The decision to trim the one-day and 14-day repo rates, after a gap of five- and-a-half months, was taken in the light of a decline in inflation rate and good monsoon. The rate was last changed on March 3, 2003 when the central bank had reduced the rate by 50 bps from 5.50 per cent.
RBI on Saturday noted that inflation has come down to 3.95 per cent on August 9 from 6.7 per cent on April 5. The monsoon has been good and widespread. The wide coverage of the monsoon has raised expectations of food kharif crop. It was felt that this reduction will also help in making the yield curve not as flat as is the case now, it said.
The market welcomed the move. It was certainly on the cards. This shows RBI is fairly confident that inflation is under control. The rupee-dollar exchange rate is also comfortable. All these actually prompted RBI to effect this cut, IDBI Capital Market Services MD GV Nageswara Rao opined.
Market players were expecting a repo rate cut as the system was still flush with liquidity, despite the Rs 12,000-crore outflow towards open market operation last Monday. There was little buying interest in the government securities market last week with the yields breaching their successive lows. In the last week, government security prices fell by up to Re 1 in select long-term papers.
StanChart head (fixed income) Tarun Saigal said, we expect fresh buying on Monday. The yield curve is also expected to steepen.
But Mr Rao is of the view that the steepening of the yield curve will be temporary. The liquidity scenario will again flatten the yield curve in the long run.