Monetary Stimulus

Indian Central Bank slashed its two key short-term interest rates by 100 basis points each on Friday and the government unveiled a fiscal package to stimulate the economy that has been slowing faster than expected. The government said it would ease foreign borrowing rules for firms in the infrastructure and real estate sectors, and raised the foreign investment limit in corporate bonds to $15 billion. The central bank also announced a cut in its cash reserve ratio, the proportion of deposits banks must keep with the Central Bank, by 50 basis points to 5.0% with effect from Jan.17

Key Points are :

- Repo rate is the rate was cut to 5.5% from 6.5%.

- Reverse repo rate was cut to 4.0% from 5.0% .

- Both reductions are effective immediately.

- The cash reserve ratio was cut by 50 basis points to 5.0% with effect from Jan-17.

- External commercial borrowing rules eased.

- Raised foreign investment limits in corporate bonds to $15 billion from $6 billion.

- Withdraws customs duty exemption on zinc, Ferro alloys .

Views:

Some more tinkering in the repo rate is possible going forward and further reverse repo rate cut is a possibility unless global economic outlook worsens further in the months ahead. Existing Investors can wait till Jan 2009 since more events to come up to give direction to the interest rate market. Fresh investments in bond funds suggested for those who have 6-12 months time horizon and as part of asset allocation theory, suggest you to look at short term income funds also.