INDIA: Bonds, Equities Fall as RBI Leave Stance Unchanged

The RBI cut rates for the first time in almost five years, voting unanimously to cut the repo rate by 25bps to 6.25%. Their stance was left at 'neutral', consistent with our view that the rate cutting cycle in India will be shallow.

• The RBI said it would remain "nimble" on providing liquidity and said it will give banks more time to comply with a new liquidity coverage ratio. However, the lack of new measures on this front as well as the status quo on stance - instead of a change to 'accommodative' - are likely accounting for the weakness across local equities, while yields across the curve are around 2-6bps higher.
• According to traders who spoke to Reuters, the RBI likely supported the rupee before the open of local markets. A very brief blip in USD/INR following the rate decision was swiftly pared and the pair has steadied since then, looking set to close around 0.15% lower on the session – but 0.9% higher compared to Friday’s closing levels.
• Responding to questions on the rupee during the Q&A section, Governor Malhotra said “Our interventions in the forex market focus on smoothening excessive and disruptive volatility rather than targeting any specific exchange rate level or band. The exchange rate of the Indian Rupee is determined by market forces.”
• When asked whether the RBI will be comfortable with inflation in the target range of 2-6%, Malhotra suggested the central bank’s focus will remain on the 4% midpoint.