Frequent surprise may create volatility: Experts

The Reserve Bank of India (RBI)’s surprise rate cuts could lead to volatility in the markets, particularly if it fails to surprise, said RBI watchers.

Ahead of the market hours RBI cut the repo rate or the rate at which banks borrow from the central bank by 25 bps to 7.50 per cent which lead to government bond yields falling sharply and rupee strengthening in early trades.

“The shift in the central bank’s strategy to make out of turn rate cuts something of a habit is likely to increase market volatility instead of anchoring it. The out of policy move, in our view, highlights a sense of urgency that can only be associated with the RBI realising that it could in fact be ‘behind the curve’ in terms of monetary policy action,” said Abheek Barua, chief economist at HDFC Bank.

This is the second time in 2015 when RBI resorted to a surprise rate cut. Barua sees the prospect of  another three repo rate cuts totalling 75 bps over the remainder of 2015 instead of his earlier view of another two cuts summing up to 50 bps.

RBI governor Raghuram Rajan said today that further monetary actions will be conditioned by incoming data, especially on the easing of supply constraints, improved availability of key inputs such as power, land, minerals and infrastructure, continuing progress on high-quality fiscal consolidation, the pass through of past rate cuts into lending rates, the monsoon outturn and developments in the international environment.

“I feel RBI is cutting rates due to pressure from the government as a result of which the monetary policy review day becomes a non-event as this time too we do not think the repo rate will be cut again on April 7 when RBI will announce the monetary policy for financial year 2015-16,” said the head of treasury of a state-run bank.

CPI-based inflation for January 2015 stood at 5.1 per cent. The data for February will be released next week. The finance ministry and RBI has agreed to put in place a monetary policy framework to focus on flexible inflation targeting, something the central bank has been pressing for.

"It was easier to predict the rate action moves of earlier governors, but with Rajan you are never too sure. That is why we see this impact in the market," said the head of fixed income of a fund house.