Both the equity and debt markets over the past two weeks and especially after the Q4 FY12 GDP growth print of 5.3 per cent, had built in expectations of a repo rate and CRR cut with the debates happening on the quantum and not possibilities.

The RBI decision of no change in repo rate and CRR has not lived up to the recent expectations and hence both markets for the day have reacted negatively. While recognising the slowdown in growth, RBI believes that impact of rate reductions on correcting investment slowdown is relatively small and may in fact lead to inflationary pressures.

Also, non-improvement in premise of fiscal consolidation and other supply side initiatives while front loading a 50bps rate reduction in April 2012 has influenced the decision of status quo on rates.

Though the central bank acknowledges that it can take rapid measures if adverse developments in global markets are seen; for supporting growth domestically, a far bigger role is required from the government in terms of correcting the fiscal situation, supply side bottlenecks and supporting investment activity in the economy.

Form a debt market perspective, the overhang of supply and probable slippages in the fiscal deficit numbers are in consideration as also growth moderation which has impacted long-term interest rates. The comfort offered by RBI on the liquidity front in terms of OMO’s as also in terms of enhancing the eligibility from 15 to 50 per cent for refinance of export credit should help provide a cap on yields.

From a valuation perspective, equity markets are in the below long-term average range and hence can be seen as a buying opportunity from a long term perspective. Global developments are keeping the markets on its toes. Before the interest rate reversal is seen the positive hopes for the market would be from policy actions and FII flows.