Most economists (32 out of 39) expect a rate cut today (25
bps) while bond traders are more divided (roughly 50% expect a rate cut while
the others expect a status quo). Given the fact that GST and pay commission revisions
along with oil price spike are going to be inflationary in 2017, RBI is going
to find it difficult to cut rates later in the year. The government seems to have
favoured a lower interest rate to support growth and empirically it seems that
the government has significant control over RBI’s decision making, therefore I
would expect a rate cut of 25 bps today.
Given that markets are divided, as far as traders are
concerned, therefore positioning would suggest that a rate cut would lead to
moderate rally in equities and bonds and USDINR can head towards 67.20 (CMP
67.31) post the decision.
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