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Debt Market Mayhem
July 16, 2013

Update from Research Desk on RBI's measures to tame currency volatility.


Author : Dr. Renu Pothen



Update Monetary Policy_Oct2012

Mint Street came out with a series of announcements last night as a result of which the debt market went into a tailspin today. As on July 16, 2013, 10 year G-Sec, 1-year Certificates of Deposit (CD) and Commercial Paper (CP) have closed at 8.10%, 10.28% and 10.39% as against the previous day’s close of 7.56%, 8.32% and 8.86% respectively. 

Depreciating currency has been a cause of concern for our policymakers for some time now and the Reserve Bank of India (RBI) in its Mid-Quarter Monetary Policy Review had made it very clear that growth-inflation dynamics along with the rising Current Account Deficit (CAD) is a big concern for the central bank. To bring some sanity into the currency market, the RBI has decided to take some measures which should be able to stem the volatility that has been witnessed in Indian Rupee.

Measures
Marginal Standing Facility (MSF) will be 300 basis points above the policy repo rate under the Liquidity Adjustment Facility (LAF). Hence the MSF will now stand at 10.25%.
The overall allocation of funds under the LAF has been capped at 1.0% of the Net Demand and Time Liabilities (NDTL) of the banking system, reckoned as INR 75,000 crore for this purpose.
RBI will conduct Open Market Sales of Government of India Securities of INR 12,000 crore on July 18, 2013.

Our Take
Since the Mid-Quarter Monetary Policy Review, we at Fundsupermart.com have been telling our investors that we are not expecting the RBI to cut rates aggressively in the next few months. The measures taken yesterday are aimed at tightening liquidity in the system which in turn will have an impact on bond yields. In the coming weeks, the bond market is expected to remain volatile and we advice investors to hold onto their current positions in fixed income. As far as fresh exposures are concerned, investors who do not want to take risk can consider Fixed Maturity Plans (FMPs) with a time horizon of 1 Year while all other investors can look at short-term funds/dynamic bond funds.

 

Dr. Renu Pothen
Research Head-Fundsupermart.com India


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