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Is the ‘Unanticipated Expectation’ the new Anticipated Policy?

, September 27, 2013, 1 Comments

Federal Reserve announcement of a possible Qe Tapering of its massive bond buying program, implying unwinding of easy or cheap money availability in emerging economies created jitters in emerging markets’ financial markets world over. But, the  actual policy stance on September 18 not only had a soothing impact on the Emerging Markets due to it being the unanticipated stance but also raised the US exchanges  too  on that day. Besides, the earlier anticipated Qe tapering policy for the same day did leave a room for possible other bilateral agreements between countries for the better insulation of impact on stock markets or economies worldwide in future.

In a similar fashion, the indian monetary policy announcement on Sept 20 did leave an unanticipated shocker behind, it being the rise in the Repo Rates. The plausible explanation given for the rise in the Repo Rates as provided is the gap filling needed between the MSF(Marginal Standing Facility) rates and the Repo Rates.

Marginal Standing Facility is the rate whereby when in an emergency situation when banks’ liquidity completely dries out banks can  borrow from the Central Bank against their securities. Banks can even borrow from the Central Bank against their securities on a lower rate (Repo Rate labeled under liquidity adjustment facility). The difference between the two rates is based upon the liquidity situation which a bank at any given time faces. Repo rate is a possible future benchmark rate for all short-term rates in India. Any change in the repo rate is immediately factored in the EMI’s which banks charge.

Though, the msf rates were cut and repo rates were raised against a reason of bridging the gap between the two, for the short-term, it did raise the EMI’s though. But the unanticipated policy stance did have a positive impact on the long-term strategy of correction of the yield curve to a positive sloping yield curve.

The main question here is like the cash reserve ratio cut which is the percentage of funds of the bank’s deposits they have to keep in the form of idle cash with the RBI.(These funds banks can’t lend and any cut in this rate releases funds for the banks for further lending),couldn’t the repo rate status quo or msf rate cut be announced that could bridge the gap between the repo and the msf as suggested as the explanation? But that stance would then become an anticipated policy move of rate cuts and no rate hikes. Though, that could have reduced the EMI rates but could it then have corrected the yield curve the way it did by the “unexpected”announcement.

Is the unexpected anticipation the new anticipation ?  An investor who would have hedged on the stock market on the reverse stance would not only got the option or the future cheap in stock exchanges worldwide but could have made immense profit on the same too.

  • P V Rajeev Sebastian

    As you have suggested future course of action will be MSF rate cut and status quo in repo rate, I think