Reserve Bank of India slashed the cash reserve ratio (CRR) by 25 bps while keeping the repo and reverse repo rates unchanged. Rahul Goswami, CIO, Fixed Income, ICICI Prudential AMC tells Jinsy Mathew how this move would impact the bond markets. Edited excerpts:
Your reaction to the RBI announcement?
The immediate priority for the RBI is to contain inflation and inflationary expectations. That was very visible in today’s announcement. Also, the RBI has revised the GDP target downwards and the inflation numbers upwards. Inflation continues to remain a huge concern at this point in time. With the Government announcing slew of reforms in the past six to eight weeks, RBI will surely be waiting for the result of those announcements to take shape before going ahead with a rate cut.
So, when do you see a rate cut coming in January or March?
I would say if the fiscal deficit comes down to 5.3% levels and if inflation moderates in the mean time, the RBI will have reasonable space to go ahead with a rate cut. So, unless inflation reaches a manageable level, we don’t see a rate cut happening.
How do you see the bond markets reacting to the announcement?
It is evident that markets were not pricing in a rate cut. Though the current stance may pose short term challenges for the bond market, we are confident that the trajectory of long term yields remains southwards. This brings forward an even bigger opportunity for investors who have missed out earlier to enter the fixed income duration segment.
We had a total of 175 bps CRR cuts till now. How do you read these cuts without lowering key policy rates?
The CRR cuts are a calibrated move by the RBI which is indicative of the fact that they would like to support growth without stoking inflation. In short, RBI is walking a tightrope of managing inflation and growth.
