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Economy

RBI Cuts Repo by 0.25%, Market Expected More

The RBI has cut the Repo rate by 0.25% in a move that was more or less expected (I actually thought they might not cut this time, given Subbarao’s speech).

The Repo rate is the rate at which banks borrow from RBI overnight. It’s now at 7.5%, with the reverse repo (at which banks park money with RBI overnight) at 6.75%.

RBI repo rate history

Bond yields have gone back up, on the more important news that the DMK has pulled out of the alliance that forms the government. The fact that they won’t provide "outside" support could mean early elections and this can substantially change the pattern of government borrowing and the fiscal deficit. The 10 year bond went to 7.92% before easing to 7.89%.

10 year bond yield

Interest rates that fall create opportunities for the bond market. It might be suitable – once the political challenges are fought through – to invest in a longer term bond fund that will benefit.