RBI keeps repo rate unchanged at 4%, scope for a rate cut later

RBI keeps repo rate unchanged at 4%, scope for a rate cut later

The Monetary Policy Committee (MPC) on Thursday left the key repo rate unchanged at 4% while retaining its accommodative stance. Reserve Bank of India governor Shaktikanta Das said while inflation had been elevated in recent months, there would be scope for a rate cut once there is a durable reduction in inflation.

Most economists believe, the rise in prices will taper off in the second half of the year and consequently there would be room for another 40-50 basis points cut in the current cycle with at least 25 bps possible in 2020. Pranjul Bhandari, chief economist at HSBC India, said what may have tilted the MPC’s decision towards a pause is the 250 bps repo rate cut since early-2019, which is still working its way through the system and the fact that financial conditions have eased considerably across the money, corporate bond and g-sec markets. “Some rate cuts should be preserved for when they will have the maximum impact within the financial system,” Bhandari said.

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Governor Das said the cumulative 250 bps cut in the policy rate since 2019had seen loan rates trending down, particularly since the pandemic. The spreads on AAA corporate bonds, Das pointed out, has contracted by about 225 bps between March 26 and July 31.

Bonds sold off on Thursday with the benchmark yield closing 4 basis points higher at 5.81%, with the markets slightly disappointed no fresh liquidity measures, to absorb forthcoming supply of bonds, were announced.

However, treasurers are confident the central bank will conduct open market operations to ensure liquidity is abundant. “If the benchmark yield moves to levels of 6%, we expect RBI to step in,” dealers said. While the fiscal deficit may widen well beyond 6.5% and the government may tap the bond markets for more borrowings, the strong dollar surpluses, when mopped up by the RBI, would add to rupee liquidity, dealers pointed out.

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