"If it isn't broken dont fix it" says RBI

That seems to be the mantra from our venerable Governor of the RBI. this credit policy is just a tweak with respect to raising the SLR to 25%. All the other rates have been maintained at the same level. RBI's review has pared down the GDP growth outlook of 6%.
The stimulation of the economy on the back of the financial crisis in the form of eased liquidity remains nearly constant. The powers that be, have been crying hoarse that it is still not time to repeal the stimulus given during the crisis. One fails to understand, why should the government not stimulate the economy constructively on a continuous basis? Why should the government only think of monetary measures when fundamental shift in stimulating the economies are needed?
The best form of stimulus would be to encourage individual savings and collective investments.
Now, what does one make of this credit policy? The policy may have said many things in words but as far as deeds are concerned, it is very clear. The Governor does not think anything is wrong and he does not want to rock the boat when everything is to the Government's satisfaction.
What do we expect in the market? The markets are more concerned with the slow growth expectations. We have already witnessed sluggish growth in corporate sales, this may start affecting the margins and profits in the next quarter. That is the fear in the minds of the players in the market now. The markets have also gone up on one way street for most part of the last year and the time for profit booking is ripe now.
So BOOK PROFITS AND DON'T WAIT TILL THE MARKETS TOP OUT.

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.