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RBI's steadiness, US grants & more... - Views on News from Equitymaster
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  • Jan 30, 2008

    RBI's steadiness, US grants & more...

    • In defiance of the popular demands from India Inc and policymakers, the RBI yesterday maintained status quo on its key policy rates. The central bank kept bank rate unchanged at 6%, repo and reverse repo rates 7.5% and at 6% respectively, and cash reserve ratio (CRR) at 7.5%. Following this stance, the Indian stocks declined, as the market expectations of a rate cut were not met. It was argued that since the US interest rates are moving down, the spread between the same (US rates) and Indian rates is on a rise. This has the possibility of leading more foreign inflows into the relatively attractive Indian assets (stocks and bonds), thus leading to a further appreciation of the rupee.

      We believe that this was not a really compelling argument for the RBI to cut rates. This is because the Indian economy continues to chug on a strong growth path (RBI expects GDP growth in FY08 to be 8.5%). Also, while the headline inflation numbers seem appeasing, readers should note that the impact of high global crude prices and rising food prices is not really seen in the same. The central bank has also raised concerns about the slowdown in global economic growth.

    • Indian stock market remained volatile in yesterday's trades, as the effect of the RBI's steady stance on interest rates was not appreciated by the stockmarkets. While the markets opened on a cheerful note on the back of an encouraging performance from the US indices, the proceedings took a downward turn in the ensuing sessions in response to RBI's third quarter review of the monetary policy for 2007-08. The indices mustered a mild recovery towards the final trading hours and briefly crossed the dotted line but gave up the struggle towards the fag end. While the BSE-Midcap index closed marginally higher, the BSE-Small cap index ended higher by 1%. The Asian markets are currently treading in the red, with declines seen in the benchmark indices of China and Hong Kong. European indices closed in the positive yesterday.

    • In order to tide over concerns on account of slowdown in consumer spending and its negative impact on the economy, the US government yesterday passed a US$ 146 bn economic aid bill. As reported on CNN's website, "The House bill calls for one-time tax rebates to go primarily to individuals making less than US$ 75,000 and to married couples making less than US$ 150,000. It would also provide temporary tax breaks for businesses that would let them deduct more of their investments in plants and equipment more quickly. And it contains two measures aimed at helping homeowners get or refinance mortgages."

      Further, Bloomberg reports that US Federal Reserve might cut interest rates by a further 50 basis points (0.5%) tomorrow and then bring it to less than the inflation levels 'to avert the first simultaneous decline in the US household wealth and income since 1974'. That will bring the real interest rates in the world's largest economy to less than zero! So, the Fed is expected to continue with throwing more of cheap money for tiding over the crisis that is incidentally caused by cheap money itself.



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