First RBI policy after demonetisation: Markets position for a 25-basis point rate cut

The present yields on the 10-year bond, which closed at 6.20% on Tuesday, have factored in a sure rate cut

Bond market participants expect the six-member monetary policy committee to deliver a 25-basis point cut in repo rate on Wednesday and have taken positions fully factoring in the same. Many in the market also expect the quantum of rate cut to be more, but only a few expect a pause.

The MPC, headed by RBI  Governor Urjit Patel, are meeting for two days, starting Tuesday, and will announce the policy decision at 2.30 pm on Wednesday.  

The present yields on the 10-year bond, which closed at 6.20 per cent on Tuesday, have factored in a sure-fire rate cut. The yield is lower than the present repo rate of 6.25 per cent. 

The local currency too strengthened past 67 a dollar level, after staying in the 68 zone for a few weeks, as foreign investors likely poured in heavy dollars in the market on Tuesday. The local currency closed at 67.90 a dollar, from its previous close of 68.22 a dollar.

“There was lot of flow and that strengthened the rupee,” said Ashish Vaidya, head of trading, DBS Bank India. 

The figure for foreign flow in debt and equity is released with a lag. It is likely that the foreigners were a net buyer in the market on Tuesday.