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Will the RBI change its stance? - Views on News from Equitymaster
 
 
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  • Oct 27, 2009

    Will the RBI change its stance?

    All eyes will be on the RBI today as it releases its monetary policy and also gives an indication of where the interest rates are headed. The decision will be tough for the central bank as while on one hand the economy is limping back to recovery, on the other hand, inflation has started picking up. As far as the latter is concerned, the RBI expects it to rise to 5% by the end of this fiscal and it will be interesting to see when it begins to hike interest rates. The RBI had in the past made it clear that it would continue with its expansionary monetary policy till such time that it becomes clear that the recovery is sustainable.

    However, the worrying factor here is that inflation is slowly beginning to creep up. Poor monsoons have been instrumental in driving up food prices as crop production was hampered. As a result, the WPI which was languishing in the negative has now moved into the positive territory. What is more, the CPI, where food prices are given more weightage, refuses to budge from its high levels. Not just that, because of India's attractiveness as an investment destination as compared to the developed economies which are mired in recession, FIIs have once again made a beeline for Indian shores. This has swamped the economy with enough liquidity and driven up the stock markets, thereby making a case for hiking interest rates to rein in inflation.

    Further, while poor monsoons raised doubts about whether the Indian economy would be able to grow at 6% plus as envisaged by the Finance Minister and the RBI, the strong growth in industrial production seems to have dispelled those fears and could be perceived as a strong sign that the economy is recovering. That is why the RBI's stance in today's monetary policy will be critical in terms of setting the tone with respect to interest rates. At some point in time, it will have to raise interest rates taking into account inflation and rising liquidity. The million dollar question is when. Over to you, Mr. Subbarao.

    Pharma results: The verdict so far
    Results for pharma companies have started pouring in and they have been heartening as compared to what was witnessed in the previous two quarters. The performance on the topline front has been mixed and subdued conditions in the global markets, especially in Europe and Russia have hampered sales to a certain extent. For instance, Piramal Healthcare's custom manufacturing business witnessed a decline precisely because innovator companies in the US and Europe are in the process of cleaning up their inventories. Similarly, in Russia, Ranbaxy and Dr.Reddy's have witnessed challenging conditions due to the sharp depreciation of the local currency and receivables as a result of which both these companies are focusing more on recovering payments even if that means foregoing some sales.

    On the margin front, however, many of them have witnessed considerable improvement due to various cost rationalization measures and improvement in product mix. Not just that, there have not been any nasty surprises on the forex front, which dominated performance in the last two years due to considerable volatility in the way the rupee moved. So, overall profits have grown at a much faster pace than the topline.

    Overall, from a long term perspective, the prospects of the pharma sector look intact as the fundamentals in terms of governments across the world veering towards low cost generics have not changed. However, mirroring the Indian stockmarkets, pharma stocks have also rallied considerably over the past few months. Hence, we advice investors to adopt a stock specific approach while investing in the sector.

     

     

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