Nikhil Johri : Mint St Unambiguous Signal

Nikhil Johri

CEO, Alliance Capital

The interest rate (bank rate and repo rate) cuts announced by the Monetary Policy were very much in line with the market estimates, though the reduction in cash reserve ratio injecting Rs 3,000 crore of additional liquidity into an already overflowing liquidity environment came as a surprise.

The RBI has, therefore, given an unambiguous signal to the markets that it is creating all the possible conditions needed to stimulate growth. The onus is now shifted on the banks to reciprocate by effecting cuts in their lending rates, particularly for the borrowers below the high investment grade credit ratings.

 

The announcements have some other positives for the money market and government securities. The repo markets are being further broadbased by extending repo eligibility to a select category of Non-SGL account holders.

This way, many cash surplus corporates intending to invest for a few days will have a very liquid investment avenue. There is also an intention to extend the repo eligibility to all debt instruments including corporate bonds.

In addition to the development of the repo market, collateralised borrowing and lending obligation (CBLO) will also get the desired fillip by it being considered a money market instrument with the same risk weight as applicable to government securities.

A few of the market expectations however are not met by this policy. But it is comforting to note that the RBI acknowledges that some of these steps are required, and has outlined the progress made in each of these cases. The market was expecting that.

The OTC rupee derivatives will be further developed by permitting the market to use all risk management tools currently used to hedge interest rate risks involving foreign currency liabilities in the OTC markets.

The operational and prudential guidelines of STRIPS will be issued as part of these policy announcements.

The policy will announce the measures leading to the development of the Mortgage Backed Securities market.

With strong foreign exchange reserves on its side the RBI will initiate steps to let resident individuals invest in offshore financial assets at least in a limited manner.

Savings Rate Structure would be deregulated thereby removing one of the few remaining rigidities in the market.

Top rated corporates will access the market directly, as is the case now, and will continue to borrow at extremely attractive interest rates. The debt schemes of mutual funds will continue to find strong investor interest in view of the benign outlook. We expect that at these lower interest rates, many individual investors will find investing into equity assets a little easier.