RBI rate cut – One for the budget

March 4, 2015 . Vidya Bala

The Reserve Bank of India gave a thumbs-up to the fiscal impulses in the Union Budget by announcing a 25 basis point rate cut 3 days after the budget announcement. The RBI has stated that the near-term inflation shall be influenced by the demand situation seen against available capacity. And the Central Bank appears to have taken its cues on this factor from the GDP estimate and the Union Budget – two key developments pertaining to demand-supply balance in the economy.

We see the implementation of the announcements from the budget as well as the rate cut trend to be incremental in nature.

Rate cuts can be expected at regular intervals. We are still at the beginning of a series of rate cuts; subject to external risks such as crude oil prices in the medium term.

Impact for debt
As far as the debt markets are concerned, the previous rate cut has given a clear southward trend to yield movements. While debt markets may have reacted a bit to the slightly delayed fiscal target, the current rate cut is likely to ensure that pressure on yields are eased.
Debt investors should continue to stay invested in medium-long debt funds (income/dynamic bond funds). There also still remains enough opportunity for investors wanting to take exposure at this stage with a 2-3 year view.

The budget measures together with rate cuts can be expected to ease the funding situation for companies in the medium term. In such a scenario, corporate bonds could well see a re-rating. Simply puts, the next 18-24 months could potentially offer dual opportunity in the debt space – capital appreciation from easing yields and credit opportunity from improved corporate fortunes. Investors need to have an at least 2-year view for both of these to pan out.

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