Monetary Policy: The next big event for the market

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Monetary Policy: The next big event for the market
It was another buoyant week for the markets with the indices touching near three year highs and then falling back on profit booking.

Once again the rally was led by foreign funds who were net buyers for all of the five trading days of the week. With plenty of foreign fund liquidity expect markets to rally further in the coming weeks, at least till the Federal Reserve decides to taper off its bond buying programme.

The Indian markets would now look to the Monetary Policy Review to be announced on Oct 29. The consensus is that the RBI would hike the repo rate for the second time in succession by 25 basis points. Repo rates are rates at which the RBI lends money to banks. A hike in these rates generally signal the RBI's intention to keep interest rates elevated.

However, a reduction in the Marginal Standing Facility and the Cash Reserve Ratio would to some extent nullify the repo rate hike move.

Economists are optimistic that the Marginal Standing Facility would be reduced as forex markets have exhibited some calm in the last one month. In fact, the rupee has now gained substantially in the last few weeks and is one of the best performing currencies in Asia.

The RBI is thus expected to cut the Marginal Standing Facility for banks, while simultaneously announcing a hike in repo rates by 25 basis points.

Banking stocks which have been badly hit ever since the RBI announced the hike in marginal standing facility have recovered ever since. It's possible that they may continue to rally as investors churn their portfolio.

In fact, some foreign funds have advocated buying into banking stocks on every dip, as any economic recovery may lead to a sharp rally in these stocks.

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