Sensex Choppy as RBI Holds Repo Rate; SLR Cut Boosts Banks

The BSE Sensex jumped nearly 100 points on Tuesday after the Reserve Bank of India cut the statutory liquidity ratio or SLR by 50 basis points to 22.5 per cent of deposits, starting in mid-June. SLR is the mandatory amount of bonds lenders must park with the RBI.

A reduction in SLR will increase the availability of credit. It will also force the government to borrow at market rates and lead to fiscal consolidation, analysts said.

Dr. Soumya Kanti Ghosh, economist with SBI said the reduction in SLR is a smart move by the RBI.

"The government is the largest borrower and it is currently borrowing at negative interest rate. The cut in SLR will force the government to borrow at market determined rate. This will lead to fiscal consolidation," he added.

The government is likely to restrict its borrowing at below Rs 6 lakh crore in 2015-16 with a fiscal deficit target of 4.3 per cent of GDP, Dr Ghosh added.

Banking stocks jumped on RBI's SLR cut, but soon succumbed to profit taking.

Meanwhile, the RBI kept the repo rate unchanged at 8 per cent, as expected. A Reuters poll had overwhelmingly expected the RBI would keep repo rate on hold after last tightening by a quarter percentage point in January.

The RBI has raised the repo rate by 75 basis points in a bid to tame high consumer inflation since governor Raghuram Rajan has taken over the central bank in September 2013.