Bernanke proposes, Rajan dismisses! - Views on News from Equitymaster

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Bernanke proposes, Rajan dismisses!

Sep 20, 2013

The equity share market's wishful thinking that the Reserve Bank of India's (RBI) newly minted governor will toe in line its expectations came crashing today. After the jubilance following Fed chief's proposal to keep the liquidity tap open for a prolonged period, this came as a shock to many.

Dr Raghuram Rajan, in his maiden monetary policy today, hiked the repo rate by 0.25% to 7.5%.

Thankfully for us, it was an assurance of the fact that that the sanity that was sadly missing amongst other central bankers, rests firmly on the incumbent RBI governor's head.

Make no mistake. The market euphoria after Dr Rajan's appointment and after Bernanke's speech yesterday was all in anticipation of this day. Fed up with ex-governor Subbarao's careful and conservative monetary policies, Indian government and markets were hoping for a change. Dr Rajan, however, as promised by him the maiden speech, has chosen to be as unpopular as his predecessor.

The marginal hike to the repo rate will not do much to change the liquidity scenario in the banking system. In fact even the marginal breather in terms of overnight lending rate (via MSF) is just a temporary measure. However, given the possible inflow of cheap money into the economy, a liquidity tightening mode will certainly arrest asset bubbles.

Growth concern, slow credit disbursal, inflation and problem of non-performing assets are here to stay. And neither this monetary policy nor the future ones can address it single handedly. In the absence of reforms, better control over subsidies and better monitoring of the performance of PSU banks, we will hardly have any solution.

So, as we wrote earlier, monetary policies cannot be reasons for investors to cheer or grumble about. The choice of stocks to invest in too cannot be based on such temporary factors. However, one could certainly be on the lookout for safe stocks that could be available cheap. As the markets keep swinging to the Fed's insane and RBI's sane decisions, it may be a good time for investors to allocate assets more carefully.

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