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Thursday, June 16, 2011

Impact of RBI credit policy

Today RBI raised key policy rates by 25 basis points, thus Repo Rate and Reverse Repo Rate becoming 7.5 and 6.5 percent respectively.
Inflation in the month of May was, a tad above 9%, which was much higher than RBI’s comfort level of 5-6%.
This move was necessary to curb the rising inflation and specially rising food item prices. RBI was not comfortable with the quantity of loans being disbursed by banks these days.
Unfortunately, RBI has no other option left but the curbing of demand by hiking policy to tame the rising inflation.
Interestingly, rising food prices have more to do with supply constraints which is beyond the jurisdiction of the RBI and more to do with the government’s policies.
Banks are supposed to increase at least short term lending rates, as their cost of funds shall rise due to hike in repo rate.
Market is expecting a further 25 basis point of policy rates hike in July. These rates shall definitely have an impact on India’s GDP growth rate.FII have been significant seller in the last 9 days, but money outflow from market was nominal, thanks to DII buying.
All hopes are now on good monsoon, which shall ensure the money from farm sector into the economy. Good monsoon is generally followed by increased buying in automobiles (both commercial and non commercial) and consumer goods.
This rise in policy rates was well anticipated by market so no panic reaction took place. Real estate shall be the most battered sector by this move followed by capital goods and consumer durable sector.
Buyers of Real Estate have a tendency of postponing their buying plans till interest rates moderate.
Hike in policy rates makes the capital expensive which makes CAPEX (Capacity Expansion) a difficult task and CAPEX is commonly deferred.
Not only India but china is also taking similar moves to curb the inflation.RBI has made it clear that it shall maintain its anti-inflationary stance.


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