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RBI cuts rates by 0.5%

RBI has cut interest rates by 0.5%. The repo rate is now 5% and reverse repo at 3.5%.

The 10 year bond yield had spiked back to 6.46% after a few days of continuous falling down to 6.3%. That was before this rate cut announcement though, and tomorrow – March 5 – is also when RBI buys back upto 9,000 cr. of bonds from the market.

Interestingly, on March 6, RBI will sell another 12,000 cr. worth of bonds.

I think the RBI shouldn’t announce market buying – just go ahead and buy, if you’re a market player. No point opening your hand.

Bond yields are likely to be very volatile over the next two days. Inflation data will be out tomorrow – and is likely to stay at the 3% level. If it falls lower, will RBI reduce rates more? I believe that at this point, RBI is driven by fire fighting rules – unless there is a fire, don’t fight it.

I have a gut-feeling that we’re going to have a fairly big fire soon. Some extremely big player – bank or real estate player or NBFC – is likely to announce serious distress, which brings the markets back down to it’s knees and creates some level of panic. This will be the trigger for future action. [And I’m happy for it – I just want all the bad news to come and go, staying hidden just delays recovery]

Meanwhile, the stock markets are bound to perk up, at least a little, given the 2% move in the US markets. For the short term, this is bound to give a little relief to the massively overused red pixels on traders’ monitors.

  • Anonymous says:

    >Amazed at how the yields are behaving after the rate cut. No change or very minimal reduction.

    Banks seems to have excess liquidity (look at the call rates, and money they park with RBI in reverse repo) They were happy taking the 0.5% differential between the savings rate and the the reverse repo. They are not drawing too much from RBI via repo either.

    Say things go south, and RBI cuts the repo rate one more to say by another 1.5%. Do you think it will increase the demand for credit ? I have reservations to believe this.

    What I don’t understand is why are banks still offering very high rates for FDs. Unless that goes down, the borrowers will still have to pay very high rates.

    Even if the borrowing rates come down a lot, I don’t know how far it will revive the demand. When people have fear of loosing the jobs or face salary cut. I am not sure if they will go and buy a big ticket items like house/cars…

    In addition to the lower rates, the prices have to drop (for houses, land by ~50%) and companies have to stop firing people before things will start improving. I strongly feel the real-estate companies should be let to fail, rather than save them with tax payer money. I want lower prices, not higher. I have not seen any tax benefit in the last two years as an individual. But see how much the big guys have got in the last six months.

    Another thing to watch is the USD-INR rates. If the rupee drops to say 60 or more / $, then I am not sure if RBI can keep cutting repo rates to zero. It will have to save the rupee, or else our import bill balloon.

  • Deepak Shenoy says:

    >Yields have been wild – they went to 6.3% in the morning, now back down to 6.42% but only 2200 cr. of transactions done on the 10 year bond.

    I think repo will go to 4%. Demand for credit may not be the problem – banks are being conservative and are deleveraging; so credit availability will be an issue. RBI though may end up lending direct, which should ease some pain.

    Banks need the FDs because the assets against which they can get Repo funding aren’t those they hold – and what they hold is toxic. As defaults increase, they are likely to up demand for deposits even then.

    We need some of the big guys to fall. That’s when it will go really low and then start to recover…like you said, let the companies fail, bring lower prices, and let the salary cuts happen.

    USD-INR – the repo rates don’t matter. Each FII is allowed only $200 million and they can totally only do $5b. That is an irrevant figure in the real borrowing of more than 300,000 cr.

    Rates dropping is bad for imports of course. I believe in a year we’ll still see the 40 levels – I know it’s a stupid thing today but I believe it will happen.