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Will lower oil prices push RBI Governor Raghuram Rajan to cut repo rate?

Expectations of a rate cut weren’t tempered by the strong HSBC Markit Purchasing Managers’ Index (PMI) for manufacturing...

By: | Mumbai | Updated: December 2, 2014 9:10 AM
Reserve Bank of India (RBI) might cut the repo rate by 25 basis points on Tuesday. (Reuters)

Reserve Bank of India (RBI) might cut the repo rate by 25 basis points on Tuesday. (Reuters)

Yields on government bonds touched a fresh 16-month low on Monday with the market betting that slowing economic growth and easing inflation would prompt the Reserve Bank of India (RBI) to cut the repo rate by 25 basis points on Tuesday, reports fe Bureau in Mumbai. The yield on the benchmark 10-year 8.40%, 2024 bond ended at 8.06%, the lowest since July 19, 2013. The yield has dropped more than 40 basis points over the last two months.

Expectations of a rate cut weren’t  tempered by the strong HSBC Markit Purchasing Managers’ Index (PMI) for manufacturing, which came in at a 21-month peak of 53.3 for November, probably because crude oil prices fell to fresh lows of levels of $68 per barrel. With growth slowing — India’s gross domestic product grew just 5.3% y-o-y in the three months ended September, slower than the 5.7% y-o-y expansion in the previous quarter and a steady fall in retail inflation over the last three consecutive months to 5.52% in October, many now believe there’s room for a rate cut on Tuesday.

graph-RBI-repo-rate

Hitendra Dave, head of global markets at HSBC, said the consensus was that inflation is moderating faster than anticipated.

“As such the medium term objective of 6% will surely be reached and the RBI will get comfortable that it will be reached,” Dave said.  The belief that interest rates could come off prompted foreign institutional investors to pay the highest ever premium of 68.5 basis points to get hold of investment limits auctioned on Monday. Limits worth $500 million were auctioned.

Meanwhile, the yield on the 10-year US Treasury note has slipped 10 bps over the last one month with the note trading at 2.16% on Monday. This keeps the interest rate differential between India and US wide making Indian paper attractive to foreign investors.

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