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Interest rates, realty and more...

Sep 25, 2008

Benign interest rates ahead?
The newly elected governor of the Reserve Bank of India, Dr. Subbarao will be putting forth the half-yearly review of monetary policy on the 24th of next month. While much has been written and said about the new governor's cautious stance on inflation-reigning measures there are conflicting views about the central bank's longer term casting of interest rates. Goldman Sachs believes that interest rates in India are set to cool off with inflation levels nearing single digits in the coming months. However, one of the largest private sector banks in the country, HDFC Bank sees long term interest rates rising even further.

While the world makes a mockery of the US that is struggling with debt levels estimated to cross US$ 11 trillion, we are ignoring the fact that back home the government borrowing levels are not looking too pleasant either. The Reserve Bank of India (RBI) has been regularly making funds available to banks in the past two weeks to boost the availability of funds. However, as capital flows to emerging markets shrink amid a global credit crunch, the same is expected to unwind.

Realty strikes hard
Nearly 112 m square feet of retail space is expected to be delivered in the next 2 to 3 years signaling sufficient supply of real estate space. But are there enough takers? As per a report from a leading business daily, the total vacancy rate in Mumbai malls stood at 13.1% in August 2008, the highest since 2005. In fact, the vacancy was as high as 30% to 50% in some suburban malls. Vacancy at Delhi's prime and suburban markets also rose to 16.2% and 10.8% respectively in the first quarter of FY09.

Real estate companies are waking up to deal with the slowdown. Hit by falling fund-raising avenues and demand from customers, construction companies are in the process of increasing the variable pay packages for a large chunk of their employees, as a measure to counter a prolonged slowdown. This is expected to help them keep their fixed costs under control. While most companies of this genre are yet shying away from downsizing their employee base, they are certainly wary of controlling the employee costs.

Mr. Market will have his way...
…believes the author of one of the largest circulated daily newsletters in the world - 'The Daily Reckoning' - Mr. Bill Bonner. Mr. Bonner finds former US President Ronald Reagan's famous line - "I'm from the government and I'm here to help" rather contemptuous and believes that Mr. Market always has something to say about what things are worth, irrespective of what he is dumped with. While the US government may be wanting to save its face by banning short-selling on financial stocks, nationalising major companies and buying a trillion dollar worth of Wall Street's losses, Mr. Market may not really be pleased. After all, he was not when the Japanese tried almost all these measures during the 1990s and still witnessed their economy sink.

  • Also read - Mr. Market and You

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