InvestorQ : Will the RBI cut the interest rates by 0.50% as markets are expecting? What is your view?
prachi Patwardhan made post

Will the RBI cut the interest rates by 0.50% as markets are expecting? What is your view?

Answer
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1 year ago


Of late there have been some reports that the RBI could consider cutting the rates by 50 bps instead of 25 bps as is being currently anticipated. This view is largely based on the sharp fall in the bond yields in the last few days. In fact, if you see since October 2018, the bond yields have fallen from 8.3% to 6.3%. Markets are expecting that this fall in yields is reflecting the likely rate cut of 50 bps. Also, the weak IIP data makes a case for the RBI to cut rates.

The actual decision may be based on some other important factors. Here are some of them.

· If the RBI cuts by 50 bps then the leeway left with them for future cuts becomes limited and that would limit options.

· The RBI decision would depend on the decision of the Fed on July 31st
. If the Fed cuts by 25 bps and gives an indication of further dovishness then RBI may try 50 bps this time.

· RBI will also be worried about debt market inflows as the yields have reduced the spread over US bonds to 4% from 5%. Anything lower than 4% will not keep Indian debt attractive for global investors.

· Finally, the RBI may also base its decision on whether the rate cut will actually translate into cheaper loans or not. That has not been the experience in the last few months.