Markets factor in RBI rate cut; PM talks 8% growth

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New DelhiMumbai, Nov 21: The financial markets are clearly holding their breath in expectation of a rate cut by the Reserve bank of India (RBI) soon. Interest-rate swaps sank to their lowest rate since 2004, dropping 84 basis points this week by Friday. Interest-rate swaps compare a fixed rate of interest to a future stream of payments using a floating rate. Swap rates are seen as a good indicator of how rates will move and their recent fall indicates an anticipation of monetary policy easing by the central bank.

Simultaneously, the yield on ten-year government bonds fell 6 bps on Friday to 7.20%--the lowest level since January 2006—another sign that markets have factored in an RBI interest rate cut. Over the last one month, yields on gilt-edged securities have fallen 52 bps. A lower yield indicates higher demand for government paper, which would take place if rates were cut.

Market expectations also received a fillip from comments made by Prime Minister Manmohan Singh at a conference in New Delhi on Friday morning. Singh said his government is committed to using all the resources at its disposal to ensure the economy’s growth does not flag. “You have my assurance that despite (the) adverse international environment, we have the capacity and ability to sustain a growth rate of about 8%,’’ the PM said.

“No instrument of public policy will be spared, whether it is fiscal policy, monetary policy, exchange-rate policy, public-investment policy—all will be deployed to ensure an environment conducive to the growth of enterprise,” Singh said, hinting at using exchange-rate management tools for the first time since the global crisis broke out.

Partly in anticipation of the rate cuts, the stock market also reversed a seven-day losing streak. The BSE Sensex closed at 8,915.21, up 464.20 points, or 5.49%. The NSE’s Nifty ended at 2,693.45 points, up 5.50%. Call money rates ended near 6% on Friday because demand eased on reporting day, with most banks having met their reserve requirement for the current reporting fortnight, money market dealers said.

Earlier in the week, finance minister P Chidambaram had said that the central bank, which reduced its benchmark repurchase rate twice within two weeks, has scope to cut rates again, but that inflation needs to fall further before growth can become the sole focus. Inflation fell to 8.90% for the week ended November 8.