Jul 2, 2003|
Interest rates: Favourable?
It was June 25th, as the world awaited the decision of the Federal Reserve. And as expected, the Fed announced a further 25 basis points cut in interest rates, bringing the cost of borrowing down to levels not seen in the world’s largest economy in the last 45 years. However, the US markets did not respond to this cut in a positive manner, as they had expected a cut of 50 basis points! Despite its expectations of higher economic growth in the near term, The Fed was worried about a substantial fall in the already low inflation levels.
This rate cut was followed by, once again as expected, a cut in interest rates in many world economies. The European Central Bank (ECB) cut its interest rates by a good 50 basis points to their lowest level in any eurozone country since the Second World War. Countries like Hong Kong and Taiwan reduced their interest rates by 25 basis points while Thailand followed with a 50 basis points cut. However, India was not among the ones to react to the Fed rate cut. However, the RBI continues to maintain its stand of a soft interest rate regime.
India: Interest Rates
So, why is that the leading economies in the world, including India, are on a rate cut spree since the last couple of years? The primary objective is to boost investment in the economy. Increased investments would lead to creation of jobs, which would lead to higher income and spending power, thereby, kick starting economic growth. However, all over the world, despite the rate cuts, there has been an absence of a visible pick-up in investments.
In India too, the lack of confidence is marring investment prospects. This is because investments are a factor of consumption demand, which has grown at a slower rate over the last five years. Despite a consistent fall in interest rates over the last five years, except for few goods like motorcycles and durables, consumption demand has been lackluster. This could be attributed to the fact that 70% of the Indian population that rely on agriculture for income have been the worst affected in the last five years in light of poor monsoons. To put things in perspective, actual rainfall as a percentage deviation from normal rainfall has been in the negative zone for four consecutive years till FY03 (Source: CMIE). However, there has been a recovery in investment demand in the last one year, as is evident from the rise in import of capital goods.
Thus, going forward, more than anything else, investment activities need to show up in the economy. Investment in the economy comes from private sector, public sector or the government. Private sector, in general, is hesitant to invest at the current juncture (barring few sectors). Public sector undertakings are inefficient and it will take a while for them to come back into shape (As per CMIE, net profit margin of PSU manufacturing companies has remained in the negative zone for the last five years). The onus therefore, lies on the government. And the realisation has already filtered into increased investment by the government in the form of the road construction project. Atleast the start has been made and visible economic impact is already been felt across key commodity sectors like cement and steel.
In the long-term, given the RBI’s bias towards a softer rate regime, interest rates are likely to remain favorable. Perhaps the area of concern is the poor fiscal situation of the country combined with the high dependence on crude oil (if oil exploration programme that is underway tastes success, import dependency could reduce noticeably). Otherwise, fundamentally speaking, favorable foreign exchange reserves and a manageable inflation level augurs well for the economy.
More Views on News
Jul 25, 2017
Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?
May 27, 2017
What happens when minority shareholders are short-changed in the normal course of business?
Feb 15, 2017
PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.
Aug 24, 2016
And here's your chance to claim a free copy of this book...
Aug 12, 2016
And Why India's demographic dividend could turn out to be a doubtful debt...
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
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: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407