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RBI's focus will be inflation

Jul 28, 2009

Today, the RBI will be releasing its first quarter review of the 2009-10 monetary policy and it will be interesting to know what the central bank will focus on and whether interest rates will remain unchanged. With FY09 being one of the worst years for the global economy and also having impacted the Indian economy significantly, the RBI had to resort to various stimulus packages to ward off any slack in demand and consumption and ease up liquidity. One such move was the reduction in the repo rate by 425 basis points to 4.75% in 6 moves since October 2008. This time around it appears more likely that the RBI will keep its rate unchanged. What it means is that the possibility of rates being lowered could be low as the economic situation has not worsened further than what it had in the previous year. At the same time, the RBI may not want to increase the rates either unless a more consistent picture of a recovery emerges. But inflation will continue to remain on the RBI's radar and as reported in leading business dailies, Goldman Sachs expects the RBI to raise its inflation target for the end of March 2010 from 4%. This is hardly surprising given that with money beginning to slosh around in the financial system, inflation was bound to gradually rear its head. Readers would do well to recall that inflation which had touched a high of 12% in August 2008 cooled off considerably since then to dip into the negative as the economy slowed down. But this has been at the wholesale level. At the consumer level, high prices continue to pinch hard . The errant monsoons have not helped either and the RBI will be kept on its toes when it comes to making a decision. Over to you, Mr. Subbarao!

Problems being faced by the shipping industry
While the economic slowdown in India has had an impact on almost all industries, the shipping industry in particular has been in even more trouble. As reported in a leading business daily, the main problem being faced by this industry is shortage of funds to purchase new vessels despite both new and second-hand ships being available in the global shipping market. Problems have been further compounded by the fact that nearly half the shipping fleet needs to be replaced in the next three years, as it would have exceeded the international age norms. The sorry state of finances in the global markets means that getting access to cheap funds is no longer easy as it was before the crisis erupted.

Also, the softening freight rates have further undermined the revenue potential for this industry. At the end of the day, shipping is a global industry and its prospects are closely tied to the level of economic activity in the world. This means that the fortunes of this industry will start to appear brighter once signs of a sustainable recovery surface in the global economy. Till such time then Indian shipping companies will have to find various ways of riding out the storm. It certainly won't be easy.

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