RBI Credit Policy Along Expected Lines

The Nifty again remained volatile today, as was expected. The RBI Credit Policy announcement today made it all the more volatile. With a 75 basis points cut by Mr. Ben Bernanke, the US Fed Reserve Governer announced last week, some people in India were expecting a rate cut too, at least a 25 bps cut, if not more. But our RBI Governer, Dr. Reddy, is a tough economist and did not follow the Bernanke route and left all key policy rates untouched. But even though there was no rate cut, yet, the Credit Policy had a more neutral stance this time as against the hawkish stance it took last time.

The rate cut not being announced today brought down all the banking stocks and the two banking charts in our newsletter yesterday, which were looking good till the policy was announced, remained underperformers. However, Tata Tea, which was also recommended yesterday, was on fire today and went up by 7.2% to close near 850 after touching a high of 895.

Coming back to the RBI Credit Policy, in short, it looks like this:

• RBI keeps key policy rates unchanged
• RBI keeps repo rate unchanged at 7.75%
• RBI keeps reverse repo rate unchanged at 6%
• RBI keeps CRR unchanged at 7.50%

A lot of people were expecting that the RBI Governer may not announce a rate cut just yet and the arguments given by him were what many expected. That money supply is at 23% against a target of 17-17.5%. This means, basically, that too much money in the system can always ignite inflation, and therefore a caution on that area was required.

Abheek Baruah, the Chief Economist at HDFC Bank had the following words to say.

• “With the kind of clarity that has come from the policy where the RBI is not likely to tighten further, perhaps banks could take advantage of this and reprice both lending and deposit rates."
• "I think growth hasn’t slowed drastically enough to completely offset inflation worries and I think across the world, the Fed and perhaps the Bank of England being an exception, most Central Banks seem to emphasise inflation concerns rather than concerns about slowing growth. This could change if the US indeed plunges into recession and there are ripple effects across the world. As of now, the tilt is towards inflation among most Central Banks but this could change going forward and I would think that the second half of this calendar year might just look very different.”

In a nutshell, this is what the RBI credit policy had to say.

• Headline inflation picked up since December 2007
• Liquidity management to be priority for policy
• Inflation to go up even if fuel prices remain unchanged
• Upside risks to inflation to increase going ahead
• Flexibility to change reverse repo, repo rates
• CRR unchanged on preview of current liquidity situation
• Financial markets warrant careful monitoring on large forex flows
• Emphasis on price stability, anchoring inflation
• Retain inflation aim of 4-4.5% for FY08, 3% in medium-term
• To maintain GDP growth target of 8.5% for FY08
• Can't exclude likely Forex flows reversal on global sentiment

That's all for today. Trading opportunities will be identified in tomorrow's newsletter. No trading opportunities studied today.

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