Money brokers are expecting a benchmark repo interest rate cut towards end April, due to twin effects of the IMF disbursement and improved liquidity in the money market following the festive season.
Some even speculate that the Central Bank may announce the rate cut immediately, in order to give a clear signal to the market ahead of the four-year bond auction scheduled for tomorrow after a lapse of 18 months.
rnrnThe repo rates are likely to be reduced by 25 basis points to 50 basis points, according to analysts.
rnrnBoth repo and reverse repo interest rates were reduced by 50 basis points to 11.5 percent and 13.5 percent respectively on March 20.
rnrnHowever, the effect of repo cut on market interest rates was minimum, with the market moving to a shortfall situation at the beginning of the festive season.
rnrnldblquote In shortfall situations, reverse Repo becomes the market benchmark. Likewise, in surplus situations market moves around the repo rate
dblquote , analyst said.
rnrnldblquote The current liquidity shortfall in the money market is likely to turn into a surplus by the end of April, with the money coming back to the banking system
dblquote , said Ajantha Madurapperuma, President Primary Dealers Association.
rnrnCurrently, the liquidity shortfall is around Rs. 8.5 bn in the money market, which was mainly caused by heavy withdrawals from the banking system for festive spending.
rnrnAccording to some analysts, the effect of the impending repo cut on market rates could be insignificant in a surplus situation.
rnrnldblquote In a surplus situation, market rates will anyway move down towards Repo rate from the current level hovering the reverse repo. A 25 basis points to 50 basis point cut in this situation will not have much effect on the market rates
dblquote , a money market analyst said.
rnrnCentral Bank is also constrained by the rupee exchange rate concern and high level of inflation in the economy, which will impede aggressive rate cuts. Moving average inflation was recorded at 14 percent last month, which is significantly higher than the budgeted target of 9 percent.
rnrnldblquote Brokers may resort to heavy US dollar buying following the rate cut with the availability of cheap rupee funds. This could result in rupee sliding against the dollar, unless Central Bank intervenes
dblquote , said G. Ramanan, Head of HNB Securities.
rnrnldblquote However, if the Central Bank is in a Dollar rich position following the IMF US$ 60 mn disbursement, it can off-load Dollars in the market and control the exchange rate. Market is also unlikely to adopt a speculative stance when its known that Central Bank has the funds to intervene
dblquote , Ramanan added.rn