Reserve Bank of India governor Y V Reddy defended his decision to keep the rates unchanged by saying that all stakeholders should pay an uncertainty premia during uncertain times.
Reddy pointed out, at a function to facilitate the Bank of Mauritius Governor, that the wide gap between the policy rates - repo and reverse repo - was the result of monetary operations and not a predetermined decision.
While the market stabilisation scheme (MSS) is performing well as a liquidity management tool, the additional bills towards liquidity absorption increased the government’s burden and affected the fiscal deficit target mandated by the Fiscal Responsibility and Budget Management (FRBM) Act, banking analysts said.
The market stabilisation scheme (MSS) is a liquidity absorption mechanism adopted by the RBI and involves the issuance of treasury bills and bonds to suck out liquidity from the system.
The scheme has become an embarrassment for policy makers as the MSS target of Rs 250,000 crore exceeded government borrowings of around Rs 1,11,196 crore.
The government’s liquidity management function has gone beyond actual borrowing to meeting expenditure needs. The government is absorbing funds to manage liquidity and compensating by making coupon payments on treasury bills and bonds issued under MSS rather than borrowing for planned expenditure.
In essence, analysts said, in order to meet the FRBM target of reducing fiscal deficit to 3 per cent of GDP by the end of next financial year and managing inflation, the government may have to sacrifice public welfare expenditure if inflows continue to pose threat.
The repo and reverse repo are two liquidity adjustment facility tools through which the RBI manages daily liquidity. The central bank absorbs liquidity through reverse repo and infuses liquidity through the repo route.
The repo rate is 7.75 per cent and reverse repo is 6 per cent currently, resulting in a corridor of 175 basis points. While there is nothing sacrosanct about the gap between the repo and reverse repo rate, it was comfortably maintained at 100 basis points. One basis point is one hundredth of a percentage point.
Reddy further stated that during uncertain times such as the deluge of foreign exchange inflows last year, all stakeholders in the financial system - banks, the government and the central bank - need to pay an uncertainty premium.
Understanding Short Term Trading
Before I begin, this blog is not for intraday traders. My definition of short term implies duration of around 2 to 3 months.
Short Term stock picking is no rocket science, but rather a visual interpretation of technical charts. A basic moving average on a time frame chart will show the direction of the securities movement.
Moving averages is a mathematical results calculated by averaging a number of past data points. Moving averages (MA) in it's basic form is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. Once the value of MA has been calculated, they are plotted onto a chart and then connected to create a moving average line. Typical moving averages used for short term trading are 50 MA and 100 MA.
Types of Moving Averages
1) Simple Moving Average (SMA)
SMA is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. The usefulness of the SMA is limited because each point in the data series is weighted the same, regardless of where it occurs in the sequence. Critics argue that the most recent data is more significant than the older data and should have a greater influence on the final result.
2) Exponential Moving Average (EMA)
EMA overcomes the limits of SMA, where more weight is given to the recent prices in an attempt to make it more responsive to new information. When calculating the first point of the EMA, we may notice that there is no value available to use as the previous EMA. This small problem can be solved by starting the calculation with a simple moving average and continuing on with calculating the EMA.
The primary functions of a moving average is to identify trends and reversals, measure the strength of an asset's momentum and determine potential areas where an asset will find support or resistance. Moving averages are lagging indicator, which means they do not predict new trend, but confirm trends once they have been established.
A stock is deemed to be in an uptrend when the price is above a moving average and the average is sloping upward. Conversely, a trader will use a price below a downward sloping average to confirm a downtrend. Many traders will only consider holding a long position in an asset when the price is trading above a moving average.
In general, short-term momentum can be gauged by looking at moving averages that focus on time periods of 50 days or less. Looking at moving averages that are created with a period of 50 to 100 days is generally regarded as a good measure of medium-term momentum. Finally, any moving average that uses 100 days or more in the calculation can be used as a measure of long-term momentum.
Support, resistence and stoploss can be infered by referring the closet MA below or above the market price. The other factor that is used in short term momentum is the trading volume. The moving averages along with the trading volume can provide a better insight to short term movement.
Markets are moved by their largest participants - I believe this is the single most important principle in short-term trading. Accordingly, I track the presence of large traders by determining how much volume is in the market and how that compares to average. Because volume correlates very highly with volatility, the market's relative volume helps you determine the amount of movement likely at any given time frame--and it helps you handicap the odds of trending vs. remaining slow and range bound.
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