Going into the first monetary policy review of financial year (FY) 2016-17, it was widely expected that the repo rate would be cut by at least 25 basis points (bps). One basis point is one-hundredth of a percentage point.
RBI also reduced the band between repo rate and reverse repo rate to 50 bps from 100 bps; reverse repo now stands at 6%. The policy not only addressed this but also other issues related to systemic liquidity deficit to ensure that the transmission of the current and previous rate cuts takes place. While this is good news for those who are looking for new loans, the reaction of both equity and debt markets was of disappointment.
Two things are clear. First, it’s likely that there were indeed higher expectations from the policy and second, the markets are driven by more than just one factor. But what impact will the 25-bps cut have on your equity, bonds, deposits and loans?
Capital markets
While most economists and market analysts were talking about a 25-bps rate cut, some were expecting it to be of 50 bps.
It won’t be unfair to say that the equity market was pricing in some optimism in the post-Budget scenario. After the government announced its commitment to maintain fiscal deficit, the ball was surely in the Reserve Bank of India’s (RBI’s) court to loosen strings on the monetary policy front.
