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RBI cuts repo rate by 25 bps to 7.75% as inflation eases

Livemint:  January 15, 2015

Mumbai: The Reserve Bank of India (RBI) on Thursday pared its repurchase rate by 25 basis points to 7.75% from the current 8%, citing easing inflationary pressures. One basis point is one-hundredth of a percentage point.

In an announcement before the stock markets opened for trading, the central bank said inflationary pressures have been easing since July and the path of inflation has been below the expected trajectory.

Lower-than-expected inflation has been enabled by lower global crude oil prices, weaker demand conditions globally and locally, and the government’s commitment towards fiscal consolidation, RBI said.

“These developments have provided headroom for a shift in monetary policy stance,” the central bank said.

Consumer Price Index (CPI) data released on Monday showed retail inflation at 5%, while wholesale price index data released on Wednesday showed wholesale inflation inched up to 0.1%.

“This cut was in a way expected because the governor had explicitly said that rates will be cut outside the policy. Now the market will try to price in more cuts because I believe global growth is likely to undergo a slowdown and economic data will reflect that,” said Ashish Vaidya, executive director and head of trading, India, at DBS Bank Ltd. “I expect RBI to cut rates by another 75 bps which means that 10-year yield could come off to at least 7.55% in the next couple of weeks.”

On Thursday, 10-year bond yield was trading at at 7.67% compared with its Wednesday’s close of 7.77%. The rupee also strengthened past 62 per dollar and was trading at 61.79 per dollar, up 0.65% from its previous close of 62.19.

Many bankers are expecting the central bank to cut interest rates further in 2015.

“Since the RBI has now changed its policy stance, I think we should expect more rate cuts. I think another 75 bps of cuts may come which means that the 10-year yield will come off,” said Saugata Bhattacharya, chief economist, Axis Bank Ltd. “I expect the 10-year yield to come down may be below 7% by the end of calendar year 2015.”

The last time RBI had tweaked the policy rate was on 28 January 2014 when it increased the repo rate from 7.75% to 8%. The last rate cut was on 19 March 2013.

“With inflation coming down the way it has, the RBI governor had no choice but to cut rates. I think we should expect at least another 75 bps rate cuts,” said Brijesh Mehra, India chief executive at Royal Bank of Scotland Plc. “What that will mean is the rupee could strengthen on expectations of more investments. It may go above 61 per dollar in the short term. Ten-year yield may also drop by at least 50 bps.”

“The market was expecting a 50-75 bps rate cut, so there might be some mild disappointment. Though the direction that RBI has given is that of a reduction in interest rates going ahead. Banks have been bringing down their deposit rates in various maturities over the last three months, so we may see some reduction in lending rates going ahead,” said V.R. Iyer, chairperson and managing director, Bank of India. “However, since pressures due to high slippages exist, credit costs for banks have gone up and so they may not be able to pass on the entire repo rate reduction benefit to their borrowers. Base rates in some banks may come down by 5-10 bps over the next week or so.”

“Credit demand in the corporate loan segment continues to subdued,” Iyer said. “The government will have to make announcements regarding reforms in new infrastructure projects and bring in some changes in the status of stalled projects for some positive sentiments to emerge in the market.”

“This was on expected lines,” said M.S. Raghavan, chairman and managing director, IDBI Bank. “More than the quantum of the cut, what is important is that the interest rates are now on a downward trend, which gives confidence to the banks. If inflation does not throw any surprises then we can expect another 25 bps cut before the fiscal year ends.”

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.