Yesterday the Reserve Bank of India came out with its policy review in which i believe the biggest positive is that the RBI has continued with its easing policy. In the background of the Economic Outlook published by the RBI a day back it was only prudent on its part to reduce interest rates by some extent. Although interest rates would have continued to come down in any case due to the fact that liquidity in the system has increased sharply, FII outflows have stopped and have become inflows and corporate bond spreads have come down sharply. The reduction in bulk deposit rates from as high as 12-13% per year in November 2008 to 5-5.5% now (for a one year deposit) clearly points to a sharp fall in interest rates on loans to consumers and corporates over the next few months.
The clear indication of the RBI on conducting Open Market Operations, unwinding MSS Bonds and conducting government borrowings in a non disruptive manner is also a positive signal for lower interest rates.
I will not be surprised if the 10 year Government of India bonds see yields falling to 5% by June 2009.
The other positive steps by the RBI have been
-Introduction of platform for Corporate bonds trading. This will make pricing of Corporate bonds much more transparent, specially in segments other than AAA. This will improve the liquidity significantly and thus lead to clearer indications on bond spreads. It will make the task of both issuers of bonds and their buyers much more simpler and will aid fund raising for corporate India.
-It has extended the deadline for NBFC’s to raise their Capital Adequacy to 15% to March 2011. This will be positive for the survival and growth of NBFC’s and fund flow through them to the economy.
-It has made payment on interest of Saving Bank deposits on a daily basis rather than the minimum amount in the account between the 10th and 30th of the month. This is a move in investor interest as most people are either not aware of this phenomenon or end up getting interest on the lowest amount in the account during the month.
-It has taken a step forward on STRIP’s which essentially means separate trading of interest payouts and principal on debt instruments. This will also help in proper formation of the yield curve and proper pricing of bonds. It will also improve trading in bonds
-It has moved forward on introducing interest rate futures on 10 year bonds which will improve price discovery and reduce volatility in bond price movements.
The above were the most positive moves from the policy in my view. The language of the policy also has been clearly pro growth which should aid the momentum that has started building up over the last two to three months.
SEBI has also made a very positive move by spelling out clear guidelines for inclusion of stocks in the Futures and Options segment. The inclusion of some stocks in this segment always came as a surprise to me. Many large,established companies with a long term listing track record did not find a place in this segment in the past. However many illiquid, recently listed and low floating stock companies came into the list. Hopefully this move will reduce the speculation and also illogical and irrational price movements in stocks which come into the F&O segment. This move is specially in the interest of retail investors.