What has the central bank done?
The Reserve Bank of India (RBI) surprised the market last Friday - the last day of the financial year - by announcing a series of monetary policy changes:
- The cash reserve rate (CRR) will increase to 6.5% from 6.0%, thus removing over R15,000 crore (approximately US$3.4 billion) from the system. The rate hike will occur in two 25 bps phases - 14 April and 28 April;
- The repo rate (the rate that the RBI lends short-term money to banks) was raised 25 bps to 7.75%;
The interest rate applicable on eligible CRR balances will be halved to 0.5% as of 14 April. The reverse repo rate will be left unchanged at 6.0%.
- The RBI has increased short-term rates (both reverse repo and repo) six times since January 2006 and has raised the CRR three times since December 2006 to control lending, which has grown by around 30% over the past three years.
What are the reasons behind this RBI move?
The RBI has made borrowing costlier as it wants to keep inflation in check (inflation is currently at 6.46% - above the RBI´s fiscal target of 5.0-5.5%).
Other reason also could be that the central bank potentially wants to stabilize the appreciating Rupee and control liquidity. Prior to the announcement of the monetary policy changes, the Rupee had ended at a seven-year high of 43.04/06.
How will this impact the share market?
Arun Mehra, Portfolio Manager of the Fidelity Funds - India Focus Fund, believes there is likely to be more volatility in the short-term, which in turn will present some good buying opportunities. Overall though, Arun thinks the market should remain range bound. Long term, he believes the measures should have no impact and from May, inflation is likely to ease which should benefit the overall economy.