Playing it safe

Guest Columns

 Vice chairman & Managing Director,

 HSBC Securities

 The RBI has decided to be cautious in not reducing benchmark rates. The status quo has disappointed the markets but the prudence shown by RBI, given the recent bond market rally and also the prevailing macro-environment, is understandable.

 The macro-economic scenario has improved significantly with growth this year expected to be the highest in the last seven years.

 Much anticipated growth in credit demand has materialised since August, and the central bank also expects a pick-up in the investment cycle going forward.

 In this macro backdrop and prospects of a stronger global growth, the RBI has decided to play it safe by not reducing rates.

 It has still left the option of a rate cut open and has not ruled out the possibility of bank rate cut, unlike in the April policy.

 The absence of rate cuts also reflects the confidence of the RBI in the economy and that, unlike in past, it no longer is required to support growth.

 The policy, therefore, need not be viewed negatively by the markets, as prospects for growth and a pick up in investment cycle should be comforting to current valuations of equity markets.

 At the same time bond market expectations had become stretched in the last month with rates on benchmark 10-year paper declining below 5 per cent and absence of cuts has only supplemented RBI