Focus on sustaining growth

MONETARY POLICY 2007-08/ OPINION

Srinivasan Varadarajan
MD, JP Morgan Chase

After the unexpected CRR and repo rate hikes by the RBI on March 30, 2007, the no-rate hike decision in the annual policy statement seeks to stabilise and consolidate gains achieved by the recent aggressive monetary measures. Clearly, price stability continues to be in focus but growth jitters seem to have been assuaged by this policy.

By pegging expected growth rate at 8.5 per cent for 2007-08 and assuring a credit environment to foster such growth, the RBI governor has ensured that the growth momentum is sustained.

The focus on development of financial markets by permitting new instruments is a welcome and timely step. Introduction of single entity credit default swaps at a time when there is rapid expansion of credit would go a long way in better dispersion of credit risk within the system.

With no rate hike in the policy and cut in SLR not looking imminent, bond markets have a lot to cheer from this policy. We should see G-Sec yields nudge lower and the 10 year benchmark bonds should trade in 7.85-8 per cent range in the short term.

As the liquidity situation improves, the RBI would continue to mop it up through tools such as CRR and MSS thereby keeping overnight night rates around the 8 per cent mark.

Therefore, the short end of the OIS curve could continue to be under pressure and the curve is likely to stay inverted for now. As far as currency markets are concerned, DOLLAR selling pressure is likely to continue till we see moderation in capital flows through policy-induced measures.