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RBI Makes Third Interest Rate Cut; Further Cuts Not Anticipated in near Term

The Reserve Bank of India (RBI) cut interest rates by 25 basis points today, the third cut for the year so far. Interest rates were previously cut on January 15th and March 4th in an ongoing push to spur investment and growth in the Indian economy.

In announcing the rate cut, RBI Governor Raghuram Rajan indicated that he will delay further rate cuts until an assessment of the monsoon season is completed, disappointing some investors who anticipated further cuts in the near term.

As a result, Indian equities declined and bonds fell slightly on concerns that the reduction in interest rates would not be enough to offset the impact of deficient rainfall on economic growth.

Incidentally, rainfall was less than predicted in April, which may “lead to an increase in prices of everything from rice to vegetables,” causing an increase in inflation, as “food costs account for almost 50 percent of the consumer price index,” says David Kunselman, Senior Portfolio Manager with Excel Investment Counsel Inc.

Kunselman adds: “The tone of the central bank has cast doubts on the possibility of further rate cuts in the short term until rainfall improves. Incidentally, the market has been concerned about rainfall every year the monsoon begins but these concerns dissipate during the summer months when the focus is less on rainfall. For now, the market is not anticipating a rate cut in August but we could see another cut possibly at the end of September or December once rainfall improves.”

“This is creating a wonderful buying opportunity for our new fund, the Excel India Growth & Income Fund, as we slowly enter the market over the next couple of weeks. Last night the yield on sovereign government bond rose from 7.82% to 7.92%,” says Kunselman.

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