RBI keeps rate stable in uncertain times: FundsIndia.com

India Infoline News Service | Mumbai |

The RBI appears to be working towards reducing the kind of volatility in FII flows that was witnessed in mid-2013.

The RBI is going to take a long-term approach – to inflation, to liquidity and to attract foreign inflows.
It is now evident that RBI’s monetary policy decisions will not simply be based on transient one off data points – such as a fall in inflation here or a pickup in IIP there. Rather, trends or averages in data points such as consumer inflation or core inflation will become driving factors for rate cuts or rate hikes as the need arises.
The RBI appears to be doing a very fine balancing act of managing liquidity and at the same time ensuring that policy impulses are felt across the interest rate spectrum.
It is to this extent that the RBI reduced the availability of overnight call money market that gives a more guaranteed or pre-set access to funds for banks and instead shift more focus to the longer windows through term repos. This would mean that increasingly impact of liquidity will be felt actively in instruments such as 1-month CDs.
The RBI appears to be working towards reducing the kind of volatility in FII flows that was witnessed in mid-2013.
Allowing FIIs to hedge their currency risk using currency futures in domestic exchanges and proposal to allow foreign investors to hedge their coupon (interest) receipts falling due over the next 12 months are efforts to this end. It is noteworthy the FII flows into debt market has been robust in 2014 thus far.
The RBI’s ‘gliding path’ approach to disinflation means that we may not be able to expect rate cuts any time soon given the elevated prices of vegetables, concerns over monsoon and high core inflation. The RBI has a CPI target of 8% by January 2015 and 6% by January 2016.
That means bond markets do not have too many reasons to fluctuate save for marginal movements. That said, lower availability of liquidity in the overnight call market could mean some return opportunities in liquid funds. But this may not be significant. Also, higher tapping of 14-day term repos would influence rates of 1-month CDs. It is noteworthy that CD and CP rates have been on the decline, triggering some price rally.
Investors would do well to remain with short-term funds that could provide sufficient opportunities at this juncture. Longer-dated bonds have not received any signal from the policy, for any kind of price rally, and may not in the near future.
 

Advertisements

  • Save upto Rs.2.67 lakh with Pradhan Mantri Awas Yojana ...Know more
  • Now Save Rs.3150 on your Demat Account ...Click here
  • Now get IIFL Personal Loan in just 8* hours...APPLY NOW!
  • Get the most detailed result analysis on the web - Real Fast!
  • Actionable & Award-Winning Research on 500 Listed Indian Companies.