The Hindu Business Line : Credit Policy

We believe that the RBI has begun its reversal of its accommodative monetary policy stance with the steps outlined in this monetary policy and that it will take further steps in the near future. We expect the Bank to increase interest rates such as the reverse repo and repo rate by 25-50 bps in the January edition of the Policy. Also, the RBI could increase CRR by 25-50 bps before the January Policy, if inflation goes beyond its comfort level. The market will remain range-bound at 7.25-7.50 per cent in the short term.

ING Investment Management

The RBI has initiated its first step of what we termed it as a ‘calibrated exit’. A phased exit from the monetary stimulus it had introduced post the Lehman Crisis. No hard measures, but a clear message to the markets that the accommodative days are nearing its end. Be ready for phase II over the next six months to one year:

CRR hikes, most probably from December (and of 50-100 bps), to suck out the excess liquidity — as a firm commitment to fighting inflation and curbing asset price speculation

Interest rate hikes (50-100 bps) starting in Q1 2010 — on indication that the economy has stabilised and monetary policy needs to get back to neutrality. And if we look at 2004-05 — growth was around 7 per cent; inflation above 6 per cent — the reverse repo was 4.75 per cent; repo 6 per cent and CRR 5.0 per cent. That’s more or less where we see ourselves in a year’s time.

Short-term market rates may rise by 50-75 bps from now till February. But of course, all these need not make the market very volatile. The exit would be very well communicated and calibrated. But the exit is necessary, as excess liquidity, low interest rates and lax regulations for a longer period of time is a recipe for building up inflation and speculative asset bubbles

Quantum Mutual

The ‘exit’ from one of the most aggressive policy easing with several conventional and unconventional measures in the RBI’s history has begun. The direction and vision has been made clear in the policy statement while sequencing and speed will depend on the evolving macro-economic conditions. The priority for the central bank is shifting from cushioning the economy from a global recession and ensuring financial stability to anchoring inflationary expectations and supporting the growth process. The central bank would surely keep a vigil on any signs of building of an asset bubble due to excess liquidity.

Post the collapse of Lehman brothers, policy-makers globally acted in a very synchronised manner to avert a severe recession and financial Armageddon. However, the policy response from hereon would diverge. In countries like India, which was a victim of the global crisis and not a source of it, the central bank would be swift in removing the accommodation while developed world particularly the US Federal Reserve are likely to maintain an ultra-loose policy for an extended period. This would complicate the job of our central bank as cheap money could create a bubble in assets like emerging markets bonds, equities and commodities ultimately leading to rise in inflationary expectations and creating financial instability. The emerging market currencies will have an appreciating bias and a rate hike to deal with goods and asset inflation would actually become counter-productive as higher rates would attract more capital inflows.

The bond market cheered the move on SLR and got support from the fact that there is no G-sec supply this week. We maintain our view that bond yields are likely to remain range-bound with an upward bias in the near term. On equity the market, we continue to expect higher volatility in the near term while maintaining our long-term positive outlook.

SBI Mutual Fund

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