The street is expecting the Reserve Bank of India (RBI) to cut rate by 25 basis points tomorrow. This will be first cut in prime lending rates in nine months. The central bank had last reduced policy rates by 50 bps in April 2012.
Vivek Rajpal of Nomura India told CNBC-TV18 that at current levels the bond market is already factoring in a 25 basis points rate cut and one should closely watch RBI’s stance and outlook for the future.
"25 bps of rate cut will not be an event as such for the market. If RBI states a cautious guidance and a neutral guidance, then I do not think there is much scope for bond yields to go lower in February," he elaborated.
Given the fact that inflation rates have been hovering above RBI’s comfort zone of 5 percent, the central bank maintained status quo on the rates front in the subsequent five policy reviews. Now since inflation has surprised on the downside, they may lower inflation forecast, he added.
Below is the edited transcript of Vivek Rajpal’s interview with CNBC-TV18
Q: What exactly is the tenure factoring in at 7.87%, do you think that it is possibly going to be 25 bps or maybe nothing?
A: Bond markets are already factoring in 25 bps of rate cut. So, 25 bps of rate cut will not be an event as such for the market. The key to watch is the guidance. If Reserve Bank of India (RBI) states a cautious guidance and a neutral guidance, I do not think there is much scope for bond yields to go lower especially in the month of February when there is a continuous supply. So, there will be a cap on the yields. But at the current levels, bond yields are factoring in 25 bps of rate cut.
Q: Anything else you will look out for in the credit policy, any revision in inflation forecast below 7.5 percent, any revision in gross domestic product (GDP) forecast, anything else you would look out from the policy?
A: RBI has been focused on inflation and has been commenting on inflation. The inflation has surprised on the downside. They will lower down the inflation forecast. RBI has been concerned about fiscal deficit. So, yes that has been handled well by the government. If we look at these two variables and expect the series of rate cut, it is more of a rear view kind of a driving.
One of the things that has surprised on the upside is current account deficit (CAD). The street was not expecting such a high CAD. It was expecting normalization of CAD going forward, but CAD is a new worry. I will be keenly watching how RBI takes CAD and that is a newer variable that will come into play and that will probably lead to a cautious guidance from RBI.