The Reserve Bank of India’s decision today to cut the repo rate – the rate at which it lends to banks – by 25 basis points, or 0.25 percent, “is a surprise” as the market was anticipating monetary policy action after the Budget, Nomura India MD – Fixed Income Neeraj Gambhir told CNBC-TV18.
The central bank cut interest rates today, about 20 days before it meets for its bi-monthly policy review, and said that it expects inflation to be lower than the 6 percent it is targeting for January next year, judging from its steep fall recently.
Inflation, as measured by the consumer price index basket, has fallen from a peak of 11.16 percent in November 2013 to 5 percent in December 2014, thanks to the recent fall in international crude prices and economic activity slowed during the recent downturn.
“Inflation is clearly on a path lower than what the central bank had envisaged,” Gambhir said, adding that while he earlier expected it to slash rates by a total of 50 basis points (0.5 percent) this year, that thesis may now need to be revisited. “This is a switch in the regime. The RBI has now moved away from managing inflation to boosting growth.”
The Nomura MD’s statement comes from the fact that RBI governor Raghuram Rajan, who had earlier resisted calls to cut rates, has stressed upon the need for monetary policy cycle to remain stable rather than flip-flop and today’s rate cut may signal the start a consistent easing cycle.
Gambhir also said that he expected bond yields to move lower in reaction: the yield on the benchmark 10-year government bond, which closed at 7.77 percent yesterday, may move lower by 15-20 basis points, he said, while maintaining that even 7.50 percent on the bond may not be ruled out.
Yields and prices of bonds move in opposite direction and a cut in lending rates generally make older, higher-yielding bonds pricier.
On the monetary policy path ahead, Gambhir said much would depend on the fiscal deficit number – or the difference between the government’s annual revenues and expenses -- outlined by finance minister Arun Jaitley in the Budget next month.
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