personal finance

Expect 25 bps rate cut with a dovish commentary, says Arvind Chari, Quantum Advisors


By Arvind Chari

Our base case expectation is of a 25 bps Repo Rate cut along with a ‘Dovish’ commentary to suggest more room to cut in the coming months . But we won’t be surprised to see a 50 bps cut on Thursday itself. There is scope to cut by 50 bps given the current inflationary trajectory and on the continued slide in GDP growth and economic activity.

The RBI sounded growth focused in the February policy and intermittent data points received since then have pointed to lower growth and softer inflation. Barring oil prices, which have risen on OPEC production cuts, there are growing signs of slower global growth resulting in lower global bond yields. Indian bond yields and lending rates remain higher than required for the current state of the economy.

The time seems right for a 50 bps reduction which may also lead to a fall in bond yields and lending rates.

Bond markets are not priced for a 50 bps cut. The extent of fall in yields will though depend on the action and the market reading of RBIs commentary on further actions.

Irrespective of whether they cut rates by 25 or 50 bps, we expect RBI to continue to focus on infusing liquidity in the system. We are of the belief that the economic slowdown and the lower inflation could be due to the fact that post demonetization, the Indian economy has operated at lesser rate of currency circulation than what is required. The RBI thus, although belatedly, has decided to boost cash in the economy to revive credit and growth.

(The author is the Head –Fixed Income & Alternatives , Quantum Advisors.)





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