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Markets like clarity and they are reading RBI's status quo on rate cut as a signal that barring any surprises, a Feb 2015 rate cut looks likely.
The Reserve Bank of India kept interest rates unchanged at 8.0 per cent on Tuesday as widely expected, staying focused on containing inflation while adopting a more dovish tone in response to the government's call for help to revive economic growth.
Commentary
A Prasanna, economist, ICIC Securities, primary dealership
This policy is as per expectation. The guidance is dovish which leads us to believe that there is a significant chance of policy easing by February subject to inflation and government's efforts to meet fiscal targets.
At this point we'll go with 25 basis points.
The bond market is running ahead, but there's more conviction about policy easing by February.
Kumar Rachapudi, senior rates strategist, ANZ, Singapore
The RBI assessing the risks to its January 2016 inflation forecast as 'balanced' - previously the risks were biased upside - is significant.
In fact, the RBI said if the current inflation momentum and changes in inflationary expectations continue, a change in the monetary policy stance is likely early next year.
Think this paves way for a rate cut in early 2015 unless global commodity prices aggressively reverse their fall. We like staying long Indian bonds here.
Sandeep Bagla, associate director, Trust Group
The change in stance by RBI is very heartening. The easing of commodity prices has meant that the central bank has room to cut rate by around 75 bps for the next full year.
Market has tried to price in this possibility by rallying strongly. There's a good chance that the 10-year yield will fall to 7.90-7.95 in the immediate term.
R Sivakumar, head of fixed income, Axis Asset Management, Mumbai
Clearly, a very dovish statement by the governor; they have acknowledged that inflation is treading expectations and that there is scope for monetary easing in early 2015.
Markets like clarity and they are reading this as a signal that barring any surprises, a Feb 2015 rate cut looks likely.
Background
- India's annual infrastructure output growth accelerated to 6.3 per cent in October, driven by pick up in coal and electricity generation, government data showed, indicating an improvement in economic activity.
- Gross domestic product expanded 5.3 per cent in the July-September quarter from a year earlier as a manufacturing slump took the bounce out of Asia's third-largest economy. Growth in the previous quarter was at a 2-1/2 year high of 5.7 per cent.
- India has scrapped a rule mandating traders to export 20 per cent of all gold imported into the country, a surprise move that could cut smuggling and raise legal shipments into the world's second-biggest consumer of the metal after China.
- The Indian government plans to raise about 891.2 billion rupees ($14.4 billion) by reducing its stakes in state-run banks to 52 per cent, the junior finance minister said.
- India could give banks more flexibility to restructure distressed loans in a bid to steer funding towards cash-strapped infrastructure projects, Reserve Bank of India (RBI) Governor Raghuram Rajan said.
- The wholesale price index rose an annual 1.77 per cent last month, its slowest since September 2009, compared with the 2.20 per cent forecast by economists in a Reuters poll.
- Retail inflation, which the RBI tracks in setting lending rates, slowed to 5.52 per cent in October from a multi-year low of 6.46 per cent a month earlier, helped by slower annual rises in food and fuel prices.
- India raised the minimum capital requirement for so-called shadow banks and tightened rules on deposits and bad loans to avoid any potential risk to the economy from these rapidly growing finance firms by regulating them like traditional banks.
