Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
RBI rate hike: Speaking the world language! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jun 9, 2006

    RBI rate hike: Speaking the world language!

    I. Statement from the Central Bank of the Republic of Turkey while raising short term lending rates from 16.25% to 18.0% (June 7 2006)
    "According to the April and May inflation figures, the annual inflation rate significantly exceeded the target path. Moreover, annual inflation figures to be recorded in the next months might further go up temporarily, with the pass-through effect of the exchange rate movements arising from the recent volatility in financial markets. The Monetary Policy Committee has deemed it necessary to revise the policy rates in order not to let such temporary developments cause permanent effects on the medium-term expectations and pricing behaviors, and also to make sure that the medium-term inflation trend is kept in line with the targets."

    II. Statement from the Monetary Policy Committee of the Bank of Thailand (June 8 2006)
    "With the oil prices surging more than expected and causing inflation to clearly accelerate beyond the committee's previous projections, there continued to be a need to maintain the tightening policy stance at this time. Therefore, the committee decided to raise the 14-day repurchase rate by 25 basis points from 4.75% to 5.0%, effective immediately.

    III. Statement from the Bank of Korea while raising short term lending rates from 4.0% to 4.25% (June 8 2006)
    "There are arising inflationary pressures due to the economic recovery and persistently high oil prices. The recent rebound in real estate prices has continued. In the financial markets, overall liquidity conditions are favorable and financial institutions' loans have shown a sharp increase."

    IV. Statement from the Reserve Bank India (June 8 2006)
    "On a review of current macroeconomic and overall monetary conditions, the Reserve Bank of India (RBI) has decided to increase the reverse repo rate by 25 basis points to 5.75% from 5.5% with immediate effect. Simultaneously, the repo rate, which continues to be linked to the reverse repo rate with a spread of 100 basis points, is also being increased by 25 basis points to 6.75% from 6.5% with immediate effect."

    Spot the difference in the abovementioned policy statements from central banks of the four 'emerging economies'! We bet you will not find many except the difference in languages used to convey the central theme - EASY MONEY IS NO MORE EASY! Tightening liquidity and rising inflation led by higher crude prices has been the basis of this theme for central bankers worldwide.

    In wake of rising pressure on central banks to tide in inflationary pressure, worries of higher interest rates have fueled a drop in stock markets around the world in the past few weeks. The fear is that if interest rates go too high, it could consequently lead to deceleration of the global growth engine, or even lead to a worldwide recession. The immediacy with which the emerging market central banks have hiked the lending rates has also been seen in the corresponding equity indices. India was down 4.7% (though before the hike was announced) and Korea and Thailand were weak by 3.5% and 2% respectively after rate hike announcements. Turkey closed with 2% losses on June 7.

    So, does the RBI's latest rate hike sound panic bells? Not really, for long-term investors! This decision by the RBI reflects the upside risks to price stability (inflation) over the medium term. Thus, the consequent hike in interest rates will contribute to ensuring that long-term inflation expectations remain anchored at levels consistent with price stability. Investors need to appreciate the fact that such an anchoring is a prerequisite for monetary policy to make an ongoing contribution towards supporting economic growth.

    In the interim, however, even long-term investors need to be cautious with respect to India Inc.'s growth expectations, considering that profitability is likely to come under pressure on the back of higher interest costs on debt taken for expansion purposes.

    Overall, at the current levels, Indian equity markets are trading at a price to earnings multiple of 15.3 times trailing twelve months earnings. Factoring a 12% compounded growth in net profit during FY06 to FY08, the valuations are 12.2 times, which we believe are attractive. The decline in the past couple of weeks should not be considered a loss but taken as an opportunity to build up a sound long-term equity portfolio.



    Equitymaster requests your view! Post a comment on "RBI rate hike: Speaking the world language!". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Will They Haul Off Trump's Statue, Too? (Vivek Kaul's Diary)

    Aug 16, 2017

    All across the country, the old gods become devils. New, gluten-free gods take their places...

    This Company Beat the Business World's 'Three Killer Cs' (The 5 Minute Wrapup)

    Aug 16, 2017

    And what it has in common with beating the stock market too.

    5 Steps To Become Financially Independent (Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Let's Hope This Correction Continues (The 5 Minute Wrapup)

    Aug 14, 2017

    Last week's correction is making a number of Super Investor stocks look a lot more attractive...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 16, 2017 (Close)