DEBT MARKETS POST RBI POLICY REVIEW ON OCTOBER 27’2009
RBI announced Credit policy Review on October 27’2009; wherein RBI kept all key policy rates unchanged & hiked SLR limit by 1% to 25% from 24%. RBI has given enough indications in the review of changing their stance from neutral to hawkish in light of the growing inflationary pressures. Though they did not raise any of the key rates like REPO, Reverse REPO & did not raise CRR to suck out excess liquidity, it is only a matter of time as to when they will work towards sucking out liquidity to contain inflationary pressures.
RBI can take any of the following measures to suck out liquidity & reverse their easy liquidity stance which they had started as part of their monetary measures last year:
- Hike in CRR
- MSS Bond Issuances
- Going slow on OMOs
These are the signals ( as & when they are announced which will give next direction to the debt markets). In the intervening period post the Policy Review announcements, debt markets have taken some positive cues based on the following:
- SLR hike of 1% will generate incremental demand of close to Rs.10-12000 crs in G Sec buying from Private sector & MNC banks. Most of the PSU banks are sitting on excess SLR holdings ( even higher than newly announced 25% ratio)
- Credit growth of 10.8% Y o Y as on October 31’2009 is way below RBI targets & not likely to improve in the near future
- Huge inflows on account of FDI/FII/QIPs etc is adding further liquidity to the already huge liquidity in the system of close to Rs.1 lac crore & above
- Generally inflation gets discounted 6 month in advance. Case in point is when in the month of January 2009- inflation was predicted to be near 0% by June’2009 & inspite of that 10 year bench mark hovered around 7% levels for quite some time. This time around RBI has raised their inflation targets from 5% to 6.50% in the month of March 2010 which is getting priced in the current G Secs trading around 7.25 to 7.27% ( from a high of 7.47% pre Policy)
- Technically also whenever 10 year has touched 7.50% levels, it has gone into oversold zone & there has been strong resistance at this level. G Sec prices in the recent past have always retraced back from these levels to settle somewhere between 7 & 7.25%
- Any positive trigger is likely to give rise to speculative buying position in G secs with a downward bias of rates breaching 7% on the lower side
Hence, I expect the benchmark rates to hover between a trading zone of 7 to 7.50% levels for some more time ( with maybe a bias towards breaching 7% on the lower side) till such time RBI announces any measures to contain liquidity as mentioned above. Treat these levels as your trading zone levels of exiting long end closer to 7% & entering long end closer to 7.50% & above.
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