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.
Monetary Policy: Inflation is the main target - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Sep 16, 2010

    Monetary Policy: Inflation is the main target

    In its 5th round of successive interest rate hikes, the RBI reiterated its strong stand against inflation. This move however proved to be a slightly more aggressive than expected. The RBI hiked the repo rate by 0.25% and the reverse repo by 0.5%. These rates will now stand at 6% and 5% respectively, with immediate effect. The central bank had announced in July that it would be shifting to a 6 weekly review of monetary policy. This hike comes as part of its first mid-quarter review of the policy. More frequent meetings will help prevent any surprise rate hikes as well improve the control of key rates.

    RBI's act comes on the back of its view that the economic recovery is now showing signs of consolidation. The Indian economy grew at an estimated 8.8% in Q1 of FY11. RBI cited the examples of improving manufacturing growth through the index of industrial production (IIP), which surged 13.8% in July 2010. This improved from 5.8% in June this year. However, the central bank was concerned with the high volatility of the index. This unpredictability raised doubts on how effective the index is at reflecting momentum in the industrial sector.

    The good monsoons that the country is receiving currently however raise chances of a robust GDP growth during the current fiscal. The slow recovery of the global economy cause export growth to remain sluggish while the strong domestic recovery has increased demand for imports. As a result, trade deficits, and current account deficits, are widening. However, the government fiscal deficit is expected to remain at around 5.5% of GDP post the successful 3G and BWA auctions. Plus increased interest rates will reduce import demand.

    Inflation however still needs to be tamed

    The RBI raised concerns on the inflation front. The published wholesale price index (WPI) inflation rate for August 2010 was based on the new series (base year: FY05=100) for the first time. The new series has a better coverage of items with manufacturing products having a slightly higher weight.

    Both series, however, indicated similar broad inflation trends. Average monthly WPI inflation for 1QFY11, based on either series, is in double digits, 10.6% (new series) and 11.1% (old series). July, 2010 saw some moderation in inflation. This further continued in August. WPI inflation fell to 8.5% in August from 9.8% in July 2010 as per the new series. Inflation rates although showing some moderation, it has more or less reached a plateau. They are still likely to remain at unacceptably high levels. Thus, the need to implement policy decisions in order to tame prices.

    Negative real rates

    Another cause of concern by the RBI is the prevalence of negative real interest rates. This has caused deposit growth to slow down for most banks. People with money to save have been looking for higher returns in other places. A slowdown in deposits will in turn reduce credit offtake. To make sure that non-availability of credit would not be a growth constraint, a combination of increased policy rates and declining inflation rates are needed. Thus, the move towards rate hikes from the RBI, despite some moderation in inflation.

    Overall, we see RBI's intentions as positive because it shows its resolve to tackle the inflation problem and that of negative real rates in a timely manner.

    The hike in rates will lead to a rise in cost of funds for the banks eventually making loans more expensive. This will help drive down consumption to some extent which has been ballooning lately. The tightening of monetary policy that it has done so far has taken the situation close to normal.

    Note: Repo and reverse repo rates are short-term rates at which the RBI lends (repo) and borrows (reverse repo) money from commercial banks.

     

     

    Equitymaster requests your view! Post a comment on "Monetary Policy: Inflation is the main target". Click here!

      
     

    More Views on News

    IDFC Bank: Strong Trading Income Shields Credit Slowdown (Quarterly Results Update - Detailed)

    Aug 10, 2017

    IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.

    ICICI Bank: Loan Slippages Trending Downwards (Quarterly Results Update - Detailed)

    Aug 10, 2017

    Asset quality will be the key thing to watch out for going forward.

    Axis Bank: Outside Watchlist Slippages a Big Worry (Quarterly Results Update - Detailed)

    Jul 31, 2017

    Almost 74% of the watchlist as provided by the bank of Rs 226 billion in FY16 has turned into non-performing assets.

    Should You Take SBI Chief's Advice and Load up on SBI Shares? (The 5 Minute Wrapup)

    Jul 6, 2017

    Does the stock score on the value versus price equation?

    AU Small Finance Bank Ltd. (IPO)

    Jun 27, 2017

    Should one subscribe to the IPO of AU Small Finance Bank Ltd?

    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.

    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.

    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

    S&P BSE BANKEX


    Aug 17, 2017 (Close)

    MARKET STATS