RBI has cut repo rate by 25 basis points to 7.75%.
In an unexpected move, RBI has cut the key repo rate by 25 basis points to 7.75% ahead of its scheduled policy review on February 03. The announcement came after both consumer price index (CPI) and wholesale price index (WPI) fell due to a decline in commodity prices, especially crude oil. As a result, the reverse repo rate has been cut to 6.75% and the marginal standing facility (MSF) rate and the Bank Rate at 8.75%.
Also, RBI will continue to provide liquidity under 7-day and 14-day term repos up to 0.75 per cent. However, the central bank has kept cash reserve ratio (CRR) unchanged at 4%.
RBI had last cut its policy rate in May 2013.
The stock markets reacted positively to the news with both the S&P BSE Sensex and CNX Nifty posting gains. Also, till the time of writing, the rupee was up at Rs 61.75 against the dollar.
RBI Governor Raghuram Rajan in a press statement said, “The developments have provided headroom for a shift in the monetary policy stance. It may be recalled that the fifth bi-monthly monetary policy statement of December had stated that “if the current inflation momentum and changes in inflation expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle”. In its public interactions, the RBI had committed to initiate the process of monetary easing as soon as data indicated that medium term inflationary targets would be met.”
Vidya Bala, Head Mutual Funds Research at FundsIndia.com said, “For the debt market, the December 2014 policy meet provided enough cues for an impending rally. Our view on the debt market remains the same – we are probably now in the middle cycle of a debt rally. Longer duration bonds will continue to gain from this rally. We think the current rate cut is a more significant one for the equity market. The thumbs-up given by the stock market today is evidence to this. With deposit rates already being cut and more to come, it is a matter of time before borrowing rates too, are cut. This could, with some lag, aid credit growth and help companies plan their investment/capex activities. A pick up in corporate earnings growth, in a few quarters from now, appears likely – backed by reforms, a congenial climate for investment and an improved demand scenario. This could trigger another leg of re-rating for companies in sectors that benefit both from lower interest cost and lower input costs (coming from lower commodity prices).”
Rahul Goswami, Chief Investment Officer– Fixed Income, ICICI Prudential AMC said “We expect CPI inflation to be close to 6% in FY2015, and 5.5% in FY2016 with downward bias, aided by the decline in fuel and commodity prices. In 2012-13, Current Account Deficit (CAD) was 4.8% of the GDP, which was contained at 2% of GDP in the last year. For the entire FY2015, we expect a CAD of around 1.2-3% of the GDP. In fact, for the January-March 2015 quarter, we expect a surplus of $ 8 billion in India’s Current Account Balance; this could be the first time after 2003-04, when India is likely to have Current Account Surplus. Further, government has reiterated its commitment to adhering to its fiscal deficit target. In light of these improving macro-fundamentals like improving Current Account, moderating CPI inflation and low credit growth, we believe there is significant potential for interest rates to trend further downwards, and therefore, we recommend investors to invest in duration-bond funds now."