The Indian rupee and bond prices fell after the monetary policy committee of the Reserve Bank of India cut repo rates by 25 basis points to 5.15 percent on October 4.
Around 1340 hours, the rupee was trading 8 paise lower at 70.98 per dollar, while 10-year government bond yield was at 6.64 percent, up 53 basis points. Bond yields and prices move in opposite directions.
A rate cut of 25 basis points was expected and the market had already factored it in, experts said.
"A 25 bps rate cut was largely factored in. A cut of more than 25 bps would have been positive for the bond market. Bond prices would go up and rupee will depreciate as a rate cut is not seen positive for the currency," said Sujan Hajra, Chief Economist at Anand Rathi Securities.
“Both, bond and equity markets may be slightly disappointed with the slightly lower than expected rate cut of 0.25 percent. However, the dovish statement keeps the door open for future rate reductions which should act as some sort of solace. Also, RBI placing importance on quick monetary policy transmission is also an important indication of the possible measures that the central bank may take in the near future,” said Dheeraj Singh, Head of Investments and Fund Manager – Fixed Income, Taurus Asset Management.
Reducing the rates for the fifth consecutive time, the RBI said there was space to cut repo rates further.
The central bank said various high-frequency indicators suggested that domestic demand conditions had remained weak.
The reverse repo rate has been reduced to 4.9 percent, and the bank rate stands at 5.40 percent.
Following the announcement, the Indian equity market also declined, as concerns over economic growth remain.
The RBI revised real GDP growth for 2019-20 downwards from 6.9 percent in the August policy to 6.1 percent. The CPI inflation projection was revised slightly upwards to 3.4 percent for Q2 from 3.1 percent projection earlier.
The macroeconomic performance of major emerging market economies was weighed down by a deteriorating global environment in Q3, RBI governor Shaktikanta Das said.
“The Reserve Bank of India’s decision to reduce repo rate is a step in the right direction. This accommodative stance will help in stirring demand among homebuyers. With festive season beginning, this decision has come at a right time," said Chintan Sheth, Director, Ashwin Sheth Group.
"Today’s announcement will help in boosting consumption, in the existing scenario when there’s an economic slowdown. Secondly, RBI’s recent mandate on directly linking repo rate with fresh home loan rate was much needed to ensure immediate transmission of rate cut. After RBI’s decision, we request the government to take necessary steps to create housing demand across segments in this slowed economy,” he said.
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