RBI Cuts Repo Rate by 25 bps

Posted On Wednesday, Aug 02, 2017


As was widely expected, the RBI cut the Repo rate by 25 bps to 6%. The 5-1 voting in favor of a rate cut also suggests that the decision was almost unanimous.

They have, wisely though, chosen to remain ‘Neutral’ on the future course of monetary policy stance.

This suggests to us that the bar for the next rate cut, if at all, is set higher.

We may have seen the last rate cut in this cycle and the RBI is likely to remain on hold at 6% for some months to come. The trend down in inflation in the last 4 months did indeed create some room and the RBI has seized that chance. That the fall in inflation was broad-based with prices of even services moderating allowed the RBI greater comfort to cut the Repo rate. But it was only a 25 bps cut. With the RBI itself now projecting the CPI to rise above the 4% (its target) mark in Q1 2018, it does not seem extremely confident of reducing rates further.

This should be disappointing to many who believed that based on the current inflation and growth trends, the RBI could have done more to support the growth revival. We believe that the current drop in inflation is to a large extent a result of the after-shocks of demonetization, which should reverse in the months to come.

Food prices fell post demonetization and are increasing only now as demand-supply balance is restored with improved market functioning. Similarly, a drop in demand due to the unavailability of cash seems to have also impacted prices of general goods and services.

The RBI has maintained its growth projections which suggests they expect demand to revive as the year progresses. They also indicated to the non-disruptive roll out of GST as a means of comfort to their GDP projection. The favorable monsoon and the good Kharif sowing of key crops does suggest that food production and resulting farm incomes should support the demand recovery. Food prices though need to rise from the current levels to help improve the incomes of the farmers and alleviate some farm stress. The recent rise in vegetable prices could be the first signs of it and needs to be watched closely.

The RBI also made a very strong reference to states a fiscal deficit and farm loan waivers which does indicate that they do not want to be complacent about oncoming risks to inflation and macro stability. The conditions appear balanced, but as we have noted in our earlier commentaries, it would be prudent for the RBI to remain cautious at this stage of the cycle.

We continue to maintain our view that the best of the bond market gains (in terms of capital gains) are behind us. Bond markets had completely priced in a 25 bps cut and hence we saw almost no change in the bond yields. Bond markets would remain range bound in the short term and await domestic and global trends to determine its future trajectory.

We expect deposit and lending rates to drop further in the coming months which will hurt the saver but benefit the borrower.

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The views expressed here in this article 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.

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Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

Above article is authored by Quantum.

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