Mumbai, Nov. 3 (PTI): The mid-term review of the monetary and credit policy signals a switch from soft to neutral stance, an “immediate hardening” of interest rates and upward momentum of rupee in the short-term due to absence of measures to stem its appreciation, Crisil said.
According to the credit rating agency, the absence of any liquidity enhancement measures marks the inflection point of interest rate cycle and rates are likely to harden immediately. The last five policies had some measures to shore-up liquidity, it said, adding that the latest policy would have an important implication on interest rates.
A large section of the market had priced in a cut in cash reserve ratio (CRR) and bank rate and an absence of these measures is likely to see a sell-off in bonds, it said.
The fact that overvaluation of bonds was more at the long-end, the yield curve being flat, the correction was likely to be more at this end, it said. A rise in yield spread of 15 to 20 basis points was expected in the immediate term, it added.
The policy's emphasis that the Reserve bank of India does not have an explicit exchange rate target is likely to be construed as a signal that it is comfortable with the recent appreciation and could add to the upward momentum of rupee in the short-term.
The absence of measures to greater convertibility will also have a similar effect. However, it makes hedging of forex borrowings over $10 million mandatory and this would affect arbitrage margins for corporate treasuries adversely, it said.
Meanwhile, credit rating agency Icra said the credit policy reinforces the “feel-good factor” and evokes optimism for 2003-04 on certain micro-fundamentals, mainly due to a growth in the agricultural sector.