Views on RBI Policy - Quote Puneet Pal, Deputy Head-Fixed Income, DHFL Pramerica Mutual Fund

The MPC has delivered a Dovish 25 bps rate cut today, lowering the benchmark repo rate to 6.25% from 6.50%. The decision to cut rates today, was a bit of a surprise in terms of the timing. The MPC has reduced its Inflation target by 60 bps for H1:2019-20 to 3.2-3.4% from 3.8-4.2% earlier. The CPI projection for Q3 2019-20 is at 3.9% The MPC has taken cognisance of the slowdown in Domestic and Global growth outlook and the continuing benign Inflation outlook . The tone of the Policy is distinctly dovish and we pencil in another rate cut in the next policy meeting in April 2019. We expect the sovereign yield curve to steepen as today's rate cut and expectations of a further rate cut will support the short end (1-4yr ) of the curve while the Bond Demand/Supply dynamics are likely to deteriorate going ahead negating a big move down in Long Term Yields. We expect the credit spreads to remain elevated as the current risk aversion continues to persist over the next 3-4 months.