Update for 27th July 2011

 Nifty Future Back to the 100 DMA !  

Following the higher than expected hike of interest rates by the RBI on Tuesday, Nifty future has already abandoned it's tentative move to test the higher resistances and returned to the more familiar level of 5880 where the 100 DMA is situated now. The important question now is whether the contract will test the lower support of 5500 and 50 DMA at 5520. As the 5500 strike is having huge Put option open interest, the level may act as a major reference point for today and tomorrow. Though unlikely, in case the 5500 level is broken before the expiry, it may lead to a mad scramble to secure the open positions by the put writers. They could cover / hedge their positions either by buying the open puts at a loss or by selling Nifty futures. As the time before expiry is short, some of them may hedge short puts by selling Nifty futures and this may lead to a sharp fall to the next strike at 5400. Apart from this, there is no change to the technical position of the market.  

   Nifty Futures - Daily Chart   

Finally, RBI takes Charge !

RBI has raised the repo rate by an unexpected 50 basis points today. This is the first time the central bank has taken a bold stand in the past one and a half years or so in which inflation has been galloping almost uncontrolled. It is sad to recall that the central bank has been treating the ever rising inflation with kid gloves and it even seemed that the Bank is not in control of the situation. But the tragedy is that the lethargy at the RBI has lead to a situation where the higher inflation has become entrenched in the economy and it may require even higher rates to remedy the situation. 

Even if it is rhetorical, some firm interest rate action at the start of the rising inflation curve would have been more effective than the initial eye in the sand mode in which it operated initially. The shock and awe of such an initial strong action would have created lesser hassles than the late in the cycle tightening which will lead to more damage to the long term economic growth.

    

Yeah, the latest RBI action once again forces one to recall the wisdom in the old saying !  Yeah, it says ' a stitch in time saves nine !'        

Some previous posts on the subject :

 Is this Monetary Policy on Non- Policy ?

 Does Inflation Affect the Nifty Valuations ?


 RBI Willing to Strike, But Afraid to Hurt Again !

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