| |
| To a market that was expecting specific rate actions from the Governor to signal further downward movement of interest rates, the credit policy was a dampener. |
| |
| Now where do markets go from here? Clearly, the inflationary situation, robust domestic growth and signs of recovery in global economy have influenced the governor in keeping the rates steady. |
| |
| However, inflation is expected to come down in the next few months as the base effect of last year wears off and agricultural growth softens food prices. |
| |
| But it is the interest rate differential between Indian and global economies, particularly at the short end, that exerts significant downward pressure on Indian rates. |
| |
| Higher interest rates in India compared with global rates spur flow of foreign money into India to exploit the differential. |
| |
| What can the markets expect? Expect more of the same thing that we have seen in the past, because everything needs to give in a little. Rupee would appreciate some more. |
| |
| Interest rates would fall some more. Forex reserves would rise some more. Intervention and sterilisation strategy would continue, so would restrictions on capital inflows. |
| |
| The RBI has been moderating these variables through a careful balance of allowing play of market forces and intervention. Expect that to continue. |
| |
| When would this cycle come to an end? When expectations in domestic and global markets change and the interest rate differential between Indian and global markets narrows. |
| |
