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.
Interest rates: What next? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Oct 19, 2004

    Interest rates: What next?

    The monetary policy is upon us again and this being October, points to the beginning of the busy season. Without delving much in to the importance of the monetary policy statement, we would like to point out that this busy season monetary policy statement assumes high significance. This monetary policy would highlight whether the RBI is able to counter various domestic as well as international pressures and still keep interest rates at current levels.

    There is speculation among market participants that the RBI is likely to hike interest rates, at least initially in the short-term, in the form of a hike in the repo rates. There are various factors that are likely to influence the RBI's decision with regards to its position on interest rates. One of the foremost factors is that of inflation and the recent trends on the same are anything but encouraging. While the inflation rate (measured on the wholesale price index) has shown signs of softening (from a high of over 8.0%, the rate has settled to just below 7.5%), we would like to point out that since global crude prices are not showing any signs of softening and that the government has not resorted to price hike of petroleum products, the effect of higher crude prices have not exactly been factored into inflation, as measured at the consumers' level.

    While this is likely to have an adverse impact on the financials of Indian oil marketing companies, the government has been able to stem inflation to an extent. The government has also tried to act of the fringe by hiking the Cash Reserve Ratio to 5% (4.5% earlier), which has sucked excess liquidity and in turn has helped tone down inflation. As inflation remains a threat, it remains to be seen how the RBI deals with the same when formulating its monetary policy statement.

    Another factor that may indirectly impact interest rates is the RBI's recent move to allow banks to transfer their G-Secs in to the HTM (Held Till Maturity) category (essentially to reduce banks' losses on the G-Sec portfolio). This move is likely to take a toll on the liquidity of these G-Secs as the HTM category warrants that the banks hold these securities till maturity. This may put upward pressure on G-Sec yields due to lack of proper price discovery. This aspect was highlighted by the chairman of one of the prominent private sector banks in the country.

    Now, there is likely to be pressure from another quarter - on account of increased credit offtake by Indian corporates. While there is still surplus liquidity in the system, a large-scale offtake of credit would immediately suck up this excess liquidity and this would put direct pressure on interest rates. Unlike China, India does not have huge FDI inflows that can help meet the demand for capital, neither does it have a high savings rate (nearly 40% for China and 25% for India) to meet the demand internally. In such a scenario, the Indian economy may be susceptible to a spike in interest rates (possibly a short-term phenomenon).

    In the overall analysis, RBI's task is clearly cut out. While it was a different story when the economy was witnessing a low inflation scenario, the current environment is different at present and we may see some initiatives by the RBI with regards to interest rates at least from the short-term perspective. Neither the government nor the RBI could afford to retard the investment climate in the country and thus the long-term objective would ideally be to keep interest rates low.

    In the long-term, however, fiscal policy plays a more important role and it remains to be seen how the government is able to keep interest rates under check especially when it has planned a slew of populist measures (like the employment guarantee scheme, free electricity for farmers and financial support of Rs 163 bn for central PSUs). Investors need to gear up for a possible rise in interest rates (at least in the short-term) and consequently investment decisions have to keep this aspect in mind.



    Equitymaster requests your view! Post a comment on "Interest rates: What next?". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    A Darkness Is Spreading Across the US (Vivek Kaul's Diary)

    Aug 22, 2017

    Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    The Key Factor Pushing Gold Up These Days (Outside View)

    Aug 21, 2017

    PersonalFN explains the chief factor pushing gold prices up of late.

    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 Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    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?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    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


    Aug 22, 2017 11:10 AM