In the second bi-monthly monetary policy review, RBI Governor RaghuRam Rajan has taken the highly anticipated move of cutting the repo rate (short term lending rate) by 25 basis points i.e. .25% to 7.25 per cent. This is the 3rd time that RBI has cut the repo rate.
One basis point = One-Hundredth of a Percentage Point
However, keeping in line with the expectation did not bring cheer to the equity market and investors. BSE Sensex tanked by 661 points with banks sectors being the biggest losers.
Further, Dismissing the IBA’s demand of cutting CRR rate, Rajan kept the Cash Reserve Ration (CRR) unchanged at 4% and Statutory Liquidity Ratio (SLR) steady 21.5%.
Highlights of RBI Repo Rate Cut June, 2015
1. RBI Repo Rate has been reduced by .25% i.e. from 7.50% to 7.25%. RBI Governor asked banks to pass on the benefit of rate cut to the customers. The total rate cut since January this year stands at 75 basis points.
2. Indian Banks Association (IBA) was demanding to bring down the CRR but Rajan termed CRR cut as Irrelevant and kept it unchanged at 4%.
3. Statutory Liquidity Ratio (SLR) or the proportion of government bonds that banks need to hold remains steady 21.5%.
4. Rajan also hints that there may not be any room for further repo rate cuts in the near future because of upside risks to inflation.
5. Rajan cited that the falling inflation rate which is expected to move downwards till August will bounce back to 6% by January 2016.
6. Growth projection is reduced by .20 percent from 7.8% to 7.6% for the year 2015-16.
7. Below normal monsoon which is forecasted by IMD will also be a reason of concern in the days ahead.
8. Increasing Crude Oil Prices and volatile external environment being other risks to inflation in the coming days.
9. Third bi-monthly monetary policy review is due on 4th August.
Beneficiaries of Repo Rate Cut
Loan Borrowers of Banks being Individuals Borrowers and Corporate Borrowers would be the sole beneficiaries of the repo rate cut as this would result into reduced base rate which means loans at lesser interest rates.
State Bank of India has announced a reduction in its base rate by 15 basis points to 9.70% from 9.85% effective from 8th June. This is the second base rate cut by SBI. The first rate cut of 15 basis points was done in April.
Source: Economic Times
Reasons to Worry for Foreign Investors (FII)
Having been reduced the figures of projected GDP by .20% and increased the projected inflation by .20%, RBI monetary policy has given a reason to worry for Foreign Investors.
FIIs have been bullish on Indian markets and are expecting repo rate cut of 50 basis points. The rate cut of 25 bps may have disappointed them and limited scope of further rate cuts in foreseeable future may give reason to investors to put investment decision on hold.
May month has already seen the biggest outflow of foreign investment of Rs.14,000 crore from Indian Stock Market in the last 2 years. Any further cash outflow may results in material tumble in the stock market.