Pressure on RBI to cut rates

MUMBAI: The US Federal Reserve’s surprise 75 bps cut in its benchmark rate late on Tuesday would increase pressure on the Reserve Bank of India governor Y V Reddy to cut rates too, bankers said.

The Reserve Bank of India (RBI), which is slated to meet for its quarterly monetary policy review next Tuesday, will be under pressure because the Fed rate cut has widened the interest rate differential between the US and India to 425 basis points (Repo rate of 7.75% less Fed rate of 3.50%).

This spurs arbitrage inflows, mostly non-resident Indian money, seeking to make a quick buck.

Says Gunit Chadha, managing director and chief executive officer, Deutsche Bank India: “The equities crash of the last few days was more due to concerns over global liquidity and the Fed move is a positive. What the RBI does in terms of rates is its decision, but money will flow into India not only because of the rate differential but also due to the strong economic growth here,” Chadha said.
 
Sundeep Bhandari, managing director and head global markets, South Asia, Standard Chartered Bank, said apart from Indian equities looking very attractive after the US rate cut, bond prices will also rally “because a 7.50%+ 10-year Indian paper also becomes more attractive”.