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Rate cut versus NASDAQ - Views on News from Equitymaster
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  • Feb 19, 2001

    Rate cut versus NASDAQ

    Conflicting signposts have emerged over the weekend and consequently, we could see an interesting day of trading ahead of us. The NASDAQ was pummeled 128 points while back home the RBI cut interest rates by 50 basis points.

  • Live ADR Quotes

    RBI had hiked the CRR rate and Bank rate by 50 basis and 100 basis points respectively in July '00. The CRR hike was implemented in two phases with a 25 basis points increase in each phase. The hike it seemed was primarily to curb the sharp depreciation (volatility) in the rupee, which decline by 5% (average depreciation rate).

    With oil prices scaling new highs the rising oil import bill was sure to adversely impact the current account deficit (estimated oil import bill $16 bn or Rs 711 bn). Further, the Rupee in real terms (REER) had overshot itself and a correction was anticipated. Lastly, forex reserves were dwindling fast as the Government continued to meet the import bill and FII inflows weakened. In fact, FIIs turned net sellers during this time. All these factors could have led the RBI to hike rates across the board, thereby sucking out liquidity in the banking system and curbing further speculation in the Rupee.

    Over the last six months, however, the environment seems to have changed. Oil prices although still firm have decline by 20% from their 10 ten-year highs of $35/ barrel. This should give a breather to the surging import bill and current account deficit. Exports too have been performing well and growing faster than imports in Dollar terms, which have brought some succour to the trade bill. In light of the dwindling forex reserves the SBI on RBI's direction issued the India Millennium Deposits (IMD) raising $5.5 bn, which boosted the forex kitty. Further, FII inflows for the year to date have also been robust bringing in an estimated $1.2 bn inclusive of debt and equity investments. Forex reserves for the week ended February 9th stand at $41.7 bn. Lastly, global markets are witnessing a declining interest rate scenario (US followed by UK), which would result in interest differentials in favour of international markets.

    All these factors could have played on the mind of RBI resulting in a rate cut. The only cause of concern is the inflation rate, which is hovering in near 8.5% (currently 8.2%). The cut, should it lead to higher spending could see this rate move even higher.

    The earnings warning season is still running on the NASDAQ. The week ended with the tech-laden bourse dropping by 5% as Nortel reworked its earnings forecast downwards. The only Blue chips club, Dow Jones, too declined by 91 points last Friday. These events could have negative connotations for the domestic bourses today.



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