ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Addressing Markets

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The Reserve Bank of India’s mid-term review of credit and monetary policy contains no surprises. In keeping with governor Bimal Jalan’s oft-expressed view that monetary policy levers should be exercised on an ongoing basis and should not await the bank’s bi-annual announcements, the review has no monetary measures at all. Both the bank rate and the cash reserve ratio (CRR) have been held unchanged at 8 per cent and 8.5 per cent, respectively. Since the governor had already announced his intention to keep rates unchanged just a few days prior to the policy announcement, markets had by and large factored in this constancy in rates.

Beleaguered debt and money markets, struggling to come to terms with a volatile interest rate scenario, nonetheless have heaved a sigh of relief. The rise in interest rates since July, when the central bank hiked short-term rates sharply in a bid to protect the rupee, had already taken a toll of investment portfolios. As it was not so long ago that the bank had been reiterating its commitment to a low interest rate regime many market players had built up huge portfolios in the expectation that these would appreciate as interest rates continued to decline. In the event, the rupee took a beating and as the RBI raised interest rates to defend the currency, all their carefully-laid plans went awry. Consequently, the RBI’s decision to hold its horses, even if only for the present, has spread some cheer in the market. Of course, it would be unwise for players to assume that the status quo will continue. As the governor has been careful to point out, we live in a world of increasing uncertainty and it is quite possible that mid-course corrections will take place much more frequently than in the past. In which case market players have no choice but to learn to manage with greater volatility.

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