Update from Research Desk on Mid-quarter monetary policy Review

A monetary policy meet which was keenly awaited by the market turned out to be a complete disappointment for the market participants immediately after the announcement of Monetary and Liquidity measures. Governor Rajan whom the markets had given a standing ovation on September 4, 2013, in his maiden policy meet surprised the markets by releasing a policy statement which is as hawkish as his predecessor and also did the unimaginable by increasing the policy rate by 25 bps. Although the central bank has eased some of the measures which were taken to stem the volatility in the currency on July 15, 2013, the mood in the market seems to be very somber as can be seen from the fact that at the time of writing, the SENSEX is down by 423 points while the 10 year G-Sec has moved from 8.19% yesterday to 8.48%.

Measures

On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:

• reduce the marginal standing facility (MSF) rate by 75 basis points from 10.25 per cent to 9.5 per cent with immediate effect;
• reduce the minimum daily maintenance of the cash reserve ratio (CRR) from 99 per cent of the requirement to 95 per cent effective from the fortnight beginning September 21, 2013, while keeping the CRR unchanged at 4.0 per cent; and  
• increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.25 per cent to 7.5 per cent with immediate effect.

Since the mayhem in the debt market on July 15, 2013 we at Fundsupermart.com have been advising investors to take an exposure into liquid /ultra short term funds (1 month to 6 months), short term funds (6 months to 1 year)  and dynamic bond funds (more than a year). On the other hand, we had also suggested FMPs to risk averase investors who have a time horizon of around 1 year. The hawkish tone of the policy statement gives us a feeling that like his predecessor, Governor Rajan is going to cling onto inflation to decide future policy actions. On the other hand, for all our investors who had taken an exposure into duration funds in the beginning of 2013, our advice is to hold onto their current positions. Though there would be more pain in the short term, we are of the view that good monsoons and a stable currency would make the central bank take a U-turn which would have a positive impact on these investors portfolios.

Dr. Renu Pothen
Research Head-Fundsupermart.com India