'Interest'ing effects - Views on News from Equitymaster

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

  • MyStocks


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

'Interest'ing effects

Apr 9, 2007

After years of administered regimes, the Indian monetary as well as fiscal authorities are yet synchronising their acts to the working of business cycles. For a major part of the last one-decade, market forces have been allowed to function in the realms of interest rates and capital inflows. The anomaly comes in the working of the monetary policy between FY02 and FY06 when it has actually allowed lower real interest rates (lending rate adjusted for inflation) with higher capital inflows and an expansionary fiscal policy. By doing this, the Reserve Bank of India (RBI), to some extent, can be held responsible for fuelling the good times of the current business cycle. With elections in 19 of the next 24 months, the politicians are now harping on inflation control while the RBI is in an unenviable situation where it has to shelter the exchange rate as the current account is in deficit. This has allowed increases in the money supply. To balance the capital inflows, it will have to reduce domestic bank credit to keep money supply growth in check. This way the inflation priorities will be met and the real interest rates will also go higher to combat the growth in money supply expansion.

While the monetary policy is turning on the screws, the ongoing tightening of the fiscal policy to meet the FRBM objectives (again, a case of doing more wrong than right as the expenditure for public goods is axed rather than the costs that the economy is better off without), will work together in making this downturn sharper.

The most crucial impact of Reserve Bank of India upping the stakes in a hectic bid to avert double-digit inflation (consumer prices in rural areas are 9.5% higher over last year) will be on spending decisions and through them, on investment patterns. The hike in real interest rates affects both the private and the public sector, but the response of the private sector (accounts for 40% of the total capital formed) tends to be more magnified.

The top two hundred companies could and will raise cheaper money to finance their growth plans, as the India story still holds merit. Thus domestic interest rate hikes will disrupt life for the small and medium enterprises who employ most of the workers, while the high interest rates will attract more foreign deposits - NRI deposits already accounted for 11% of capital inflows in FY06 compared to 3.1% in FY05 when the real interest rates were the lowest in the recent history.

We continue to argue for a way to use up the reserves to avoid squeezing credit on one hand and yet raising money supply. Or else, once a turning point of the business cycle is reached - destabilising monetary policy, destabilising fiscal policy and destabilising bank credit - accentuate the downturn just as they have worked to accentuate the high of the business cycle in recent years.

Equitymaster requests your view! Post a comment on "'Interest'ing effects". Click here!


More Views on News

These Stocks Have Rallied Over 300% In the Last 12 Months. Is the Rally Justified? (Views On News)

Nov 12, 2021

As many as 150 stocks from the BSE 500 index deliver multibagger returns in the past one year.

Ultimate Guide to Hedging Your Portfolio (Fast Profits Daily)

Sep 21, 2021

How can you protect your portfolio in a market crash? Find out in this video.

Ride the Indian Real Estate Revival with this 'Different' Smallcap Stock (Profit Hunter)

Mar 23, 2021

Affordability in the housing segment has never been so good in last one and a half decade. Here's how you could make the most of it...

My Latest Stock Recommendation (Fast Profits Daily)

Oct 9, 2020

How I picked an exciting stock using trends from both the commodity and equity markets.

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?

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms