29th Januray RBI Policy Meet.

29th January is an important date. Now it’s not a red letter day or neither is any day the Indian history to be remembered. For financial market 29th of January remains a big day as the RBI will hold its much-awaited monetary policy. The whole Indian economy is keeping a close eye on the movement of the giant steps of RBI. It have been a much hyped that RBI might go for a rate hike any time soon. Prime drivers of this are the food inflation and the CPI.

A quick look at the inflation numbers.

1) The above index chart depicts that CPI and food prices have started rising from 2003-2005.Where as non food items were lower at that point of time. Then we find a controlled price and CPI remaining below the level of 5.Suddenly from 2006 end to till date inflation and food prices started climbing back breaking all past levels.
If we get into further detail analysis and trend evaluation of the RBI actions and market movement for a period of 1 year then we get some interseting facts which will be described via the chart itself. (I will not put a note of analysis as I think the chart is beyond of any description.

2) In the below chart I have tried to bring forward the actions taken by RBI in 2008 to 2nd quarter of 2009,in parallel to repo - rates, stock market index movements along with CPI.

Now what we can expect from the RBI on 29th of January regarding interest rates.( Speculation)

Before this we need to understand the ways other than which RBI can withdraw liquidity from the market other than interest rate hike. Very recently RBI declared that will issue bonds of Rs.18000cr into the market.

Primarily there is one scheme other than interest rate hike by which RBI can squeeze liquidity from the market is short-term bonds under the market stabilization scheme (MSS) to absorb liquidity instead of increasing the cash reserve requirements. Now what is the difference of issuing bond instead of interest rate?

Indian banks have provided fewer loans to consumers and are having a growth in their deposits. Commercial banks are sitting with huge reserves of cash in their holdings. If interest rate hike is being made it will not be able to squeeze liquidity out of the system with a fortnight. It will depend upon the loans disbursement .Since only then the repo rates and reverse repo-rates will come in to play to squeeze liquidity from the banks and put the pressure on consumers.

Moreover as Indian export is still way lagging behind and if rate hike is made at this point of time it will increase the cost of borrowing and will pose a threat to Indian economic growth rate of 8%.

Indian companies are still finding difficulty to raise funds from banks and are opting for other sources to raise funds. Now at this point of time if any rate hike is made then it will further detoriate the fund raising plans of the corporate.

Finally they might not be able to take such a hard decision at this point of time when export and Indian economic growth have started to raise equal to 2007 period. Bond is the safest option to suck out the liquidity of the commercial banks. And these bonds will be released in the reaming days of 2009-2010 fy. At the same time SBI is coming up with a bond of another Rs 3,000 and Rs 5,000 crore by way of issuing 10-year retail bonds, before 31st march 2009-10 fy.

Bonds will not make an overnight pressure on the market or corporate India. It will reflect its affects very quietly on equities but with a strong bang on Bond market. I am not ruling out that RBI will not go for a rate hike to control the dragon inflation but it’s a speculation keeping in mind the Rs.18000cr bond to be issued that RBI may not go for any hike in 2009-2010 fy.