Interest rates expected to hold steady in near term
Economic Times, Financial Times, January 31, 2010, Page 3
There is adequate liquidity and interest rates will not move in the near future, says Ashish Gupta
The stock markets were keenly following the Reserve Bank of India (RBI) for moves to reign in inflation and ensure growth. This was for the simple reason that the inflation rate has been rising consistently. Interest rates and credit are important constituents for industry. Corporate performance is to a great extent tied up with the availability of credit and the cost at which it is available. Inflation is a major concern.
So, the RBI had the tough task of balancing growth and liquidity. In the credit policy review it has left its short-term interest rates unchanged, but raised the cash reserve requirements of banks by a higher-than-expected 75 basis points, to be implemented in two phases. It also warned of rising inflation. The RBI has increased the cash reserve ratio (CRR) by 75 basis points as against market expectation of 50. It has clearly indicated its intention to control inflation.
The RBI said it will anchor inflation expectations and keep a vigil on the trends in inflation, and be prepared to respond swiftly and effectively through policy adjustments as warranted. Further, the RBI will actively manage liquidity to ensure that credit demands of productive sectors are adequately met. It will also maintain an interest rate environment consistent with price and financial stability, and in support of the growth process.
The RBI has also hiked its forecast for GDP growth in the current year to 7.5 percent, from an earlier target of six percent, and said the current rate of growth is likely to be sustained in the financial year that ends March 2011.
The RBI had earlier pegged the growth rate at six percent and inflation at 6.5 percent. Assuming a near-zero growth in agricultural production and continued recovery in industrial production and services sectors, the baseline projection for gross domestic product growth for 2009-10 is now raised to 7.5 percent. Keeping in view the global trend in commodity prices and the domestic demand-supply balance, the baseline projection for wholesale price inflation for end-March 2010 is now raised to 8.5 percent. On the assumption of normal monsoon and global oil prices remaining around the current level, it is expected inflation will moderate from July.
As an outcome, banks will start exercising a little more caution keeping in mind the fact that the RBI is so concerned about inflation. Banks are not expected to hike the rates immediately because there is excess liquidity in the system. The industry does not foresee interest rates going up in the near future because of the expected inflows and the liquidity condition at present.
The fact that interest rates have not been increased will continue to spur demand. There was a lot of anxiety on whether the government will pull back the various stimulus measures. The fact that interest rates have not been changed will now put the industry at ease.
The net impact on stock markets is expected to be neutral in the near term. With the raised GDP growth projections, the industry demand is expected to grow. Also, as the interest rates are expected to remain at their present levels in the near future, business plans of corporates will not be affected adversely.
All this may not impact the stock markets negatively. Especially so because the interest rate sensitive sectors may not be adversely impacted as the impact on interest rates would be just marginal, if any.
However, in case the inflation rate does not come under control, the RBI would have to step in with tougher measures.
Economic Times, Financial Times, January 31, 2010, Page 3
There is adequate liquidity and interest rates will not move in the near future, says Ashish Gupta
The stock markets were keenly following the Reserve Bank of India (RBI) for moves to reign in inflation and ensure growth. This was for the simple reason that the inflation rate has been rising consistently. Interest rates and credit are important constituents for industry. Corporate performance is to a great extent tied up with the availability of credit and the cost at which it is available. Inflation is a major concern.
So, the RBI had the tough task of balancing growth and liquidity. In the credit policy review it has left its short-term interest rates unchanged, but raised the cash reserve requirements of banks by a higher-than-expected 75 basis points, to be implemented in two phases. It also warned of rising inflation. The RBI has increased the cash reserve ratio (CRR) by 75 basis points as against market expectation of 50. It has clearly indicated its intention to control inflation.
The RBI said it will anchor inflation expectations and keep a vigil on the trends in inflation, and be prepared to respond swiftly and effectively through policy adjustments as warranted. Further, the RBI will actively manage liquidity to ensure that credit demands of productive sectors are adequately met. It will also maintain an interest rate environment consistent with price and financial stability, and in support of the growth process.
The RBI has also hiked its forecast for GDP growth in the current year to 7.5 percent, from an earlier target of six percent, and said the current rate of growth is likely to be sustained in the financial year that ends March 2011.
The RBI had earlier pegged the growth rate at six percent and inflation at 6.5 percent. Assuming a near-zero growth in agricultural production and continued recovery in industrial production and services sectors, the baseline projection for gross domestic product growth for 2009-10 is now raised to 7.5 percent. Keeping in view the global trend in commodity prices and the domestic demand-supply balance, the baseline projection for wholesale price inflation for end-March 2010 is now raised to 8.5 percent. On the assumption of normal monsoon and global oil prices remaining around the current level, it is expected inflation will moderate from July.
As an outcome, banks will start exercising a little more caution keeping in mind the fact that the RBI is so concerned about inflation. Banks are not expected to hike the rates immediately because there is excess liquidity in the system. The industry does not foresee interest rates going up in the near future because of the expected inflows and the liquidity condition at present.
The fact that interest rates have not been increased will continue to spur demand. There was a lot of anxiety on whether the government will pull back the various stimulus measures. The fact that interest rates have not been changed will now put the industry at ease.
The net impact on stock markets is expected to be neutral in the near term. With the raised GDP growth projections, the industry demand is expected to grow. Also, as the interest rates are expected to remain at their present levels in the near future, business plans of corporates will not be affected adversely.
All this may not impact the stock markets negatively. Especially so because the interest rate sensitive sectors may not be adversely impacted as the impact on interest rates would be just marginal, if any.
However, in case the inflation rate does not come under control, the RBI would have to step in with tougher measures.
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