Rate hike in line with market expectation; experts feel short-term income fund is the best option at the moment
Reserve Bank of India (RBI) in its mid-quarterly monetary policy review today raised the key interest rates by a 25 basis points (bps), in line with the market expectation to tame the rising inflation. The move has raised repo rate to 8.25 percent from the previous 8 percent and the reverse repo rate to 7.25 percent from 7 percent while the CRR was left unchanged at 6 percent. Also, the marginal standing facility has gone up to 9.25 percent from 9 per cent. RBI has raised the key lending rate for the 12th consecutive time since May 2010.
In the mid-quarter policy review statement, RBI said domestically, even as many indicators point to moderating growth, both headline and non-food manufactured products inflation are at uncomfortably high levels. The policy statement also stated that in the current scenario, with the likelihood of inflation remaining high for the next few months, rising inflationary expectations remain a key risk. Therefore, it is imperative to persevere with the current anti-inflationary stance.
Moreover, RBI expects the inflationary pressures to ease towards the later part of 2011-12 following stabilization of energy prices and moderating domestic demand. Soon after RBI’s move, Pranab Mukherjee, finance minister claimed that the central bank’s monetary tightening would impact the country’s economic growth.
Ramanathan K, CIO, ING Investment Management said inflation continues to be the primary driver for monetary policy. “We are at the end of the monetary tightening cycle and inflation should head southwards starting end of third quarter of this financial year, driven mainly by base effect,” he said.
Waqar Naqvi, CEO, Taurus Mutual Fund, suggested investors to invest in income funds with short maturity and to consider a move into long term fixed income funds only once the interest rate start declining. MIPs too are a good option, he added. Commenting on the impact of the hike on equities, he said “Equity markets in my opinion have already discounted and factored in the fact that this would happen.”
