About RBI Policy

Today Reserve Bank of India(RBI) will announce its monetory policy now.Many experts have different different opinions about CRR hike upto 50 basis points alongwith 25 basis points hike in Repo Rate and Reverse Repo Rate.Some of them were predicting no hike in CRR neither in Repo and Reverse Repo.We think there will be hike in CRR by 25 basis points.The sector will be affected are FMCG,Auto,Consumer goods,Capital Goods,Banking,etc.But all the related stocks are arleady down by maximum 20% to 5%.So the expectation of rate hike is already discounted upto some extent.Surprisingly today FMCG leaders are vary with today's trades.Hindustan Unilever is trading down by 4% and ITC is trading flat.Banking is also trading flat as BankNifty is at 8400 level just down by 23 points below yesterday's close.So, the market will definitely surprise us with high volatility after whatever outcome of the RBI policy.Lets cross our fingers and hope for the betterment for Indian Economy and best for Markets.We recommend hold non leverage positions at this levels and invest at these levels in any good stocks for the upside of 20-30% in medium term.

Here we are mentioning some concepts' clarifications.

CRR :

The Reserve Bank of India (Amendment) Bill, 2006 has been enacted and has come into force with its gazette notification. Consequent upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary stability in the country, can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate or ceiling rate. [Before the enactment of this amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could prescribe CRR for scheduled banks between 3 per cent and 20 per cent of total of their demand and time liabilities].

Banks in India are required to hold a certain proportion of their deposits in the form of cash. However, actually Banks don’t hold these as cash with themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is considered as equivlanet to holding cash with themselves.. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio. Thus, When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 9%, the banks will have to hold additional Rs 9 with RBI and Bank will be able to use only Rs 91 for investments and lending / credit purpose. Therefore, higher the ratio (i.e. CRR), the lower is the amount that banks will be able to use for lending and investment. This power of RBI to reduce the lendable amount by increasing the CRR, makes it an instrument in the hands of a central bank through which it can control the amount that banks lend. Thus, it is a tool used by RBI to control liquidity in the banking system.

RBI uses CRR either to drain excess liquidity or to release funds needed for the economy from time to time. Increase in CRR means that banks have less funds available and money is sucked out of circulation. Thus we can say that this serves duel purposes i.e. it not only ensures that a portion of bank deposits is totally risk-free, but also enables RBI to control liquidity in the system, and thereby, inflation by tying the hands of the banks in lending money.

SLR : Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio of cash and some other approved to liabilities (deposits) It regulates the credit growth in India.Presently, the SLR is 25% with effect from 7 November, 2009. It was raised from 24% in the RBI policy review on 27 October, 2009.

Repo & Reverse Repo :

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI

It's difficult to say how the stock markets will react; or for that matter to what extent the markets will react. In the last few trading sessions, there has already been a correction of about 4 per centSE Sensex. Any irrational fall in stock prices, in our view, should be seen as an opportunity to add to your exposure, in installments, to equities/equity funds, your planned asset allocation permitting. Your Personalfn consultant will be able to guide you in this regard.

It is impossible to predict near term movement in stock prices. And therefore any investment you consider should be made keeping in mind that in the near term you could be sitting on losses on fresh investments. From a 5 year perspective however we are reasonably confident that a well managed equity fund can deliver returns in the range of 12-15 per cent per year. This is not to say that you will make this return every year.

There will be years in which you may lose money, and others where you may make far more than what we have projected. Over the 5 year tenure, on a point to point basis, you will average a return of 12-15 per cent per annum, which in our view is a realistic estimate.

From a debt market perspective

If you are contemplating on investing monies in the debt market, you will benefit from higher interest rates on offer. However, existing investors in debt oriented funds may take a one time hit; but at the same time, since overall interest rates are higher, from here on, such funds will yield higher returns.

So what should you do now?

Although the interest rates have risen quite a bit, it may still not be the best time to lock in all your money in long term debt instruments (interest rates may still rise).

Go in for short term Fixed Maturity Plans, which yield attractive post tax returns (you could get an annualised return of about 8 per cent on a post tax basis for a three month deposit).

If you can take some risk, go in for well managed Monthly Income Plans (MIPs) that are offered by mutual funds. Go in for the low risk option (equity less than 20 per cent of assets) with a quarterly dividend option. With higher interest rates and possibly lower stock prices, MIPs could yield an attractive post tax return.

From the perspective of a borrower

As a prospective borrower, you are the worst hit. The cost of money i.e. interest rates will rise post the CRR hike. You will probably need to settle in for a lower loan amount given the EMI.

If you are an existing borrower, as long as the rate of interest on your loan is fixed, you are immune to any rise in interest rates. However, if you have a floating rate loan, then expect either the tenure of the loan or the EMI to jump soon.