RBI's midterm review of the Credit Policy 2004-05 included increasing
the repo rate to 4.75% (leaving Bank Rate and CRR untouched), increasing
inflation projections to 6.5% from 5%, and reducing GDP estimates to
6-6.5%. RBI also increased the ceiling on NRE deposit interest: since
liquidity is under control, it will no longer discourage NRI deposits.
Importantly, RBI announced that it would execute measures to stabilize
inflationary expectations in a calibrated manner.
Clearly, RBI is concerned about inflation - despite its assertions
that inflation is largely supply driven, it increased CRR in September,
and has now increased repo rate (a move un-anticipated by the markets,
that made 10-year G. Sec. yield rise almost 20 bps after the announcement).
Based on this, it appears RBI will continue to respond to the emerging
scenario on a dynamic basis.
However, we do not believe RBI will consider any further repo rate
hikes in the next few months. In fact, any such action could jeopardize
growth prospects and investment demand in the economy.
The market's current levels provide a great opportunity for long-term
debt investors to enter the markets.