In line with market expectations, RBI increased repo rate by 25 bps to 8.25% in its mid-quarter monetary policy review today. While acknowledging global uncertainties and domestic demand slowdown, RBI has continued with its anti-inflationary stance to ensure inflationary expectations are well anchored. Lagged effect of past actions and global environment would moderate the domestic demand and inflation trajectory going forward, in our view. Our sense is that RBI is likely to take a pause after today’s rate action. This should be viewed positively by bond and equity markets.
We expect bond market to remain range bound with a downward bias in yields over the next couple of months. Sentiments in equity markets should improve on evident signs of peaking of rate cycle. Markets would closely watch global developments and movement in commodity prices.
September 16, 2011