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The RBI move perhaps has changed the financial landscape quite significantly. All markets will react on Monday, but there is considerable surprise at what the RBI has done, in changing the CRR and the repo rate.

It is very bad news for markets. It is almost certain that stock markets and bond markets will both sell off on Monday morning. Being led by the rate sensitive sectors, Markets are in for a blood bath on Monday morning because this has come as a surprise, particularly because the markets were expecting that rates might actually start cooling down in the end of April as inflation cools down but the RBI has not even waited for its monetary policy meeting.

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The RBI hiked Cash Reserve Ratio, the amount of depositors’ money that banks need to park with it, by half a per cent to tighten money supply as part of concerted efforts with the government to ease inflation. The CRR would be hiked by 0.25 per cent from April 26 (taking CRR to 8%) and by an identical percentage from May 10.

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Inflation numbers (at 7%) are still very much out of RBI’s comfort zone (of 5%) and show no signs of relenting. While the banking system is once again flooded with surplus cash flows, price levels too are rising to newer highs. CRR (Cash reserver ratio) hike seems to be next on the cards. This would help to reduce liquidity in the markets and hopefully in the process, lower inflation rates. Bad news for investors and retailers .. Stock markets may tumble further due to this news and the eventual liquidity crunch. Continue Reading»

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