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.
The RBI does it again! - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Dec 11, 2006

    The RBI does it again!

    Citing the continuance in strong economic growth and heightened chances of having an overheated economy, the Reserve Bank of India (RBI), on Friday, raised the CRR (cash reserve ratio) by 50 basis points (0.5%), effective in two stages over a period of next 30 days. While the CRR will rise from the current 5% to 5.25% on December 23, 2006, there will be a further 25 basis points rise effected from January 6, 2007.

    In raising the CRR this time, the RBI hinted at its earlier statements made in October 2006, during the announcement of the mid-term review of the annual policy for the year 2006-07. The central bank had then stated, "containing inflation expectations in the current environment and consolidating gains achieved so far in regard to stability would warrant appropriate, immediate measures and willingness to take recourse to all possible measures in response to evolving circumstances promptly. The objective is to continue to maintain conditions of stability that contribute to sustaining the momentum of growth on an enduring basis. Towards this objective, the monetary policy stance and measures will need to be in a process of careful rebalancing and timely adjustment." The latest hike in the CRR suggests part of this process of rebalancing and readjustment from the RBI.

    The central bank has outlined some recent developments, particularly on the domestic front, that have influenced its latest stance. Some of these include:

    • The Indian economy has grown at a real (inflation adjusted) rate of 9.2% during July-September, 2006 and 9.1% during the first half of FY07.

    • Non-food credit has continued its strong momentum, increasing by over 30% YoY during the period April to November 2006 (31% YoY growth during the corresponding period of previous year). The overall growth in money supply has been over 19% YoY during this period.

    • On the back of strong economic growth and buoyant credit offtake, combined with higher prices of commodities, the inflation (as measured by the wholesale price index or WPI) was at 5.3% at the end of November 2006 (4.1% at the end of March 2006).

    • Importantly, the inflation at the consumers' level (as measured by the consumer price index (CPI) for industrial workers) was at a high of 7.3% in October 2006, from 4.2% a year ago.

    • The RBI has also cited its study of the private corporate sector, where it has indicated higher increase in prices of both inputs and outputs. Also, on the back of robust growth in domestic demand and inconsequential growth in capacities, there have been growing strains on capacity utilisation. Also, while expansion of capacity across most of the industries is underway currently, the benefits from the same are likely to be realized only over a period of next two years.

    If one goes by the recent actions of the RBI and some of the other central banks in the world (England, Turkey, Thailand), there has been a move towards greater intermediation, as demanded by he prevalent economic situation. Monetary policymakers no longer wait for the 'Monetary Policy announcement date' to make clear their intentions, and rightly so. The world economy, over the past few years, has integrated at such a rapid pace that it has left little flexibility in the hands of national monetary policymakers to make decisions as and when they want. Today, economies dance to 'one' global beat and those who miss the step might do more harm than good to their economic policymaking. The Indian central bank, the RBI, is following the same.

    As far as inflation in the Indian economy is concerned, we believe that it is not solely a factor of pressures like higher commodity prices. Rather, the inability of capital productivity to match pace with capital utilisation is what has hurt us more in the past. Frequently, the early stages of an economy's expansion include a period of above-trend growth, as underutilised resources are put back to work. As slack in the economy is reduced, however, economic growth tends to moderate. Indeed, at that stage, some slowing of growth to a pace consistent with the rate of increase in the nation's underlying productive capacity is necessary if the expansion is to be sustained without a buildup in inflationary pressures. We, as an economy that has relied a lot on that 'incremental' capital for achieving a lower incremental growth, need to learn this fast if we have to protect ourselves from overheating.

     

     

    Equitymaster requests your view! Post a comment on "The RBI does it again!". 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.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    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 SENSEX


    Aug 18, 2017 (Close)

    MARKET STATS