Wednesday, 29 July 2009

Annual Credit Policy and its effects.

The Reserve Bank of India has come out with its annual policy document which we popularly refer to as the credit policy. This time theRBI has maintained the bank rate at 6.0% repo at 4.75% and reverse repo at 3.25%. It has also maintained the CRR at 5% of the net time deposits. The GDP forecast has been pegged at 6% and inflation is being expected to hover at 5%. RBI also expects that the gross fiscal deficit to be at 6.8% up from 2.7% in 2007-08 and 6.2% in 2008-09.
What does all this mean to the common man and to the person who would like to invest his money in his own business or the business managed by somebody through the stock exchange? let's take a hard look at this issue.
If the Government thinks that inflation is to hover around 5% and the popular discounting rate is 4.75% then it is committing itself to a regime of negative real interest rates. This is bound to result in capital flight, capital flight means that FIIs (the temporary or the hedge fund type) are bound to pull out part of their money weakening the Rupee and strenghtening the Dollar. A weaker rupee will mean fuel prices will go up in India and bring down the profitability of oil companies. Exporters like software companies and other export oriented companies will do well due to the competitive pricing available to them.
Capital flight could also result in sudden contraction of the money market making liquity remote and thus pushing down inflation. But, that is just a pipe dream given the way the Indian economy operates. Indian economy has more resilience and is bigger in the unorganized sector than the organized sector, that will increase the woes of the government by supplying more and more of M3 for the government to keep absorbing if the government wants to keep a check on liquidity.
Another pertinent point that has been brought out time and again by various experts is about the inflation based on WPI and CPI. This time the RBI document itself has thrown its hands up in despair and is wondering why WPI and CPI are not showing positive correlation as they were earlier. The answer is simple! people have changed their consumption habit and manufacturers have changed their consumption habits too, but the RBI has not changed its basket of commodities for a long time. Times are changing but the measures are not changing with the times and thats the trouble!!
Stock markets have been having a great time for the time being. Technically speaking, the nifty has to cross and close above 4640 to signal a distinct break out. If the NIFTY breaks out then we can look forward to going back to the old highs of 6000 on the NIFTY. Fundamentally, things are not so rosy, with negative real interest rates, weakening Rupee, a large fiscal deficit and a ruling PE of 20, its going to be hard for the markets to put up a brave face and trudge the bull mountain.
From here the view is more pessimistic than optimistic.


Nishant said...

Yes Sir..
I truly agree with your point of view that the scene is not so rosy at this point of time. Even though this quarter has given revival signs from many companies, the revival of economy is far ahead.

In such a globalized financial world, we can't say that India will recover sooner when we still import tonnes of crude as well as veg. oil, when our service sector earns heavily from foreign clients and when the production rate is contracting..

I believe there are many questions left unanswered by the govt. They are appeasing people by showing them a spurious image of the present..I don't understand why some people are extra optimistic when great business Tycoons like LN Mittal are saying this will stay till next 2-3 years.. Why not spend some time doing some ground work rather than basking in the glory of the past?? Someone should answer that..

snehal satya said...

Its absolutely true to say that the situations are not under control.
But what I feel is that the Indian investors are still now bit afraid and worried before investing in the market, may be due to translucent picture of the market.

There was a news regarding change of inflation standard i.e. changing the base year from 1991 to 2003 and also increasing the basket size along with changing the percentage allocation of the commodity.
I hope this might help the investors to seek the market in better perspective and could invest in the market efficiently.