“RBI in its monetary policy cut the repo and reverse repo rates by 25 basis points. The repo rates now stand at 6.25 % and reverse repo rates at 6 %. The reason for reducing the repo rates is due to CPI inflation being revised downwards by 60 basis points. Consumer Price inflation for the current quarter is expected to be 2.8 %, the first half of the next financial year is expected to be 3.2 -3.4 % and the third quarter of next financial year is expected to be 3.9 %. As per RBI, CPI inflation going forward is expected to be lower due to excess supply conditions prevailing for several food Items, lower crude prices, Lower electricity prices. RBI survey of household and producer inflation is reflecting significant moderation in inflation expectations. They also expect the inflation picks up, in health and education, to be a one-off phenomenon. The Monetary Policy Committee noted the output gap has opened up moderately as actual output has inched lower than potential. This necessitates the need to strengthen private investment activity and increase private consumption. The GDP growth for the next financial year is projected at 7.4 with risk evenly balanced.
The focus of the union budget is tilted towards consumption which increases the chance of CPI inflation to go up. Given that the combined borrowing of central, state and PSU is around 8 % of GDP, we don’t expect Repo rates cuts to be shallow. We expect one more rate cut in the April policy, as CPI inflation near term should be lower due to lower food and crude prices. This should bring the real rates which is the difference between RBI forecast of CPI inflation (3.9%) and repo rates( 6%) to around 200 basis points. Going forward, we expect the short and medium term rates to come down by 25 to 35 basis points and the long end rates to be range bound due to supply pressures. The next ten years is expected to be in the range of 7.20 – 7.50 % in the coming months. The corporate bonds spread is expected to widen due to risk aversion and continuous supply of papers”.
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