RBI has preferred to follow a policy of tracking expected inflation when deciding on current action. This indicates that RBI expects inflation to come down in December.
RBI has spoken of the tapering programme and its impact on policy. The tapering programme could cause a movement of foreign funds away from our debt market. However, the final call taken will also take into account the developments on the balance of payments front. A strong current account coupled with healthy reserves may not prompt rate action even in case the tapering programme is invoked by the Fed. The implication is that we can expect policy changes even in between the policy dates if warranted.
The 10-years yield has moved downwards after the announcement and the 8.83% paper may be expected to range around 8.6-8.7% on account of the unchanged rate stance of the RBI.
As inflation pressures are likely to subside in the coming months on account decline in food prices in the coming months, CARE expects Repo rate to close at 7.5% by end of the current fiscal year assuming CPI inflation comes down towards 9% and WPI stable at 6-6.5%. A lot will depend on the rabi crop and its impact on prices. .
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