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RBI rate cut hopes rise as growth slows

Poor economic growth data released on Friday have revived hopes of an interest rate cut despite remarks by a senior Reserve Bank of India that appeared to rule out such a move in the near future, analysts and traders said.

Bond market sentiment was dampened in the morning after central bank deputy governor Y V Reddy said the US Fed's rate cut on Wednesday was only one factor taken into account by the RBI.

Speaking to Reuters during a visit to Colombo, Reddy said: "We have always indicated this would be one of the factors that would be closely monitored, but as in the past the actions of the central bank in India are not correlated to the actions of the US Fed.

Reddy said domestic factors such as gross domestic product growth and government borrowing would weigh heavily in deciding whether to make any rate cut, and added they were all basically on track.

Bond prices eased from early highs after his comments.

But poor economic growth data released in the afternoon revived the rate cut hopes.

The government reported gross domestic product expanded by just 5.2 per cent in 2000-1, sharply down from an earlier estimate of 6.0 per cent, leading some economists to say they would pare growth forecasts for this year.

"The known response of central banks worldwide when growth falls short of target is to cut interest rates. We should also expect one soon," said Neeraj Gambhir, assistant general manager at financial services firm ICICI.

He said the RBI was likely to weigh some other factors like the government's profligate spending manners before effecting a bank rate cut from the current seven per cent.

Industry has been clamouring for lower rates, in line with trends overseas, to help reverse a slowdown.

Analysts say the central bank has enough leeway to reduce rates -- inflation is benign, the rupee is stable and lower rates overseas mean a domestic reduction is less likely to affect foreign capital inflows.

While the US Federal Reserve has lowered the bank rate by 275 basis points to 3.75 per cent since January, the RBI has lowered its bank rate by just 100 basis points.

A Reuters poll released on Thursday showed that 11 of 14 bankers, primary dealers and analysts expected the RBI to lower the bank rate by 50 basis points. The remaining three expected a cut of 50-100 basis points.

All the respondents said the RBI would reduce the bank rate before end of September.

BOND YIELDS AT RECORD LOWS

Indian markets have been speculating on an RBI rate cut since the Fed cut rates in May.

Bond yields, currently hovering around record lows, have already discounted a local 50 basis point cut, debt traders say.

The benchmark 10-year bond has fallen 82 basis points since April and traders say there is scope for more dips given comfortable liquidity conditions and poor demand for credit -- the result of the economic slowdown.

Inflows of Rs 130 billion are expected in July and August and are expected to help push bond prices further up.

"With credit not picking up, investments are the next best option," an analyst in a local brokerage house said.

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