RBI has Space to Cut Rate

Murthy Nagarajan, Head - Fixed Income, Quantum Mutual Fund
Sunday, January 29, 2017
Murthy Nagarajan, Head - Fixed Income, Quantum Mutual Fund
Headquartered in Mumbai, Quantum Mutual Fund is India's First Direct-to-Investor Mutual Fund offers a wide portfolio of top performing Mutual Fund schemes in India through its invest online platform.

In November 2016, the Indian bond yield fell to its lowest level since May 2009, as a result of the unfolding of two important events, the victory of Donald Trump in the U.S. presidential elections and the announcement of demonetization of Rs.500 and Rs.1, 000 currency notes by Prime Minister Narendra Modi. Demonetization has added significant liquidity in banking system which raised hope for further reduction in interest rates. However, on 7 December 2016, the RBI has kept interest rates unchanged. The central bank of India has preferred to wait for more data to come which will assist RBI in framing next policy stance. Meanwhile the 10 year Indian bond yields declined from 6.80 percent to 6.20 percent levels due to excess liquidity in the banking system. The total liquidity in the banking system surged due to deposit of Rs.500 and Rs.1, 000 currency notes post demonetisation was Rs.12.44 lakh crore.

In the recent monetary policy meeting, the RBI kept Repo rate unchanged. The market had anticipated a 25 to 50 bps reduction in rates. All Six members of MPC (Monetary Policy Committee) voted in favor of status quo, i.e. keeping rates unchanged.

U.S. Fed Hikes Rates, Yield Rise

Globally, the U.S. Fed interest rate decision was a key event. In policy review meeting, U.S. Fed has raised interest rate and signaled for further rise in rates. Janet Yellen, the chairman of the Fed, described the move as ‘a reflection of the confidence we have in the progress that the economy has made and our judgment that progress will continue’. The U.S. Fed last increased the interest rates in December 2015. U.S. yields moved up by 10 basis points to 2.57 percent levels from 2.47 percent before the announcement of FOMC decision.

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