Rupee gains, bond yields fall after RBI cuts repo rate by 25 bps

Indian rupee gained against the greenback on Thursday while bond yields declined, after the Reserve Bank of India (RBI) cut interest rates and changed its monetary policy stance to “neutral” from “calibrated tightening”.

At 11:50 AM, the rupee was trading at 71.61 a dollar, up 5 paise from its Wednesday’s close of 71.56. The home currency opened at 71.67 and touched a high and a low of 71.54 and 71.76 a dollar, respectively.

In debt markets, the yields on the 10-year government bonds fell 0.31 percent to 7.34 percent from its previous close of 7.36 percent. Bond yields and prices move in opposite directions.

The RBI surprised the markets by reducing repo rate to 6.25 percent from 6.50 percent earlier.

Four of six members of the MPC voted to cut the rates, while all six members voted for a change in the stance.

“Over the past two and a half days, that is during February 5, February 6 and February 7, the Monetary Policy committee reviewed the macroeconomic and financial conditions and prospects and voted by a 4:2 majority to reduce the policy repo rate by 25 basis points (bps). The MPC also voted unanimously to shift the policy stance from calibrated tightening to neutral,” RBI governor Shaktikanta Das told reporters after the policy.

A rate cut benefits the rupee by increasing confidence on the economic outlook and sparks hopes of more foreign inflows.

Economists expect rupee to come under pressure going ahead on account of fiscal and inflationary risks.

"There could be problems on the rupee, I don’t know where rupee today is after the RBI policy, so all taken together it will be more difficult to deliver a rate cut if on balance things start moving on the negative side," said Kaushik Das, chief economist at Deutsche Bank.