The Reserve Bank of India (RBI) defied market expectations by keeping interest rates on hold today and instead announcing another increase in the cash reserve ratio, to 8.25% (with effect from 24th May). The choice of instrument is an attempt to reduce inflation but not growth by reducing the supply of money rather than directly increasing its price. The decision prompted a rally in both bond and equity markets, and led to a slight weakening of the rupee. Nevertheless, by reducing the funds that banks have available for lending, the hike in the reserve ratio is still likely to contribute to slower growth in India’s industrial sector.
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