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: When Reddy sees red - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Aug 1, 2007

    Economy: When Reddy sees red

    Much to the angst of bankers, retail borrowers and leveraged corporates, the Reserve Bank of India (RBI) in its first quarter review of the FY08 monetary policy yesterday, chose to use its oft-sought tool, the CRR (cash reserve ratio) to solve multiple macro economic problems that have surfaced in the last couple of months.

    No longer shielded from global implications
    The Indian economy is no longer impervious to global macroeconomic adjustments. According to the projections released by the International Monetary Fund (IMF) in July 2007, growth in the world economy is likely to moderate to 5.2% in 2007 as also in 2008 from 5.5% in 2006. While global economic activity has remained resilient during 2007 so far, protectionist pressures, further rise in oil prices, persisting global imbalances, adjustment in the US on account of housing slowdown and potential shifts in financial market sentiment pose downward risks to global growth prospects. The higher interest rates are expected to tame the inflationary pressures on economic growth, albeit, notwithstanding some negative repercussions as well.

    (%) GDP growth (YoY) Exports growth (YoY)
    1HCY06 1HCY07 1HCY06 1HCY07
    US 3.7 1.9 14.2 10.8
    UK 2.4 3.0 3.4 6.4
    Japan 3.0 2.6 5.3 5.4
    India 9.6 9.1 13.0 12.6
    China 10.3 11.1 26.6 27.8
    Brazil 3.9 4.3 10.6 14.6

    Source: RBI Macroeconomic review

    Liquidity overhang

    Foreign investment into India by way of FDI and ADR/GDR in addition to the external commercial borrowings (ECB) has been the prime reason for the liquidity overhang. Net ECB inflows rose from US$ 8.2 bn in FY06 to US$ 16.1 bn during FY07, reflecting sustained domestic investment and import demand besides hardening of domestic interest rates. Having said that, reserve money expanded by 29% YoY in 1QFY08 as compared with 17% in 1QFY07. Also, growth in broad money and domestic deposits of 22% and 23% YoY respectively were higher than that of 1QFY07 (19% and 20% respectively) and their projected rates.

    Net capital inflows
    (US$ bn) FY06 FY07 Change
    FDI 4.8 8.5 77.1%
    FII 9.9 3.2 -67.7%
    ADR / GDR 2.6 3.8 46.2%
    ECBs* 8.2 16.0 95.1%
    NRI deposits 2.8 3.9 39.3%
    Short term credits 1.7 3.3 94.1%
    Source: RBI Macroeconomic review *Excluding IMD redemption

    According to the RBI, a comparison of major reserve holding countries over the period 2000 to 2006 shows that current account surpluses accounted for 179% and 138% of accretion to reserves in Japan and Russia respectively, and 56% each in case of China and Korea. In contrast, in India, over the same period, accretion to foreign exchange reserves was almost entirely due to capital inflows.

    Contagious delinquencies
    Risk of the US subprime mortgage delinquencies surfacing above what seem apparent, looms large on financial markets worldwide. For the uninitiated, subprime mortgages are issued to people with poor credit histories and thus carry higher risk. It is estimated that US$ 50 bn to US$ 100 bn have been invested in the US subprime market. Suck out of excess liquidity is expected to further worsen the situation, as funds invested in the risky assets will get more expensive. Resultantly, a tighter liquidity situation is expected to force speculators unwind their positions in the risk-heavy assets and thus bring more sanity in the markets.

    What is in it for investors?
    The RBI's policy review clearly states that growth rates in tourist arrivals, revenue earning railway freight, new cell phone connections, export cargo handled by civil aviation, passengers handled by civil aviation, cement and steel demand have moderated. Given this, while the Finance Minister's claims of notching double digit GDP growth in FY08 seems unrealistic, the RBI's target of 8.5% sounds more feasible. In the central bank's own words, holding inflation within 5% in FY08 assumes priority in the policy hierarchy and thus you, as an investor, should keep yourself prepared and your investments resilient to such temporary (short-term) macro economic shocks.

     

     

    Equitymaster requests your view! Post a comment on "Economy: When Reddy sees red". 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

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    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.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    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