Our view on the RBI policy
KEY HIGHLIGHTS OF THE MONETARY POLICY
- Repo rate cut by 35 bps to 5.40%. Stance remains “accommodative”
- Consequently, reverse repo rate at 5.15% and marginal standing facility (MSF) at 5.65%
- Four members voted for a 35 bps cut in repo rate and two members (Dr. Dua and Dr. Ghate) voted for 25 bps cut
- All six members voted for retaining stance at “accommodative”
RBI delivered higher than expected rate cut of 35 bps while most market participants were expecting a 25 bps cut. The MPC focused on the transmission of rate cuts which is evident by some relaxation in the risk weights and a raise in the bank’s exposure limit to a single NBFC to 20% of the Tier–I capital.
The MPC remained committed to providing banking system liquidity and were open to using all tools to monitor the same. However the market would have liked an outline on the liquidity management framework.
On rates, given the downside risks to growth and inflation remaining low, we see room for further rate cuts. With inflation expected to be around 3.50 - 3.70 for most part of the coming year we expect a terminal rate around 5.0% (a real rate of 135-150 bps).
Going forward, we believe the market will take further cues from the RBI Liquidity management framework and the clarity on sovereign bond issuance. We expect the yield curve to steepen. The 10 year G-Sec is expected to trade in the range of 6.20-6.40 for most part of this quarter.
Data Source: RBI
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