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After two surprise rate cuts in early 2015, which took the repo rate to 7.5 per cent, RBI has paused for a breather. Fortunately, macro factors such as the current account, inflation and crude prices look favourable.
The core liquidity has reversed from deficit to surplus and, going forward, RBI's efforts to improve liquidity and provide a conducive environment for growth may continue. The average rate of inflation is likely to remain at 5 per cent at the close of FY16. Also, lower crude oil prices have resulted in savings of billions of dollars in the country's import bill, implying that we could end FY16 with a marginal current account surplus of about 0.75 per cent of the GDP.
And while most global currencies are weakening against a stronger dollar, the Indian rupee may continue to hold steady. With increasing foreign exchange reserves, RBI will be able to prevent the rupee from appreciating much. We also expect a slight improvement in economic growth. In conclusion, with comfortable macro indicators, interest rates are likely to decline by another 50 basis points over the course of this year. To benefit from this possible reduction in interest rates, investors are advised to remain invested in high duration funds.
Nimesh Shah
MD & CEO
ICICI Prudential AMC
