Bond market expects the Reserve Bank of India to cut the repo rate after the government buys back gilt worth over Rs 84,000 crore (Rs 840 billion), hopefully this month.

Though the RBI has repeatedly ruled out the repo rate cut in the near future, market players said the excess liquidity to the tune of Rs 30,000 crore (Rs 300 billion) in the economy, low inflation rate and ample arbitrage opportunities between the Indian and overseas markets have made it imminent.

"The repo rate cut is likely because of the excess liquidity. May be the RBI will reduce it after the government completes the gilt buyback scheme," I D Singh, managing director, PNB Gilts, told PTI in New Delhi on Thursday.

The government plans to exchange high-cost bonds with low-cost securities for the principal amount and pay the premium amount in cash. This additional cash would increase liquidity to some extent.

The existing excess liquidity was due to the inflow of foreign exchange and low credit offtake from banks in the initial months, B Surendranath, senior fund manager, Aviva Life, said.

A senior official of the Standard Chartered Mutual Fund pointed to the huge arbitrage opportunites between the Indian and the United States markets and said the repo rate cut was imminent.

The US central bank recently cut the refinance rate by 0.25 per cent to 1.0 per cent, which is much lower than the 5 per cent repo rate and 6 per cent bank rate prevailing in India.

The economic fundamentals pointed to a soft interest rate regime due to the declining inflation, sluggish credit offtake, burgeoning forex reserves and low global interest rate, which in turn supported lower domestic interest rates.

It should be noted that inflation fell to this fiscal's lowest level at 4.97 per cent, while forex reserves swelled to over $80 billion. Even after redeeming about $4 billion on India Millenium Deposits expected in October, the market views an excess liquidity situation.

Despite this, the RBI governor Bimal Jalan had ruled out the repo rate cut till last week.

"The apparent disconnect between the economic fundamentals and RBI's stance is not sustainable in the medium term," the market players said.