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RBI policy: Disinflation process to continue

Policy appears to be hawkish than June statement but in near term it will align the expectation of early rate cuts to gradual ones.

August 05, 2014 1:34 IST | India Infoline News Service
The RBI has maintained status quo as per our and consensus expectations, according to Kunal Shah, Fund Manager-Debt, Kotak Mahindra Old Mutual Life Insurance Ltd
RBI highlights that risk to inflation is more balanced than the situation in June, however re-iterated that the risk to target of 6% by 2016 are on upside. Policy appears to be hawkish than June statement but in near term it will align the expectation of early rate cuts to gradual ones. RBI has reduced SLR & HTM by 50bp as a plan to gradually reduce the reserve requirement overtime to help banks fund credit requirement of the economy.
We expect current disinflation process to continue and core inflation to moderate further however sharp fall is unlikely in short-term given weak start of monsoon.
Bond yields will initially inch up however should continue to trade in the narrow range in future till the time inflation actually drops. In medium term as inflation drops and sustains at lower levels yields will drop along with drop in policy rates.

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