In line with market expectations, the Reserve Bank of India slashed the repo rate by 25 basis points from 7.50% to 7.25% in its bi-monthly monetary policy review.
The RBI kept the cash reserve ratio (CRR) unchanged at 4%. It changed the reverse repo rate to 6.25%, and the marginal standing facility (MSF) rate and the bank rate to 8.25%.
Sharing the rationale behind the rate cut RBI said in a press release “Banks have started passing through some of the past rate cuts into their lending rates, headline inflation has evolved along the projected path, the impact of unseasonal rains has been moderate so far, administered price increases remain muted, and the timing of normalization of US monetary policy seems to have been pushed back. With low domestic capacity utilization, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today.”
The central banks expects inflation to come down due to base effect till August but to start rising thereafter to about 6% by January 2016.
Murthy Nagarajan, Head-Fixed Income ,Quantum AMC said that further movement in rates would be dependent on how the monsoon progresses in the coming months. “As expected, RBI cut the repo rate by 25 basis points. RBI has stated increased oil prices in global markets, uncertain in monsoon has tied the hands of RBI to cut rates in the near term. Markets are expected to be range bound with a slight selling bias as RBI has increased the inflation forecast to 6 % from 5.8 %.”
Bekxy Kuriakose,Head – Fixed Income, Principal Mutual Fund said that money market rates are expected to remain range bound going forward. “RBI continues to maintain a cautious tone on its stance going forward given the uncertainty on monsoon and future trajectory of food prices. RBI emphasized that the government needs to be proactive in controlling food inflation and supply side issues. In terms of growth projections, it’s interesting to see that RBI has focused on gross value added (GVA) at basic prices rather than real GDP at market prices probably because of distortion in the latter due to subsidies and indirect taxes. Gilt prices have fallen post policy probably due to heavy positions and traders’ view of no further rate cuts given RBI policy tone. We feel yields are attractive to stay invested and would recommend investors who are underinvested in duration to use this correction as an entry point. Money market rates are expected to remain range bound going forward and we expect banking system liquidity deficit to ease from May levels”.
Vidya Bala, Head of Mutual fund Research at FundsIndia.com says that there is an opportunity for investors in medium to long term debt funds. “For investors, this means that the opportunity in the yield curve is only consolidating and remains there. In other words, an opportunity for rally remains. However, this would require an easing of yields driven by macro numbers such as inflation and normal monsoon. Investors should continue to hold income accrual/dynamic bond funds but not expect any short-term returns from these funds for now. Short-term rates can be expected to continue to ease unless there is a liquidity issue or inflation firms up. To this extent, the opportunity in medium to long term debt funds remains better than short-term funds at present. Besides, the fact that deposit rates have eased and may further reduce also means that one has to scout for investment opportunities outside of bank deposits.”
Rahul Goswami, CIO - Fixed Income, ICICI Prudential AMC says that investors can invest in long term duration funds to cash in on the rate cut. “With repo rate of 7.25% and possibility of further rate cuts, the 10 year bond yields at 7.85% remains reasonably attractive. Long term duration funds seem better placed in a downward rate cycle. But for those looking to diversify, a debt portfolio with short- and medium-term bond funds can be a good combination as well. This is a suitable time to invest into such products with an aim to benefit from the falling interest rates and also limit the re-investment risk.”
“Existing investors should remain invested into longer term funds if they can stay for another 12 months as currently long term yields are trading at an attractive level over the repo rate. New investors with an investment horizon of 12-18 months can also start adding duration to their portfolio by investing into long term income and gilt funds. For a risk averse investor with an investment horizon up to six months, short term income funds offers good opportunity as liquidity is expected to ease going forward which will be reflected in short term rates going down” says Vikaas Sachdeva, CEO, Edelweiss Mutual Fund.
The third bi-monthly monetary policy statement will be announced on August 4, 2015.
