What's in store after 8 rate hikes in FY11? - Views on News from Equitymaster

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What's in store after 8 rate hikes in FY11?

Mar 17, 2011

Inflation is the nemesis that has been haunting the RBI for the greater part of FY11. For the eighth time this fiscal the RBI used its monetary policy tools to rein in price rises. The RBI raised the rates at which it borrows from (reverse repo) and lends to (repo) banks by 0.25% each. Thus the repo rate now stands at 6.75% and the reverse repo rate at 5.75%.

The economic growth estimate still remains intact at 8.6% for FY11. Credit growth has also been above the central bank's target. However, inflation is 1% off target. The inflation for March 2011, as per the WPI (wholesale price inflation) is now estimated to be at around 8%, compared to the target of 7%.

There has been some easing in terms of food price inflation, and there are a number of measures in the latest Union Budget which will help control demand-supply imbalances and increase agricultural productivity.

But, the disastrous news flashing from Japan has made us forget two important concerns. Oil prices and Middle East politics. While oil prices may have eased a bit lately, since Japan is a large oil consumer, they may be back up very soon. High crude prices are of major concern to our central bank. Troubles in Libya and Bahrain have not eased as yet. And with threats of a nuclear disaster in Japan, the RBI expects that Japan may substitute thermal energy for nuclear power. This may impact prices of crude oil even further. Either way, at over US$ 100 per barrel, it is still way over comfort levels.

Increased commodity prices, including coal prices and fuel prices are a big concern. It impacts customer wallets, businesses, and overall economic growth. But more importantly it also impacts the fiscal deficit in two ways. Firstly with an increased import bill, and secondly due to higher subsidy costs.

So what does the future hold? With inflation still above comfort levels, the regulatory watchdog has indicated that it will continue with its current anti-inflationary stance until further notice. With the banking sector's loan growth at 23% YoY in FY11, incremental off takes to the retail segment may get marginally hurt in FY12. But what really concerns us is the impact on investment growth and economic activity.

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1 Responses to "What's in store after 8 rate hikes in FY11?"


Mar 31, 2011

I am of the opinion that increase in repo rate and reverse repo rate by RBI will have no impact as presently the banks are having sufficient liquidity. The banks have larger part of their investment in Govt Securities ie. SLR securities. The Governor of RBI Dr
Subbarao has repeated said that the Banks should not focus on increasing the NII. It is indication that the credit must be made available at lower rate of interest and the Banks must cut their operating cost not only by reducing their expenses but also proper monitoring of advances as a large chunk of Profit goes for provisioning for NPA resultingof which net NPA are shown to the lowest level. The Bank should make their apprasial and monitoring of advances more effective and value added. Furthr it is needless to mention that in most of the cases, the delay in taking action/steps results in creating more NPAs. A stich in time saves nine. But nobody wants to bell the cat.
The money supply to the needy sector either through Banks, through capital market, through Post offices or any method will certainly come. The people do not keep their funds in cash in their hosues as in old ages but circulate it in the money market in any of the way.
As reagards, oil prices, yes! this is a matter of conern specifically keeping in view the international situation where Libya is in trouble. The unfortunate situatin in Japan is also a matter of concern. But I doubt that generation of newclear power is going to be ignored in the time to come except that more care shall be taken for safety which may increase the cost. This situation will help so many coutries specifically for growth of Indian economy becasue of demand from India.
Over all every thing is good and any further minor increase in rate of interest is not going to hamper the growth of GDP.

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