On Raghuram Rajan's Birthday, No Party as Rates Remain Unchanged

Raghuram Rajan kept repo rate unchanged at 7.75 per cent on Tuesday disappointing stock markets and home loan consumers on his 51st birthday. The BSE Sensex fell over 200 points below the key 29,000 amid a selloff in banking stocks.

Dr Rajan said the Reserve Bank wanted more comfort that inflation would continue to ease, while awaiting action from the government regarding the country's finances.

"Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank to await them and maintain the current interest stance," Dr Rajan. (Watch)

The RBI had cut repo rate by 25 basis points just three weeks ago in a surprise move. The Governor said he would like to see three data points - GDP print on February 9, inflation data in mid-February and Budget on February 28 - before deciding his next move.

Analysts expect the RBI to cut rates aggressively post the Budget as fiscal deficit is likely to be curtailed to 4.1 per cent of GDP as announced in last year's Budget; inflation is also expected to trend lower on continued softness in global crude prices and domestic fruits and vegetable prices.

"I expect front loading of rate cuts to continue with another 50 basis points of cuts to be delivered before June 2015. A cut after the Budget will be a boost to the overall sentiment if the budget announces some good investment plans," said Bank of Baroda's Rupa Rege Nitsure.

To spur banks into cutting lending rates, the RBI cut the statutory liquidity ratio (SLR) - or the amount of bonds that lenders must set aside - by 50 basis points to 21.5 per cent of deposits from February 7.

"Banks should use this headroom to increase their lending to productive sectors on competitive terms so as to support investment and growth," the RBI said in a statement.

However, analysts say the move may not lead to a reduction in lending rates. "The SLR cut is insignificant as most banks hold heavy quantity in SLR as there are no significant lending opportunities," said UR Bhat of Dalton Capital.

The central bank, however, increased the amount of US dollars Indians can spend from $125,000 to $250,000 per person per year.

The RBI also announced a slew of initiatives to develop markets, including allowing foreign institutional investors to re-invest government bond coupons even when their investment limits are exhausted.

(With inputs from Reuters)