RBI begins its easing cycle

Posted On Monday, Jan 19, 2015


On the morning of 15th January, 2015, the RBI Governor chose to surprise the market by announcing a cut in interest rates by 0.25%. This pre-emptive announcement was a fortnight ahead of the scheduled policy review meeting, to be held on 3rd February.

In a move which was against our expectations the RBI reduced the Repo rate by 25 bps to 7.75%, reacting to the lower than expected December inflation numbers, the government’s commitment on this year’s fiscal targets, and the continuing fall in global commodity prices – particularly crude.

We had expected a 50 bps cut immediately post the Budget but the RBI had committed to initiate the process of monetary easing as soon as data indicated that medium term inflationary targets would be met. And thus they have met the commitment with an inter-meeting cut. We now expect a further 25 bps cut in the April policy post a budget outcome.

Inflation projections have fallen significantly below the 8% targeted by January 2015. This is significant, as for the first time RBIs has shown its comfort that it now expects CPI inflation to be below its January 2016 target of 6%.

The RBI Governor Raghuram Rajan re-iterated that “once the monetary policy stance shifts, subsequent policy actions will be consistent with this stance. Key to further easing are data that confirm continuing disinflationary pressures”

This means further rate cuts could be due later in the year and will depend on monsoons and high quality fiscal consolidation as well as steps to overcome supply constraints.

Bond yields had already priced in this 25 bps cut post the soft inflation data. The rate cut on an auspicious day should make the finance ministry very happy and also possibly indicates that the Governor has got comfort from the ministry on fiscal trajectory and on the signing in on the inflation mandate. Also, for a while, it will put to rest the press reports on RBI and ministry not being on the same page.

Given that this is a start of a possibly 12-18 months easing cycle, we should expect banks to start cutting lending rates very soon and support the RBI in monetary transmission.

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The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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