Repo Rate Cut: Market Euphoria

Monday, October 20, 2008

The liquidity squeeze has prompted more action from the RBI, a 100bps cut in the Repo rate...the first since 2004. Markets have gone ballistic, up nearly 4.5%. One can argue the market was oversold last week and shorts got squeezed this morning; but volatility is not good news for markets.

Every rally is an opportunity to exit the market and reduce risk. RBI is responding to a crisis; conditions are not normal when we get extraordinary responses from the central bank. The current move follows the reduction in CRR which released Rs 60,000 cr into the system.

Expect many more such moves; I expect interest rates to decline by 3% and further declines in CRR.

This is not time to commit money to the market; one can recover from an opportunity lost but real losses are permanent. Risk is high and rising. This is still the capitulation phase.

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