So, the US Fed has, expectedly, decided to keep policy rates on hold. It also appears that the Fed is unlikely to raise rates in the near future too.
It would be interesting to watch the reaction from other major central banks in the days and weeks to come. Personally, I feel that other central banks are unlikely to ape the move. Their decisions are likely to be based almost entirely on local considerations. Having said that, policy rates still seem to be (at least for most major markets) at or close to their near term peaks. The same seems to hold true of the Indian markets too.
Talking about Indian markets, Wednesday’s trading session was a study in contrasts. Overnight money rates crashed on abundant liquidity. Rates in the collateralized CBLO segment fell sharply to near zero, while call money rates were in the range of 2%-2.5% at close. This led many (money) market participants to speculate that the central bank (RBI) might react with some harsh measures, including possible a hike in the cash reserve ratio (CRR) - a method of prempting bank funds. Knowing RBI’s penchant for surprising markets, nobody is ruling out anything nowadays.
In contrast, the equity markets seemed to have taken this penchant to the other extreme. Their were rumors of a reduction in CRR leading to a rally in banking stocks. The Bombay Stock Exchange’s bank index gained approximately 1.5% on the day.
Money rates have opened at 1% levels in the CBLO segment and 2% levels in the call money segment on Thursday. Given these conditions it’s difficult to forsee a reduction in the cash reserve ratio
Personally, I’m inclined to go along with the money market mandarins.