India: Expect cuts in Policy Rates

Thursday, November 13, 2008

Inflation for the week ended November 1, 2008 was 8.98%, sharply lower than the previous week's 10.72% reading. Expect further sharp declines in the coming weeks and months...creating substantial room for policy makers to cut rates and provide further liquidity infusions.

Currently:                     Policy rates                        Reserve Ratios
Bank Rate                           6.0%                C.R.R.           5.5%
Rep Rate                             7.5%                 S.L.R.         24.0%
Reverse Repo Rate           6.0%
So we have room of 4% on SLR, 2.5% on CRR and I would expect a reduction of at least 250 basis points more in Policy rates.

As the financial crisis plays out globally, expect inflation expectations in India to vanish from the landscape...the above liquidity infusions combined with targeted stimulus packages and financial sector reforms will be instituted by the government.  There is almost no choice in the matter and a debate will not be required.

With respect to markets, I am now 5% equities and 95% cash...and on the internal Hamlet debate of to buy or Not to buy...I found the following quote amusing:
So who would sell into such a market? The Investor Team's resident academic, Anant Sundaram, puts such sellers into two categories: the clueless and the choice-less. Sundaram, a professor of business administration at Dartmouth, says the former need to take a Prozac, but the latter have more ramifications for the economy. Only those with a gun to their heads, in the form of margin calls or investors screaming for their money back, would sell now, he says, and they must be either hedge funds, statistical arbitrage mavens or private equity players.

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