We Expect Market Yields To Fluctuate In a Narrow Range over the Near Term<
30-Jan-13   15:51 Hrs IST

Mr. Santosh Kamath
RBI in its third quarter review of monetary policy, has cut CRR, repo rates by 25 bps? What's your outlook going forward?

The policy outcome was along expected lines reflecting the RBI's efforts to boost growth - repo, CRR and SLR have been cut by 75 bps, 75 bps and 100 bps respectively over the last one year. The moderation in headline inflation along with the recent measures by the government to address fiscal deficit, seemed to have provided the central bank adequate comfort. It has indicated that the overall weak growth environment needs to change - investment activity remains lackluster, falling consumption demand and anemic export demand. RBI acknowledged the need to address this worrisome trifecta and indicated that inflation pressures could be manageable.

At the same time, it has highlighted various downside risks stemming from the widening twin deficits (current account and fiscal), potential spillover of global risks (given India's rising capital linkages) and risk aversion in the banking system due to credit quality concerns. While India has been witnessing strong FII flows, FDI flows have been quite low. The recent increase in FII investment limits in government and corporate debt should help in getting new flows as well as deepen the local bond market.

The CRR cut is a pre-emptive measure to cushion the banking system from seasonal demand for liquidity ahead of the financial year end. In recent weeks, the LAF borrowing levels have edged lower but broadly remained above bank's comfort zone. Historically, the banking system has witnessed a rise in liquidity pressures during the last quarter of the financial year.


Global economic growth continues to remain subdued, particularly in developed economies. The high sovereign debt burden and limitations on the fiscal side have led central banks to adopt unorthodox policy measures to support growth. This was reflected in Bank of Japan's recent measures - it joined the US Federal Reserve in adopting open-ended monetary easing (linked to inflation target of 2%). Central banks in Emerging markets have also maintained an easy monetary policy stance, while focusing on reining in export competitiveness.

Amidst this uncertain environment, RBI should maintain its growth supportive stance. However, a lot depends on the evolution of local and global risks. Inflation seems to be trending down due to fall in core drivers and weakness in global commodity prices. However, the government needs to usher in supply side reforms to ensure that the economy is not overtly dependent on the vagaries of global commodity markets. In addition, boosting of investment activity remains a key component for future growth.

RBI will continue to do a balancing act to manage growth and inflation expectations. Accordingly, the path to monetary easing is likely to be uneven. We expect market yields to fluctuate in a narrow range over the near term and the focus will now shift to the Union Budget. A portfolio of fixed income funds providing a combination of high coupon income along with capital gains will work well in the current environment.

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