The Policy Rate Mechanism as conceived by Central Bank

The Policy Rate Mechanism as conceived by Central Bank

Not unusual for a monetarist in the world who sit down to look periodically at the Policy Rate of their Banks. To be precisely the monetary policy is assumed statement about the quantum of money supply at the given interest Rate. The Interest Rate is here a short term rate at which Banks and Financial institutions are engaged in borrowing and lending for short time.  Such rates are decided based on an indicative statement of Central Bank as well as following the demand and supply of Money in the monetary system. And thus a mechanism evolve out of connect between the Policy statement and the Short term rate. While Central Banker being the last Lenders resort and Bankers Bank, resorts to maintain its announced rate for all lending and borrowing purpose, the Market choose to adopt some admissible variation depending upon the liquidity.

The mechanism of Rate transmission is further impacted out of prevailing Currency and Bond Market condition within the financial system. It is now established and measurable to find out the interrelation between the Bond market and currency market impacting the Liquidity. Infect in an unrestricted market the impact has been enormous.  So we can safely assume the rate transmission have other players contributing to the rate mechanism. To add to the uncertainty is the non parallel transmission of Rate on the Yield Curve.

This completes the short term rate as practiced and bench-marked in the money market gradually evolving into Long term rate. The process of this policy transmission is multi lateral and multi dimensional. Given the array of loans following Time, issuers, tenor and rating obligation, the Bond market adjust through a possible array of lending Rate also.

Needless to say the rate transmission is so complicated market oriented process, that books of theory are distant in absolute measurement of the fact. The nearest to arrive to the explanation could be Monte Carlo Simulation as employed for discovering future Interest rate. The rate architecture further enhances its unpredictability given the reason that rate are dynamic function of Time. The Variables of Macro changes with time leading to evolution of dynamic Rate Transmission.

Indian Bond Market - An Overview

Indian Bond Market - An Overview .

Indian Bond Market unlike its peer Equity Market has been characteristically predictable and measurable.  It is especially in context of Bond investor and Mutual Fund Investor, Who found great value while investing in Bond Portfolio with measured risk only.

While changing macro variable have thrown enough challenges for ordinary investor, the professional Fund Manager from Fund houses and Security houses have summarily prejudged and benefited from the rally.

Besides a sequential understanding of Macro Obstacle, it is also imperative for   investor to understand the impact of major policy impact - Monetary and Fiscal on the Bond Market.

Much have been written on style and functioning of Monetary managers specially when multiple and non linear macro have led to sudden and unpredictable change in Policy direction.  Mr Y V Reddy in 2008 and Mr Raghuram Rajan 2014 is possible great case study to engage with.

But still the silver line rest with our ability to measure the Bond Market unlike Equity. While Equity is seemingly immeasurable, Bond is contrast opposite.

Investors have great return in all these previous year at A/B/C/D. The moot point whether D still holds value for investor or the rally is over.