Dr. Rajan has once again re-asserted his claim that he is not there to collect facebook likes but to take harsh decisions, however unpopular, in the interest of the economy. In his maiden monetary policy unveiled on 20th September 2013 he has endeavoured to clear any misgivings arising out of Ben Bernanke's postponement of 'QE tapering' announced 2 days earlier. In the bargain he may have saved a large number of retail investors from entering the equity markets at the current unreasonable levels. The 'Irrational exuberance' exhibited by the markets at the behest of FIIs (fair weather friends) and unscrupulous traders had lifted the markets by 20% within a span of 15 trading sessions (Nifty had risen from a low of 5118 on 28th August to 6143 on 19th Sept.). His pragmatic policy announcements have made sure that the equity markets behave in a restrained manner. After all nothing much has changed for the economy, between August 28th and now, to warrant such volatility. Retail investors must bear in mind that markets basically move on sentiments and can show excessive behaviour on both sides (upside as well as downside).
Now let us analyse the decisions taken by Dr. Rajan in his maiden monetary policy. He has hiked the Repo rate by 25 basis points to 7.5% and at the same time reduced the rate of MSF (marginal standing facility) by 75 basis points to 9.5%. His two major concerns for hike in Repo rate have been: Controlling high inflation and boosting household savings. At the same time he has eased the liquidity concerns of the financial system by lowering MSF. There have been concerns in the market circles about growth, but we must understand that these expectations are beyond the realm of monetary policy. It is the fiscal policy of the Govt. that directly drives growth, and the govt. needs to do much more to spur growth by removing the supply side constraints, through fast track clearance of projects and controlling fiscal deficit. It was unfair on part of market participants to hope for a rate cut in the current challenging economic environment. On the contrary, we might see another repo rate hike in the next policy as it will take some more time for inflation to cool-off and the currency to stabilise.
The equity markets may still thrive on the excess liquidity due to the largess doled out by Ben Bernanki, but the markets must remember that the QE tapering has only been deferred, it may come to haunt the markets sooner than later. Indian equity markets would now be driven on the back of Q2 results which would start pouring in from 10th October. Investors still have some time to realise their profits before the equity markets start their downward journey once again. Going by the current scenario the results are expected to be dismal so investors must brace for substantial decline in indices in the medium term. The postponement of QE tapering has also given a temporary lease of life to the Real estate sector. However, I firmly believe that real estate market is in a 'bubble zone' and a crash in real estate prices in India is imminent in 2014. More about the real estate bubble in my next post.
Now let us analyse the decisions taken by Dr. Rajan in his maiden monetary policy. He has hiked the Repo rate by 25 basis points to 7.5% and at the same time reduced the rate of MSF (marginal standing facility) by 75 basis points to 9.5%. His two major concerns for hike in Repo rate have been: Controlling high inflation and boosting household savings. At the same time he has eased the liquidity concerns of the financial system by lowering MSF. There have been concerns in the market circles about growth, but we must understand that these expectations are beyond the realm of monetary policy. It is the fiscal policy of the Govt. that directly drives growth, and the govt. needs to do much more to spur growth by removing the supply side constraints, through fast track clearance of projects and controlling fiscal deficit. It was unfair on part of market participants to hope for a rate cut in the current challenging economic environment. On the contrary, we might see another repo rate hike in the next policy as it will take some more time for inflation to cool-off and the currency to stabilise.
The equity markets may still thrive on the excess liquidity due to the largess doled out by Ben Bernanki, but the markets must remember that the QE tapering has only been deferred, it may come to haunt the markets sooner than later. Indian equity markets would now be driven on the back of Q2 results which would start pouring in from 10th October. Investors still have some time to realise their profits before the equity markets start their downward journey once again. Going by the current scenario the results are expected to be dismal so investors must brace for substantial decline in indices in the medium term. The postponement of QE tapering has also given a temporary lease of life to the Real estate sector. However, I firmly believe that real estate market is in a 'bubble zone' and a crash in real estate prices in India is imminent in 2014. More about the real estate bubble in my next post.
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