A rate cut and much more

What Indonesia's central bank did in January, the Reserve Bank of India (RBI) did on Friday-apolicy rate cut despite the pressure of the local currency's depreciation against the dollar.

- TAMAL BANDYOPADHYAY

Of course, there is a difference. While the rate cut in Southeast Asia's largest economy to fuel growth was unexpected, in India, the world's fastest-growing major economy, it was on expected lines. As inflation is easing, the growth-inflation dynamics have changed in favour of a growth push.

The RBI reduced its policy repo rate by 25 basis points (bps) to 6.5 per cent in the first rate cut since May 2020, when there had been a 40-bp reduction to 4 per cent amid Covid. This was also the Indian central bank's first rate action Since February 2023, when the rate had been raised to 6.5 per cent. One basis point is the hundredth of a percentage point.

However, there has been no change in the monetary policy stance, which continues to be neutral. Theoretically, at this point, yet another rate cut in the next Monetary Policy Committee meeting in April is not a given, as the stance remains neutral against the backdrop of several uncertainties facing the global economy.

The policy, RBI Governor Sanjay Malhotra's first, has not given any forward guidance.

This explains the reaction of the bond and forex markets. Since there was no clarity on future rate cuts, or to use a cliché, as the policy was not as dovish as many expected, bond yields rose 5 bps to 6.70 per cent. For the same reason, the rupee didn't depreciate against the dollar despite the rate cut. In fact, it appreciated 15 paise to close at 87.43.

The deferment of the new liquidity coverage ratio (LCR) framework also dampened the sentiment, as it postponed the demand for bonds needed to maintain LCR. Yet another reason for a rise in bond yields was the absence of any fresh liquidity measures by the RBI.