The RBI's move to slash the key short term rates by 100 basis points is likely to provide a positive push to the volatile stock market, say analysts, cautioning that the impact of fresh monetary measures would be short lived as these are in line with expectations.
"The RBI's step of reducing both repo and reverse repo rates by 100 basis points is in line with the market expectations. It was expected consequent upon sharp reduction in inflation over the last few weeks and the desperate need for kick-starting the process of providing stimulus for growth," Reliance Money CEO Sudip Bandhyopadhyay said.
The short-term lending rate (repo) would fall to 6.5 per cent and borrowing (reverse repo) rate to 5 per cent with effect from December 8.
The primary liquidity made available to the system through these measures is worth over Rs 3,00,000 crore (Rs 3,000 billion).
"The steps may be positive for the market initially but the full impact may be ascertained towards the end of trading on Monday.
"However, recovery is only possible when investor confidence returns, even as the government is doing everything it can to revive the economy," Arun Kejriwal director Kejriwal Research and Investment Services said.
Announcing the fresh measures, RBI Governor D Subbarao said, "Taken together with earlier measures, these would step up demand and arrest the growth moderation."
He was also confident that the government's decision to lower petrol and diesel prices would further ease inflation.
Analysts believe the measures are forward-looking as they focus mainly on the middle class and lower middle class segments, with the central bank classifying home loans below Rs 20 lakhs (Rs 2 million) in the priority sector.
"The move may trigger some short-lived positive sentiments with interest rate sensitive sectors like realty and banking, gaining on liquidity infusion in the economy.
However, the initial positive bias would gradually make way for the cues from the global markets," Ashika Stock Brokers Research head Paras Bothra said. The BSE benchmark Sensex had closed down 265 points at 8,965 on Friday. Echoing sentiments that the domestic triggers would be transitory, SMC Global Vice-President Rajesh Jain believes their direction depends on global cues. "World markets have discounted all negative news, including the US falling into recession, high unemployment rate and if US benchmark index Dow closes above 9,000-mark it would signal a recovery which all world markets would follow," Jain added.
