Reserve Bank Governor Raghuram Rajan's second rate cut in less than two months sent Indian stock markets to record highs on Wednesday. The Sensex jumped over 400 points to edge above 30,000 for first time ever as the RBI lowered repo rate by 25 basis points to 7.5 per cent. But Sensex failed to sustain the gains and ended over 200 points lower at 29,380 on profit-taking.
This was the second rate cut this year that took place outside of the RBI's scheduled policy review meetings.
The repo rate cut came days after Finance Minister Arun Jaitley's Union Budget announcement on Saturday. In his Budget, Mr Jaitley had loosened the reins on public spending to drive growth, but promised lower-than-expected borrowing despite raising the fiscal deficit target.
"Exciting morning! It looks like the RBI feels reassured by the Budget proposals. The Budget is going in the right direction with greater spending on infrastructure, something that the RBI has sought," said Frederic Neumann of HSBC.
Mr Jaitley increased government spending on infrastructure by Rs 70,000 crore or 0.5 per cent of GDP, a move that is likely to provide stimulus to the economy at a time when India's private sector is struggling with falling profitability. On the other hand, the borrowing target proposed in the Budget was below expectations easing fears of higher inflation.
The finance minister's balancing act seems to have gone down well with Dr Rajan. In a statement, he said, "The fiscal consolidation programme, while delayed, may compensate in quality, especially if state governments are cooperative."
Minister of State for Finance minister Jayant Sinha said Wednesday's rate cut represents a vote of confidence in the government's fiscal consolidation efforts and will provide a near-term boost to the economy.
(Read | Rate Cut a Vote of Confidence in Budget: Jayant Sinha)
The repo rate cut has also raised the clamour for a reduction in interest rates on home and auto loans. Commercial banks have been cutting deposit rates over the last six months, but very few lenders have passed on the benefits of the previous rate cut, announced on January 15, to consumers. (Read)
MS Raghavan of IDBI Bank said, "It's a very simple arithmetic that the rate cycle has reversed. If not today, tomorrow (bank interest) rate has to come down."
Analysts attributed today's fall in Sensex to profit-taking. Sensex rose nearly 3 per cent in the previous four sessions on Budget announcements which were mostly viewed positively by market participants.
(With inputs from Reuters)
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