RBI has recently announced its Monetary Policy. Commenting about it, R.K.Gurumurthy, Head – Treasury, Lakshmi Vilas Bank, said “RBI cuts key Repo rate by 35 basis points, in line with expectations However, the quantum of cut i.e 35 basis points, is an unconventional first and could soon be the order. The global economic backdrop where rate cuts and a reversal to a QE regime seems the more preferred path, today’s rate decision seems most timely. Stance has been maintained as “accommodative” with liquidity expected to be in an enduring surplus mode, inflation expectations are benign and GDP Growth has been lowered by 10 basis.
The rate cut was supported by an overwhelming majority with 4 of the 6 members voting for a 35 basis cut with the two others, for a 25 basis cut. The key takeaway is that a 25 basis cut was considered as inadequate – which endorses the fact that growth concerns have moved to the forefront and trajectory of the rate curve in the coming quarters will dovetail economic data, especially on growth. Measures to improve credit flow to NBFCs, unsecured borrowers and Priority Sectors with lowering of risk weight will complement the overall stance of adequate liquidity and lower rates. Rate transmission is expected to improve significantly in the coming days. Deposit rates should continue to drift lower.
Bond markets had nearly priced-in the quarter-percentage rate cut. While profit taking may temper sharp fall in yields, the trend is towards lower yields. Market may also start debating if the next move will be a 15 or 40 basis cut as a weaker than expected Q1 GDP numbers and lower inflation readings for the next two months will re-ignite easing expectations.”