RBI may not follow the Fed with rate cut economists say
Indian debt markets have priced in a 25 basis points rate cut by the Reserve Bank of India (RBI) at its April policy meeting or even sooner, but some economists remain circumspect and warn the rally in bond yields could prove premature.
The benchmark 10-year bond yield dropped as much as 13 basis points on Wednesday to 6.21% before closing at 6.23%, in the wake of the U.S. Federal Reserve’s surprise cut, which raised expectations the RBI would follow suit.
The RBI eased rates by 135 basis points in 2019 before abruptly deciding to hold rates in December.
But, with interest rate transmission – the pace at which changes feed through to the wider economy – still stuttering and the RBI having deployed several unconventional measures to boost credit growth, economists believe another cut is far from a given, and warn it will do little to tackle growth concerns.
Markets will thus see a massive sell-off if the RBI fails to deliver on these expectations, they added.
“We may not see selling immediately, but if even after 5-7 days there is nothing from the RBI, it will be bad,” a senior trader at a private bank said.
The RBI has repeatedly said there is space for more rate cuts if inflation eases. The February reading, to be released later in the month, might prove critical.
The RBI’s Monetary Policy Committee has been leaning toward easing as soon as inflation comes off the boil.