Ultra-short term rates to remain volatile: Baroda Pioneer AMC

India Infoline News Service | Mumbai |

We expect the ultra-short term rates to remain volatile with hardening bias due to higher supply of CD, Baroda Pioneer AMC says

RBI kept the repo rate and CRR unchanged at 8% & 4% respectively, which was in-line with market expectation. However, RBI cut the SLR by 50bps to 22.5%. The Liquidity facility under the export credit finance reduced from 50% to 32%, which is compensated by special term repo of 0.25% of NDTL.  This policy reiterated RBI’s anti-inflation stance but the tone changed to neutral as there may not be any need for a rate hike if CPI inflation is on its easing path. However, RBI may soften rates if inflation excluding base effect falls faster than anticipated. RBI expects possible strong government action on fiscal, food to balance CPI risk and past rate hike to ease inflation pressures. RBI is expecting a GDP growth at 5.5% in FY 15 and expects investment demand and credit to pick up as the economy seems to be on recovery path. 
Alok Sahoo, Head Fixed Income of Baroda Pioneer AMC, said, “The ultra-short term rates have softened in May after the election outcome. The 3 month and 1 year CD rates have come down by 40 bps and 20 bps respectively as compared to end of April 2014. We expect the ultra-short term rates to remain volatile with hardening bias due to higher supply of CD and tight liquidity due to advance tax out flows. We expect long end of the curve to remain volatile with softening bias due to stable government, neutral to dovish stance of RBI, lower fiscal and current account deficit and easing inflation. The 10-year GOI yield is likely to trade in the range of 8.25%-8.75% in next 6 to 9 months.”
 

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