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RBI cuts interest rates by unexpected 50 basis points

A move that will boost prices for Indian bonds and earnings for equities

Citing the need for more accommodative policy measures, the Reserve Bank of India (RBI) cut its benchmark rate by 50 basis points on Tuesday morning. The larger than anticipated rate cut follows three cuts of 25 basis points each, earlier this year, to sustain growth in the Indian economy, which remains the fastest growing among major emerging markets.

Further than expected

“RBI Governor Raghuram Rajan has proven time and again that he has his finger on the pulse of the economy and today’s rate cut is indicative of the fact that he has made the right move at the appropriate time to further stimulate the economy,” says Bhim D. Asdhir, President and CEO of Excel Funds Management Inc. “Evidently, the delay by the U.S. central bank in raising interest rates has given him room to lower rates by more than expected,” he adds. Mr. Rajan, who as RBI Governor has the autonomy to maintain price stability in the economy, noted in his announcement that inflation is under control. The RBI has an inflation target of 4%, within a band of plus or minus two percentage points. Inflation currently stands at 3.66%.

A good move for bonds

“The rate cut is positive for bond prices and will benefit investors in the Excel India Growth & Income Fund,” says Christine Tan, Senior Portfolio Manager with Excel Investment Counsel Inc. “Earnings of companies in the Excel India Fund should also improve due to lower carrying costs, leading to an increase in their prices,” she adds. It is worth mentioning that there is expected to be a positive ripple effect in the majority of Excel Fund’s suite of emerging market mutual funds which are overweight India. Tan advises that “While Indian bond yields will fall due to the rate cut, investors will benefit from the appreciation in bond prices.”

With the Indian economy firing on all cylinders, we believe India remains a great investment opportunity. The rate cut has simply increased its attractiveness. The Excel India Fund can help you get in on the action.


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