The Hindu Business Line : Market View

From a foreign perspective what is important to watch for is the ranking of India relative to other emerging market countries. The out performance over the last 1-2 months has been spectacular in comparison to other emerging markets. This is recognition of the growth story, which is gaining increasing traction globally and forcing foreign investors to sit up and take notice. As a result we could be in the midst of a P/E re-rating for India compared to its peers. This is particularly so since many emerging market funds were underweight in their allocations to India, which is now likely to be revised.

OptiMix Quarterly Newsletter

The consensus expectations were mixed with regard to a repo/reverse repo rate hike, with strong credit/money supply growth indicating a rate hike and the recent global oil price decline along with the strength in the rupee to maintain status quo. However, RBI's decision to increase the repo rate alone without a commensurate increase in the reverse repo rate took the market by surprise. Through this hike in borrowing costs for banks, the central bank has indicated that it would like to see a more balanced growth in the credit portfolios and is aiming to mitigate any overheating, without dampening the growth prospects. The widening of the differential corridor between the repo rate and the reverse repo rate means a wider play of rates at the short-end and inter-bank rates.

Franklin Templeton Investments

A significant move, from the markets perspective, is to allow banks and PDs to carry forward their short positions in the government securities market for 5 days. Currently, banks and PDs are forced to square off short positions intra day. This would mean that banks and PDs can now cover their short position through a repo deal (borrowing of the security shorted against cash) in addition to an outright purchase. This is a positive development that would move the Indian bond markets closer to the globally mature markets. Overall, the policy statement seems to be neutral, with a mild hawkish bias, for the bond markets. We do not expect significant price changes in the near term. Going by the tone of the statements and the mood in general a further hike in rates in the next quarterly review on January 30, 2007, or even earlier, looks like a distinct possibility.

Sundaram BNP Paribas Mutual Fund

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