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  • RBI does once more outside policy

    Published on March 4, 2015

    The RBI decision to cut repo rate by 25 basis points was widely anticipated, though the timing of the cut may be surprising. Coming close on the heels of the budget and the announcement of the inflation targeting pact between the Government and RBI, this cut reaffirms our belief that the inflation trajectory will and expected to stay benign in FY16. As far as the transmission mechanism is concerned, monetary policy responses in India and even in developed countries typically have an asymmetric impact on financial markets in terms of transmission of policy signals. In the Indian context, during 1996-2000, expansionary monetary policy had indeed a weaker impact on financial markets than contractionary policy. This indicated, a risk-averse behaviour on the part of agents and hence, the markets perhaps always need greater assurance and clear intention of continued central bank action in terms of further rate easing. From such a point of view, 2 successive rate cuts is a welcome move by RBI in terms of transmission of policy impulses. However, with the RBI shifting to a 4% median inflation target from FY17, we believe most of the rate cuts will be front loaded in FY16 and there will be a prolonged pause aftermath. We are maintaining another 25 bps cut by June 2015 and possibly another 25 bps by March FY16.

    source : Lokesh Shastri

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