The Monetary Policy Review announced today offers a great amount of clarity and direction on the outlook as well as the stance.
The RBI has actually taken three steps or actions:
Ø Marginal Standing Facility Rate has been cut from 10.25 per cent to 9.50 per cent
Ø Hiked the Repo Rate by 25 basis points to 7.50 per cent
Ø CRR balances to be maintained at 95 per cent of the CRR requirement from the earlier level of 99 per cent.
There are two things from the policy statement which deserves our special attention:
Ø The first is the statement that inflation is high and household financial savings are low. The RBI would target lower inflation and higher household financial savings. This justifies to some extent the 25 bps hike in the repo rate.
Ø The second thing of importance is the indication from the RBI that further actions on exceptional measures will be contingent upon exchange market stability and can be two-way.
ü The message from the policy is that short term interest rates need not be as low as what we had seen earlier. But improvements are possible in this segment as the current rates are still quite high. All the market rates including the overnight rates, one year CP and CD rates would converge towards the new MSF rate.
ü Investment preferences at this juncture should ideally be at the short end of the curve like Short Term Income Funds and Fixed Term Plans. The Long end may continue to be under some pressure (the 10Y benchmark has moved up from 8.20 per cent to 8.40 per cent after the policy announcement). The very same investment preferences have been advised by us in our earlier updates too.
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