The Reserve Bank of India (RBI) has reduced the repo rate by 0.25% to 6.25%. This is the first time in five years they have cut the rate. However, after the announcement, the bond market reacted strangely, with bond yields going up instead of down. Experts believe many were hoping for a more comforting message or extra measures to help the economy, but the RBI decided to stay careful, which disappointed some investors.
Shriram Ramanathan from HSBC Mutual Fund mentioned, “People wanted clearer signs of support from the central bank, but they stayed cautious.” Despite this, he is hopeful that interest rates will continue to drop in the coming months, possibly leading to another cut in April, which could positively affect the bond market.
Lower interest rates usually mean higher bond prices as investors seek better returns. Apurva Sheth from SAMCO Securities explained that bond yields rose because the market already expected this rate cut. Future cuts will depend on what other countries, especially the U.S., decide about their rates. The RBI also has to think about keeping the rupee stable, which might hold back future cuts.
To improve risk management, the RBI has also introduced new contracts for government securities. This will help long-term investors, like insurance companies, to better handle interest rate changes.
However, there are concerns. Umeshkumar Mehta from SAMCO Mutual Fund pointed out that if U.S. bond yields rise too much compared to Indian yields, it might push foreign investors to pull their money out of India, affecting the rupee. This could make the rupee weaker because of the uncertain global economy.
In short, the RBI is trying to balance helping the economy while keeping the currency stable. Future rate cuts might be small unless inflation stays low.
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