Bonds rally on speculation of off-cycle RBI's rate cut 

Photo: The Hindu

MUMBAI, 29 Dec, 2014: Bonds rallied on Monday after news agency NewsRise Financial, citing an unidentified finance ministry official, reported the government was pushing for a cut in interest rates even before the central bank's next policy review in early February. 

NewsRise quoted the official as saying the government expected "an out-of-turn rate cut" given "inflation would continue to trend down." The Reserve Bank of India is next scheduled to decide on monetary policy on Feb. 3. 

The benchmark 10-year bond yield fell 5 basis points to 7.93 percent on the news. It had hit a near 1-1/2 year low of 7.82 percent in mid-December. 

The clamour for rate cuts has grown on the back of sharply easing inflation. Data earlier this month showed consumer inflation in November falling to the lowest since the series was introduced in 2012 because of easing food and fuel prices. 

Still, RBI Governor Raghuram Rajan has indicated he would move cautiously on any rate cuts, warning in an interview with a TV news channel on Friday that he wanted to avoid having to flip-flop on interest rates. 

The RBI has a medium-term retail inflation target of 4 percent. Although the consumer price inflation is currently not far from that level at 4.38 percent, Rajan has expressed concerns about an unexpected resurgence in it. 

The last time the RBI took a decision on rates outside its bi-monthly policy review was in July 2013, when it unexpectedly raised the rate on a liquidity tool, called the marginal standing facility, in the midst of a crisis in the rupee. 

"The RBI has said that if inflation falls according to its stated glide path, then it will cut rates. So we have to see how inflation comes under control as per the RBI's glide path to take a call on interest rates," said N S Venkatesh, treasurer at IDBI Bank.

Courtesy: The Economic Times