India’s Central Bank Keeps Key Interest Rates the Same

India’s key interest rate stays at 7.5%

India’s central bank came out with its first bi-monthly monetary policy review for 2015-2016 on Tuesday, April 7. According to the review, the bank chose to keep its key interest rate as well as the cash reserve ratio (or CRR) for commercial banks the same. The Reserve Bank of India (or RBI) uses tools such as the repo rate and the CRR to control the supply of money in the economy, thereby influencing credit and capital conditions.

The key interest rate, or the repo rate, which is the rate at which the central bank lends money to commercial banks in the event of any shortfall of funds, remained unchanged at 7.5%.

India’s Central Bank  Keeps Key Interest Rates the Same

India’s CRR stays put at 4%

The cash reserve ratio (or CRR), which is the amount of funds that the banks have to keep with the central bank, also remained unchanged at 4% of the net demand and time liabilities. Banks, including the State Bank of India, had been pressing for a rate cut from the central bank on the belief that it would reduce the cost of borrowing and in turn, spur lending growth in the economy.

Bank stocks such as HDFC Bank (HDB) and ICICI Bank (IBN) were down about 0.78% and 1.70%, respectively, while technology stock Infosys (INFY) gained 1.51% on the news. The central bank explained the move by saying that a 100-basis-point cut in the CRR would translate to a cut of a mere 7 to 8 points in the lending rates, even if the entire freed-up $12.83 billion is used for lending purposes by commercial banks.

India’s Central Bank  Keeps Key Interest Rates the Same

Future cuts will depend on the US Fed policy

India’s monetary policy moves are, to a great extent, guided by the direction of the US Federal Reserve Policy. “The timings of future cuts will depend on how much room we have, adequately buffered against US Fed Policy,” said the RBI Governor Raghuram Rajan.

India continues to be a favored destination for foreign funds on account of its expanding reserves and narrowing current account deficit. The fall in crude oil prices has also benefitted India, which is a net importer of oil. Funds such as the WisdomTree India Earnings ETF (EPI) and the iShares MSCI Emerging Markets (EEM) offer exposure to Indian equities. Investors are turning to these funds in order to provide a cushion against the expected rate hike in the US (SPY) (IVV).

For more information, read India’s monetary policy announcement impacts India ETFs.

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