The glaring gulf between policy rate and market interest rate cycle

Despite the fact that the RBI has now cut the repo rate by 50bps since August 2018, it is clear that the cost of funding for the broader economy seems to be trending upwards

With headline inflation persisting below the 4% mark for seven consecutive months and expected to stay contained till 2QFY20, the RBI acted in line with consensus expectations and administered a 25 bps repo rate cut. Given the commentary contained in the monetary policy statement, rate cuts to the tune of 0-25 bps can now be expected over the rest of 1HFY20. Moreover, assuming that the RBI aims to maintain a real policy rate of 1.5% and given that inflation is expected to tend to 4% by 2HFY20, the lowest implied policy rate that the RBI can maintain works out to