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The increase in repo and reverse repo rates by 25 bps each is in line with the expectations of most market participants.
The Reserve Bank of India , in a complex macro environment, has attempted balancing growth and inflationary trends, by adopting a calibrated approach, post the normalisation phase, into the tightening phase of the monetary policy.
Rate hikes to continue
The RBI is expected to continue to take rate increase measures until clear signs of inflation control are in sight, since the GDP growth estimate is 8.5 per cent for FY-11 with positive bias and inflation estimate having being changed to 7 per cent, with both supply and demand side pressures observed.
The further rate increases expected are in the range of 75-100 bps up to FY- 12.
The current issue of system liquidity, which has been far lower than the intended 1 per cent of NDTL (Net Demand and Time Liabilities), has been partially addressed through extension of the 1 per cent Statutory Liquidoty Ratio leeway up to April 8.
The dynamics of liquidity over the past nine months has been very challenging for the market.
From a debt market perspective, the yield curve is expected to remain in the flattened mode.
The 10-year G-Sec rate is expected to trade in the 8.15-8.25 per cent range in the immediate term and will look for direction based on fiscal deficit estimates from the budget and inflation moderation.
The equity markets also have not reacted much to the announcement since the rate increase is on expected lines.
Apart from inflation and interest rates on the domestic front, the opportunities which overseas markets could offer on a relative basis based on global growth and the impact of the same on flows and oil prices are the current challenges for the markets.
Conservative approach
From a current equity strategy perspective in a market which looks more challenging relative to the previous two years, the approach is to be a bit more conservative from a portfolio perspective.
Conservatism to be reflected in terms of market capitalisation mix with more focus on large caps until there is more clarity from a global and domestic perspective.
On the back of a good GDP growth of around 8.5 per cent for FY-11, moderated growth rate of about 8 per cent is likely, which is good on a stand-alone basis.
(The author is Chief Investment Officer, Kotak Mahindra Old Mutual Life Insurance Ltd.)
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