Reaction to RBI move kneejerk, liquidity key driver: IIFL

A repo rate hike by 25 basis points does not make much of a difference because the short-term rates have been much higher, says Nirmal Jain, chairman, IIFL.

Also Read: Continue to see extreme liquidity tightness: SBI head
In the next few days, if the market gets more confidence on the rupee, which should happen with rising Foreign Currency Non-Resident (Banks), or FCNR(B), as well as overall rebound, then the easing of liquidity in MSF and LAF window will have a much better impact on the market or at least on sentiment with the banks, so the market reaction right now is just kneejerk, he says.
He feels the market will have a positive bias which has nothing to do with monetary policy, but more with the global liquidity as Quantitative Easing (QE) has not been tapered of more money can be expected to flow into the Indian equity market. Below is the verbatim transcript of Nirmal Jain's interview on CNBC-TV18 Q: It has been a rollercoaster ride for us, we were so jubilant yesterday and now there is this despondency in the market. But do you also believe that this was the most pragmatic approach that the Reserve Bank of India (RBI) governor could have taken and now what does one do with respect to the market? Has it seen the reaction play out with a 500 point cut in the Sensex or do you fear there could be more?
A: I don't think there is anything which is such a big negative that market has to react but market is always sensitive. Yesterday also it overreacted and it is again overreacting today as well. 25 bps repo rate does not make much of a difference in any case because the short-term rates have been much higher. And to my mind I think what market would have expected is easing of liquidity in liquidity adjustment facility (LAF) and marginal standing facility (MSF) window which policy very clearly says that we can do it anytime and not necessarily on the policy day.
So the entire set of exceptional measures which include CRR on 99 percent on daily basis and 300 bps MSF rate above repo rate at 10.25. So out of these few things have been done and that is MSF has been brought down to 9.5 percent and CRR has been brought down to 95 percent on a daily basis. I think in the next few days if they get confidence about the rupee which should come because with Foreign Currency Non-Resident (Banks) - FCNR(B) as well as overall rebound I think rupee seems to be stabilising and then the easing of liquidity in MSF and LAF window will have a much better impact on the market or on at least the sentiment with the banks so I feel that it is a kneejerk reaction.
Yesterdays gains were also little exaggerated so some part of that has given away. But on the whole, this seems to be the approach that would be warranted in this kind of an environment. Q: So once this kneejerk reaction plays out how are you feeling about the markets after two important events are out of the way, do you think the market could be headed to that 6200 level or are we going to go back all the way down to levels of 5400-5500 on the Nifty?
A: In a way if market moves up or in either direction on a slow and consolidated basis is good. I have a feeling that the market will have a positive bias which has nothing to do with monetary policy, but more with the global liquidity as Quantitative Easing (QE) has not been tapered of so we can expect flow of more money into our equity markets. So once the dust settles then markets will have a slow steady growth, rise which is good in a way because 300-700 points rise in a day is neither healthy nor sustainable. For complete interview, watch accompanying video