Playing the debt market

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: The monetary policy review and changes made by Reserve Bank of India late last month have had mixed reactions from many of the fixed income players. While some of the policy changes made and not made were expected, the hawkish stance now adopted by them has left many of the long-term investments in a grey area, where one is not willing to make an outright prediction on what may or may not happen. However, in the short term, things appear to be a lot clearer with most market experts concurring with RBI’s views and attempts to try and curb excess liquidation while maintaining enough room for the GDP to grow.

“Till now what RBI was basically following was a monetary expansion policy. This was to try and avoid recession setting into the country, and the policy was successful in doing so. However, the current price stability is one of the major concerns that the current policy tries to address. Also, RBI has changed its inflation forecast from 5% which they had anticipated in July this year, to 6.5% and this will be a continuous cause of concern till the rate is under check. The new policy tries to maintain a dual role of keeping both recession and inflation in check. This would require them to maintain the balance between excessive liquidity and tight liquidity. As of now, around Rs 3700 crore cash will be introduced into the system. This way liquidity will hopefully be curtailed to the point where inflation can be kept at bay, yet leaving enough room for the economy to grow” explains YP Narang, head, Fixed Income (debt) Group, Unicon.

Key policy changes

In the new monetary policy changes announced, RBI has left its repo, reverse repo and CRR rates unchanged at 4.75%, 3.25% and 5%. This is pretty much what was expected this October so no surprises there. However, the overall tone of the policy has become hawkish and interest rates may begin to rise from as soon as the last quarter of the FY09-10.