Rate volatility to continue on CAD, fiscal deficit worries
What is the quantum of rate cuts that you expect from RBI in policy review?
We expect RBI to cut interest rates by 25 basis points. It is not that the inflationary expectations are behind us, but the logic of cutting rates stems from two facts. First, GDP growth has been clocking below the trend growth in last three quarters despite a relatively hawkish stance from RBI. Second, the recent measures by the government look concrete and will address the fiscal profligacy to a certain extent.
Rural incomes are rising causing higher inflation due to demand for quality food items such as milk, fish and egg. The supply-side bottleneck can only be addressed in medium term by better policies from the government and better state-centre coordination. On other hand, urban savings are declining as inflation is eating into the savings and incomes are rising at a slower pace. This, coupled with a higher current account gap, gives limited maneuverability to the central bank.
Bond yields are hovering near 7.87% mark. How do you see the yields moving in the coming week?
We believe the benchmark 10-year bond yields will hover in a band of 7.75%
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