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Monday, 1 June 2015

RBI : To Cut or not to Cut, that is the question!

The RBI June policy review meeting is scheduled for tomorrow, and the Indian markets and economy will be waiting with bated breath to see what RBI governor Raghuram Rajan has to offer this time around.  

This time general consensus is predicting, almost demanding, a 0.25% repo rate cut.  A few optimists are in fact suggesting that a 0.5% repo rate cut might be on the cards.  I for one think Raghu will stay with a 0.25% repo rate cut.  

The CRR (Cash Reserve Ratio) might also see a cut of upto 0.5% depending on how much liquidity the RBI governor wants to release into the markets. 

Both of the above should provide a healthy uptick to the Indian stock markets tomorrow.  The repo rate cut of 0.25% is probably already baked into the market, so only a higher rate cut will move the needle.  On the flip side, no rate cut will be a huge downer, leading to a large fall in the indices.

The CRR impact may not be immediate, but should help overall.

As always rate sensitives like banks, NBFCs, Auto and Auto ancillaries, will benefit the most from any reduction in the repo rate.  I am also hoping that long term GILT funds will benefit from any interest rate reductions coming up.  I had reiterated my resolve to build up a position in GILT funds late last year in december.   Since then, I have been slowly accumulating GILTs.  The performance has not been spectacular, but it hasn't been a loss either.  I will come back after this monetary policy review with some performance analysis of long term GILT funds, in a falling interest rate scenario.

Till then, here is hoping Raghu gives us a helping hand!

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