Short term rates to ease due to cut in MSF rates: FTI

Investors with a short to medium term horizon can continue to consider funds focused on corporate bonds

October 30, 2013 10:28 IST | India Infoline News Service
The RBI (Reserve Bank of India) in its Second-Quarter Review of Monetary Policy 2013-14 on Tuesday hiked the repo rate by 25 bps (basis points) to 7.75%. The central bank kept the CRR (cash reserve ratio) unchanged at 4%. 

The repo rate is the rate at which banks borrow from RBI and one basis point is equivalent to 0.01%. 

RBI Governor Raghuram Rajan, in his second policy review, has cut MSF (marginal standing facility) rate to 25 bps to 8.75%.
MSF rate is an overnight borrowing rate for banks, which eases the cost of funds for lenders, fuelling credit growth.
The central bank expects GDP at 5% in FY13-14 and CPI to remain at or above 9%.
Commenting on RBI policy, Santosh Kamath, CIO-Fixed Income, Franklin Templeton Investments-India, commented, “We expect short term rates to ease in response to the cut in MSF rates and expansion of term repo facilities, and the yield curve to steepen. Going forward, the utilization of MSF window is likely to reduce progressively. The longer end of the curve may however continue to be volatile, given the RBI’s cautious stance and possibility of further rate hikes. Any negative news flow around government’s ability to meet fiscal deficit targets could exacerbate volatility.
Our outlook for the economy remains very cautious, despite the policy actions over the last year. At this stage, the timing of a change in monetary policy direction (read monetary easing) remains uncertain, and will be dependent largely on inflation movements and global developments. There is a clear need to utilize the current easy global liquidity phase and take structural measures to address deficits and inflation issues, rather than mere tactical measures.
In our view, investors with a short to medium term horizon can continue to consider funds focused on corporate bonds and those with a medium to long term horizon and high risk appetite can consider funds with exposure to long dated bonds/gilts.

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