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RBI's move, stock's groove & more

Jun 12, 2008

Fed talks it, RBI does it
In its late yesterday move, the Reserve Bank of India (RBI) has raised its key lending rate - repo rate, the rate at which it lends to banks - by 0.25% to 8%. This move comes in the wake of rising pressure on the central bank to rein in inflation, currently ruling at its 4-year high of over 8.2% (based on the wholesale price index). After a series of CRR (cash reserve ratio) hikes over the past few months, the latest measure is expected to further dampen credit demand in the country.

  • Our view on RBI's monetary policy for FY09

    This repo rate hike is likely to add to the worries of bankers who are finding it difficult to pass on the already prevailing high interest rates to customers for the fear of dissuading them in payment of their EMIs (equated monthly installments) or availing fresh loans. Inability to exercise their pricing power on incremental loans will inadvertently shave some margins off the banks' books. This comes at a time when credit offtake has seen some slowdown while NPA (non-performing assets) levels are on a rise.

    However, Mr. Deepak Parekh, the Chairman and Managing Director of HDFC and one of the leading veterans from the Indian financial sector, has a different opinion to offer. According to him, a hike of 0.5% to 1.0% in interest rates will not hurt the customer's monthly payments significantly and thus not hurt the consumer spending or the economic growth. While this may hold true in the case home loans, particularly those with small ticket sizes and acquired for residential purposes, loans on auto, consumer durables and credit cards are already losing favour. The latest move from the RBI is indeed a brave step from the central bank while its peer, the US Federal Reserve, has just started hinting towards rate increase in the world's largest economy.

  • What is the Fed saying?

    Indian Pharma's latest theme
    India's largest pharmaceutical company, Ranbaxy, which in the past two years, has been on the prowl to acquire companies and has actually made a string of acquisitions now finds itself on the other side of the table. The company announced today that its promoters namely Malvinder Singh and Shivinder Singh would sell their entire stake (around 35%) to the Japanese pharma company Daiichi Sankyo at a price of Rs 737 per share.

  • Read our initial views on the deal

    The transaction is valued at US$ 3.4 bn to US$ 4.6 bn and Ranbaxy overall at US$ 8.5 bn. Considering the fact that Ranbaxy generated revenues to the tune of US$ 1.7 bn in CY07, this implies a price to sales ratio of around 5 times, which is by no means cheap for Daiichi. This development further brings to fore the expensive valuations that are prevailing in pharmaceutical mergers in the global generics space. As per SEBI regulations, Daiichi will make an open offer to the public shareholders to purchase additional 20% shareholding, thereby taking its total stake in Ranbaxy to around 55%. With Dabur Pharma's promoters cashing out recently (by selling their 73% stake to a Singapore firm), promoters selling stakes seem to be another theme brewing in the India pharma space. Whether this will be detrimental to the interests of minority shareholders remains to be seen. Watch out this space for more on the same.

    Haze surrounding stocks
    There is a haze surrounding the Bombay Stock Exchange building, as seen from our office window. While this haze is on account of Mumbai's unrelenting monsoon showers, there is another haze that surrounds stocks listed on the exchange, or for that matter stocks listed in India, and Hong Kong, and China, and the US. Economic growth worries fueled by higher oil prices, rising inflation and subsequently lower consumption spending has severely impacted sentiments across the world. In today's trade, for instance, all major Asian markets are trading deep in the red, with Japan, China and Hong Kong down by 2.5% apiece. The US markets closed yesterday at its lowest levels since March. This followed a spike of US$ 5 in crude oil price, as it rose to US$ 136.4 per barrel.

  • Roadblock that's hit Asian stocks

    Vibes coming out of the US Federal Reserve, which suggest that the central bank of the world's largest economy is planning to target inflation (thereby indicating higher interest rates going forward) have also playe d spoilsport for the Asian indices. How does the Indian markets react remains to be seen.

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