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Why did the market shoot up minutes before the RBI’s governor’s speech? Did someone know what that there would be no nasty surprises?
Today, a very peculiar phenomenon was observed in the markets. It was noticed that the markets had already made its move ahead of Raghuram Rajan’s decision to increase repo rate. Just minutes before the announcement, the markets fell down and then immediately shot up. Volatility was immense. Did the markets anticipate that the Reserve Bank governor Raghuram Rajan would do what was widely expected and not spring a nasty surprise like last time?
The market was trending down since morning, continuing the decline witnessed yesterday till 10.45 when the Nifty was trading at 6,085. A few minutes later, at 1052 hours Nifty markets inched up to 6,090. However, within the next few seconds, the market shot up to 6,124, or 34 points – well before Raguram Rajan spoke. Subsequently, when he announced the widely expected policy of raising repo rates, Nifty fell all the way to 6,079 within a matter of a few seconds in a knee-jerk reaction. Mr Rajan announced a 25 basis percentage points increase in repo rate, from 7.50% to 7.75% and kept cash reserve ratio (CRR) intact. Since this exactly what was expected and there was no nasty surprise, the buyers stepped in and pushed the market much higher. The intraday volatility was immense. However, the fact is that even before the RBI governor appeared, the upwards market direction was suddenly well-set without absolutely no new information present.
The screen grab from Google Finance above will illustrate the point:
In fact, the markets had tanked yesterday when there were rumours of an even more hawkish stance from the RBI governor, while rest of Asia and the world was trending up. Bulls were emboldened today that the hawkish stance did not come to pass. But even before Raghuram Rajan spoke?
Raghuram Rajan, in the second quarter monetary policy, has increased repo rate while reducing MSF or borrowing rate for banks by 0.25%
The Reserve Bank of India (RBI), in its second quarter credit policy review has increased repo rate by 25 basis points (bps) while reducing the marginal standing facility (MSF) borrowing rate for banks by 25 bps to 8.75%. The cash reserve ratio (CRR) remained unchanged at 4.0%.
With the increase of 25 bps, the repo rate now stands at 7.75%. Consequently, the reverse repo rate under the liquidity adjustment facility (LAF) stands adjusted to 6.75% and the bank rate stands reduced to 8.75% with immediate effect.
"With the more recent upturn of inflation, and with inflation expectations remaining elevated anticipating the pass-through of exchange rate depreciation and ongoing adjustment in administered fuel prices, it is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth. It is in this context that the LAF repo rate has been increased by 25 bps," the RBI said in a statement.
During September, inflation measured by the wholesale price index (WPI) rose for the fourth month in succession. The pass-through of rupee depreciation into prices of manufactured products is acting, along with elevated food and fuel inflation, to offset possible disinflationary effects of low growth. While food price pressures may ease with the arrival of the kharif harvest and the usual seasonal moderation, overall WPI inflation is expected to remain higher than current levels through most of the remaining part of the year (see chart below), warranting an appropriate policy response.
Similarly, retail inflation measured by the consumer price index (CPI) has also risen sharply across food and non-food constituents, including services, keeping inflation expectations high. "Notwithstanding the expected edging down of food inflation, retail inflation is likely to remain around or even above 9% in the months ahead, absent policy action," the central bank said.
RBI said, from September, as steps to contain the current account deficit (CAD) started taking effect in an improving external environment, volatility in the foreign exchange market ebbed and it became possible to unwind the exceptional liquidity tightening measures. "Keeping in view the need to infuse liquidity into the system to normalise liquidity conditions, term repos will now be conducted for a total notified amount equivalent to 0.5% of net demand and time liability (NDTL) of the banking system. In addition, the MSF rate will be reduced by 25 bps," it added.
In his statement on monetary policy, Dr Raghuram Rajan, governor of RBI, said, the central bank plans to build its developmental measures over next few quarters on five pillars, namely…
He said, action on the monetary policy framework will follow the submission of the Dr Urjit Patel Committee report. A number of measures to strengthen bank structures and financial markets have already been announced, and more will follow as they are worked out. The strategy to expand financial inclusion will be informed by the Dr Nachiket Mor Committee report, though significant efforts to explore the use of technology are already under way.
Rajan said a number of banks have expressed concerns about the difficulty of settling electronic funds transfers when the markets have closed. “Keeping this in mind, we have revised the timing of MSF operations. With effect from 5 November 2013 they will be conducted between 7.00pm and 7.30pm instead of between 4.45pm and 5.15pm. I believe this new timing will help the banks greatly in their reserve management and help free up liquidity for the economy,” the RBI governor said.
Commenting on the monetary policy measures, Chandrajit Banerjee, director general of Confederation of Indian Industries (CII), said, "The RBI could have refrained from affecting a hike in repo rate as industry is already reeling under pressures of high cost of capital and low availability in a tight liquidity situation. CII is fully appreciative of the RBI’s concern on anchoring inflationary expectations but this is a supply side led issue and therefore, raising interest rate would hurt growth while proving unequal to the task of tackling inflation."
Here are the highlights of the RBI's second quarter monetary policy: