Ram Gopal
CIO, IL&FS Mutual Fund (Fixed Income)
The policy is overall neutral and in line with expectations. The initial bullish reaction of the market has, perhaps, more to do with the technical factors and changes in a priori expectations rather than with the actual measures.
The cut in CRR is in line with RBI medium term target and is therefore not really a surprise. The resultant release of Rs 3 bn is not materially significant in view of the excess liquidity in the system and will be absorbed in the daily monetary sterlization through repo window.
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The reduction in CRR is clearly designed towards moving this ratio to the stated goal of 3% over the medium term. This move would release Rs. 30 bn to the Banking system and is expected to be sterilised through open market bond sales or through the daily repo window of RBI.
The reduction in the repo rate has been in line with expectations and is forced by market conditions, awash with liquidity. Given that this liquidity is being sterilised through the daily repo window, it wasnt going to be long before RBI provides economically justified interest rates on the amounts sterilised.
The reduction in the bank rate signifies a continuation of the soft stance in the conduct of the monetary policy by RBI. Significantly the Governor has also indicated that the rate is likely to be held at the current level till the end of the financial year i.e. Mar 31, 2002.
In addition RBI has reiterated its policy of providing adequate liquidity to meet credit growth and support investment demand. This should also be viewed in the context of the central bank reducing its GDP growth estimates to 5-5.5%
By reducing both the bank rate and the repo rate, the RBI governor has in a way met the desires and expectations of a wide cross section of constituencies.
Bond market participants would be enthused by the moves, especially since many market players had started expressing reservations on the possibility of a rate cut. In the light of these revised expectations prior to the policy, the measures assume bullish significance for the market.
The initial reaction of the bond market has been to bring down yields across the entire maturity spectrum by 5-15 bps. This move can clearly be attributed to the comfort derived by market participants due to the dual cuts (repo rate and bank rate) announced by RBI.