Some Thoughts on Interest Rates

  RBI Willing to Strike, But Afraid to Hurt Again ... !!!

The RBI has once again announced  mild hikes of interest rates at the face of accelerating inflation. The repo and reverse repo rates  were hiked by 0.25 and 0.50 % respectively by the RBI today. The last hike did not lead to any hikes in the rates by the Banks on the ground. Going by the reaction of the markets, Tuesday's action too may become inadequate to tame the inflationary expectations. The RBI still expects the inflation to fall to 6 % levels by the next March. However, it may be remembered that inflation was expected to fall to 5.5% by the last March too. ( It seems that the base effect has not been bailing out the 'expert' predictors ! ) So much for the too accommodating policies of the present managers of economy.

Bye the way, no one needs to be an accomplished economist to understand the situation. Just check up the interest rates of one year bank deposits and compare it with the Government's own inflation figures. You can see that the interest rate is much below the inflation rate and therefore, the depositor actually loses his  purchasing power, by making the deposit. This is called negative interest rate and it kills the savings of the depositors and  robs the poor.   

Now, one may ask who are the beneficiaries of these negative interest rates. Of course the big borrowers including the government are the ultimate beneficiaries of the negative interest rates. Even though a bit of mild inflation is supposed to be good for growth in the economy, run away inflation may lead to bubbles and the subsequent busts as happened in the Nineties. The world has not yet been able to recover from the well known busting of the Greenspan bubbles. Do we need another one of the desi variety ?

 
© 2010, momentumsignal.blogspot.com All rights reserved.

Disclaimer: No research, information or content contained herein or in the accompanied spreadsheet shall be construed as advice and is offered for information purposes only. We shall not be responsible and disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered by the user or any third party as a result of or which may be attributable, directly or indirectly, to the use of or reliance on any information or service provided. All files/information is provided 'as is' with no warranty or guarantee as to its reliability or accuracy.

Update on The Ultimate Momentum Signal - 27th July, 2010

 Another Higher Open and A Lower  Close ... !!! 

The Nifty futures opened near the day's highs on Monday and as usual  it  started it's slow downward movement right from the morning. The futures recorded a high of 5464 and a low of 5417 before closing at 5419. Here is a quote from the last post : A higher open and the slow downward trading "is becoming a common pattern of trading these days." However, a lower opening may lead to the opposite too. Following the overnight gains on Wall street, the market may trade in the positive territory on Tuesday morning and then wait for the policy action by the RBI.

Nifty Futures - Daily Chart

The Nifty futures have minor support at the top end of the previous narrow trading range between 5360 and 5410. However, a break of the lower end of the said narrow range may attract serious selling too.  

BSE Sensex - Daily Chart

As seen in the above chart of the BSE Sensex, the last two day's trading has lead to the formation of  doji star candles indicating selling at the higher levels. According to the Momentum Signal system, the  Sensex has closed in the neutral area as on Monday. However, the Sensex and the Nifty  are still trading above their short term support levels.

Tuesday will also see the interest rate hikes by the RBI. A 0.25 to 0.50 %  hike in the repo rate, especially the former, seems to have been discounted by the  market. A 0.25 % hike may be expected in the reverse repo too. However, it seems that the market has not yet discounted any hikes in the cash reserve ratio. The RBI has been following a soft money policy so far, in spite of the high rates of inflation these days, may be because of the political pressures.  The last hikes have not been effective at all in dealing with the inflationary pressures. And the RBI has fallen behind the curve too as the real rates of interest ( Inflation - Interest ) for borrowers these days have become negative for some time.  

World Markets 

Some emerging markets are also trading strong alongside the Indian markets. Now, some analysts  may again bring out the age old decoupling theory to justify the high valuations of the Indian markets. 

In case readers are interested in the topic of the decoupling theory, click here to read  the article "Risk of full-fledged crash continues to grow" published by the Economic Times.  

Even if the crash envisaged in the article does not materialize at all, the western economies seem to be set for a long period of slow jobless growth.

The European stock indices, FTSE, CAC and DAX closed in the positive territory on Monday, with gains of  0.72, 0.81 and 0.45 percents respectively. The US market indices closed with strong gains of 0.97 to 1.19 percents on Monday, on the back of better than expected new home sales data.  The more important point to be noted here is that the US indices have closed in the positive territory by the year to date  yardstick. The CBOE VIX index also closed at 22.73, below it's 200 day moving average placed at 23.38,  for the first time in two and a half months.

Updated Momentum Signal Spreadsheet

The updated spreadsheet showing the Momentum Signal as on the close of  26th July 2010, is given below.

Even though the future as well as the index closed near the  lows of the day, both of them were able to close in an area which still retained a +50 value of the Momentum Signal.

Projected Momentum Signal Close Values

The projected levels of closing values corresponding to the momentum shift / neutrality / continuation as on the close of trading on 27th July, 2010 are given in the table below. The table also include the projected closing values of BSE Sensex corresponding to the momentum shift / neutrality / continuation signals.

  Please click on the table to enlarge. For more info on the above table,  please click here.  

The trailing stop for all long positions remains at 5360 which is 2.1 % away from the new high. A close below 5352 will lead to the Momentum Signal indicating a sell as on Tuesday.

As the Momentum Signal is primarily a trend following system, it may indicate whipsaw signals in range bound markets. As such, all readers of this blog are requested to read the various pages describing the system and understand all the intricacies of trading the Momentum Signal and it's risk factors too. Please do write in your comments and suggestions.

Cheers and Prosperous Investing and Trading !!!

To access and/or download  the free online Position Limit Calculator click here.

To checkout the five year history of The Momentum Signal Spreadsheet click here.

© 2010, momentumsignal.blogspot.com All rights reserved.

Disclaimer: No research, information or content contained herein or in the accompanied spreadsheet shall be construed as advice and is offered for information purposes only. We shall not be responsible and disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered by the user or any third party as a result of or which may be attributable, directly or indirectly, to the use of or reliance on any information or service provided. All files/information is provided 'as is' with no warranty or guarantee as to its reliability or accuracy.