InvestorQ : What can we expect from the RBI monetary policy on August 07 and how are markets likely to react to it?
Mary Joseph made post

What can we expect from the RBI monetary policy on August 07 and how are markets likely to react to it?

Answer
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sara Kunju answered.
1 year ago


The RBI monetary policy will be announced around 11.45 on Wednesday and the 25 bps rate cut is what most of the market analysts and traders are expecting. Some time back there was a debate over whether the RBI would cut rates by 25 bps or by 50 bps but now a 25 bps rate cut more likely. Here is why.

· The US Fed has cut the rates by 25 bps and the RBI may also want to ensure that it does not cut too much more than the US. India gets a lot of debt fund flows from FPIs due to the attractive rate differential.

· While inflation has remained below the 4% mark, which is what the RBI wants, the inflation has shown tendency to go above 3.1% in the last few months. The RBI may not want a situation where the rate cut leads to inflation going above 4%.

· The RBI may also be cautious about the weakening of the rupee in response to the Yuan. A rate cut normally makes the rupee weaker and that could have larger repercussions. So the RBI it looks like may restrict to just 25 bps rate cut.

· In the last policy, the RBI had spoken at length about the need to give a push to growth. To that extent, the RBI may cut rates by 25 bps as a token to give a signal to the banks to reduce the cost of borrowing.

As of now, based on the data and news flows, a rate cut of 25 bps looks the most likely option.