“As was widely expected by market participants, RBI cut key rates (repo and reverse repo) by 25 bps each while maintaining neutral stance. The MPC voted 4-2 in favor of this outcome. While they have acknowledged that some of the upside risks to CPI inflations have not materialized, they continue to remain cautious with eye still on the medium term target of 4% for CPI inflation. Apart from softness in food and fuel prices, RBI also noted interestingly that the Inflation in transport and communication services was depressed by the pricing war in the telecommunication space. Pricing power for industry also remains subdued as per RBI survey.

 Among the market development initiatives announced by RBI, it is noteworthy to mention the separate limit in IRFs (Interest Rate Futures) to the extent of Rs. 5000 cr for FPIs. Also RBI plans to review the MCLR and Base Rate mechanism to address the issue of inadequate monetary transmission. Steps are being taken to close out the gap of information asymmetry between borrowers and lenders by having a comprehensive PCR (Public Credit Registry) for which RBI plans to set up a task force.

 Outlook: To some extent the rate cut was factored in money market, bond and gilt yields. We expect prices to be supported in the backdrop of ample banking system liquidity and overall benign macro environment. In the near term the ten year benchmark may trade in a range of 6.30 – 6.50%”