Tuesday, August 31, 2004

Economic and Market Conditions

The business standard headline today screams "Inflation might choke growth: RBI report" and goes on the say that crude oil concerns, insufficient rainfall and growing global interest rates might increase inflation and put downward pressure on GDP growth this year.

Interesting in the context of a recent project report I had to prepare in the FIS course on bond trading strategies in post july 2004. Post july, there has been a huge volatility in the bond markets particularly in the short and long ends of the yield curve. Interestingly, we found that this volatility is a direct result of signals of the market stabilization scheme of the RBI. We found significant volatilities in the yield curve on Aug 17 and 26th - on 17th, the govt conducted an open market operation for 9000 crores and on 26th, it increased the MSS to 80K crore from 70K crore - suggesting that the MSS is actually destabilizing the market instead of its expected result in the short run. In the long run - there would actually be beneficial effect.

Its indeed interesting to see the effect of such signals by the RBI on market conditions. Today, crude oil is again on the upward path. Plus, today's RBI report and the news that SBI is raising its fixed home rates by 50bps - it would be interesting to see the effect of market volatilities.
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