Gaurav Kapur, senior India economist at Royal Bank of Scotland NV, comments on the outlook for interest rates after the Reserve Bank of India kept them unchanged after six increases this year.
The central bank cut the statutory liquidity ratio, or the proportion of deposits lenders need to invest in government bonds, to 24 percent from 25 percent from Dec. 18.
“The reduction in the statutory liquidity ratio is negative for bonds as it may reduce demand. But overall, the cut will help improve liquidity, and may soften short-term rates. Still, a rate increase in the January to March quarter is likely and that depends on how the liquidity situation stabilizes.
“With the fuel price hike, inflation will get a further leg up, and RBI will continue watching inflation very carefully.”