchmark 10-year security closed at Rs 100.28, implying an yield of 8.78 per cent. The rupee, however, depreciated to Rs 62.09 in apprehension of what the Fed might do.
“If the expected softening of food price inflation does not materialise and translate into a significant reduction in headline inflation in the next round of data releases, or if inflation, excluding food and fuel, does not fall, RBI will act, including on off-policy dates if warranted, so that inflation expectations stabilise and an environment conducive to sustainable growth takes hold,” Rajan added.
Chanda Kochhar, MD and CEO of ICICI Bank, said in a release, “The policy recognises the improvement in India’s external balances, while acknowledging the risks of tapering by the US Fed. In view of the current macro situation, RBI’s commitment to managing adequate systemic liquidity and its balanced approach to growth and inflation should be seen as positives for economic recovery and stability.”