Monetary policy review: A hawkish rise - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Monetary policy review: A hawkish rise

Jan 31, 2007

The Reserve Bank of India (RBI) has hardened its stance as the 'lender of the last resort'. Another 25 basis points increase in the banks' repurchase (repo) rate to 7.5% comes within a couple of months of a hike of similar proportions. In recognition of the cumulative and lagged effects of monetary policy, the Reserve Bank since mid-2003 had started reducing availability of credit to different sectors by tinkering with the risk weights attached to them and in general by increasing the repo rate by 125/150 basis points, despite inflation then being within its tolerance band. The stance of monetary policy has progressively shifted from an equal emphasis on price stability along with growth to one of reinforcing price stability with immediate monetary measures. The RBI is spooked by the runaway increases in asset prices as seen in the stock markets, real estate and gold. The continuing growth in the manufacturing and services industry as well as the elevated asset prices has seen a surge in aggregate demand. With most industries working at over 90% capacity utilisation, there are expectations of a supply shock generated by the lags in the domestic production process till new capacities gear up to meet this increased consumption. Internationally, with booming crude oil prices, there has been a shift in cropping pattern towards bio-fuels, leading to a shortage of food crops. Recourse to cheaper imports to reduce the inflationary impact of a lower domestic agricultural production (down to 1.4% in FY07 from 7.6% in FY06) is not an option.

Three years of very robust non-food credit growth has taken a toll of the banking sector's investment in government securities. Investments have reduced drastically to just 3.5% more than the levels required by the Statutory Liquidity Ratio. The banks thus have very little leeway in raising funds with collaterals. There have been instances of banks borrowing from the mutual fundsMutual Funds for a fortnight at 15%-20% to meet temporary imbalances. There is a distinct rumble in the monetary review about the asset-liability mismatches. A fiscal leg up in the form of tax free status for term deposits with banks in the coming budget would help reduce the liquidity crunch faced by the banks as they compete with mutual funds whose dividends are not taxed in the hands of the investor.

By declaring overt war on inflation and asset bubbles, the RBI's stance should smoothen the cycles between the financial and real sectors.


Equitymaster requests your view! Post a comment on "Monetary policy review: A hawkish rise". Click here!

  

More Views on News

BSE Sensex Surges 510 Points; ONGC Among Top Gainers (Market Updates)

Sep 28, 2020 | Updated on Sep 28, 2020

The BSE Sensex Surged 510 Points; ONGC Among Top Gainers. Find the latest update, special reports and news on all time high gainers of BSE Sensex at equitymaster.com.

Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

Jun 1, 2020

Is too much data hurting your quest for market beating returns?

Quantum Mutual Fund: Hum woh nahi hain (The Honest Truth)

Apr 29, 2020

Ajit Dayal on how the mutual fund industry robs you of your wealth.

This One Trigger Could Turnaround Yes Bank's Stock Price (The 5 Minute Wrapup)

Oct 16, 2019

If Yes Bank manages to do this, it could be the start of a much-needed turnaround for the bank.

Gold could Hit 40,000 Sooner Than Expected (Profit Hunter)

Aug 16, 2019

Domestic gold prices are firing on both engines now. Gold prices could touch 40,000 faster than you could imagine.

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS