X

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.
Economy: Interest rate conundrum... - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jul 27, 2006

    Economy: Interest rate conundrum...

    The central bank's move of taking the reverse repo rate to a four-year high of 6% is being largely comprehended as a defensive move, before the WPI figures exceed the central bank's comfort zone of 5% to 5.5%. An analysis of the liquidity situation in the economy, consumer prices and economic growth numbers, however, contradict this view.

    WPI - Not an accurate measure of inflation
    The commonly used Wholesale Price Index (WPI) inflation indicator in India is similar to the Producer Price Index in other countries. Hence, India's WPI inflation rate has been extremely sensitive to wholesale commodity prices and not necessarily representative of underlying final consumer goods prices. Moreover, WPI is also biased towards goods prices and offers very little representation of services and prices at the consumer's level, thus giving a wrongful impression of the real inflationary scenario in the economy.

    Liquidity - not abundant enough!
    The RBI, in its monetary policy review, has given a caveat of negative surprises emanating in the near term, if the unwarranted exceptional growth in credit disbursement continues. This is despite the higher provisioning having been accorded to high-risk asset classes. This has also been accorded to the surplus liquidity present in the system. However, the credit growth seems well justified when compared to the real GDP growth. Also, the growth numbers for money supply and deposit mobilisation (largely term deposits - due to fiscal benefits) speak for themselves.

    Vis-a-vis
    (%, YoY) 1QFY06 1QFY07
    Real GDP growth 8.6 9.3
    Inflation (WPI) 4.1 4.7
    Crude oil prices (US$ / barrel) 58.1 71.4
    Growth in money supply (M3) 13.8 18.8
    Aggregate deposit growth 14.9 20.7
    Non food credit growth 31.0 32.9
    Export growth (in US$ terms) 35.4 16.9

    While the Reserve Bank of India (RBI) deems the interest hikes to be pertinent, to contain a superfluous liquidity expansion, a comparison with the trend seen in corresponding quarter of FY06, shows that the spurt seen in 1QFY07 is pretty seasonal. Infact, excessive tightening may lead to burgeoning interest burden in the books of the corporate and retail borrowers, leading to the creation of bad assets.

    Falling in line with global peers?
    A comparison of the short term interest rates in the country, vis-a-vis its peers in the developed and developing world, shows that the RBI is largely trying to align the economy with the global trends. The bank has also indicated that with the balance of risks in the previous fiscal being tilted towards the global factors, and in a situation of generalised tightening of monetary policy, India cannot afford to stay out of step.

    Conclusion
    We believe that debt-funded consumption growth, which has been at the heart of the GDP growth trend over the past three years (non food credit to GDP has grown from 50% in FY03 to 80% in FY06), may be hit by the rise in the cost of capital and lead to the consequent soft landing of the credit growth cycle. Further, India is now running a current account deficit (13% of GDP) that is funded to a large extent through less stable capital inflows, influenced by global risk appetite and the US interest rate cycle. Hence, we believe that, incrementally, the RBI will hike its short-term policy rate in line with the Fed rate.

     

     

    Equitymaster requests your view! Post a comment on "Economy: Interest rate conundrum...". Click here!

      
     

    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    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...

    More
    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

    MARKET STATS