In a surprise move RBI hikes CRR to 6%: This will invariably jolt the onward forward march of Inflation in the short term:RBI sends a strong message, that Inflation should be tamed at any cost: Good for the Common People: But then, is it a "Mediaval Approach"???!!Complex Situation could arise in the markets today due to this move:Selan Exploration will start getting HUGE benefits due to near completion of the Renovation and Expansion of the Oil wells, from April, 2007 or latest by 2nd quarter, 2007: Selan Exploration could cross double digit mark within the next 6 to 8 months time:Noida Toll Bridge Company Ltd's Mayur Vihar Project on the Verge of completion: Noida Toll is available at dirt cheap price, after such wonderful quarterly results and increase in the traffic on its Toll Bridge:
[Updated at 0800 hours]
RBI again spun a surprise by hiking CRR (Cash Reserve Ratio) by 50 bps from 5.5% after the market hours today. This hike will be implemented within two stages. This is in order to contain the inflation monstar and in the light of current liquidity conditions.
The annual inflation touched a record high of 6.58% for the week ended Jan. 27. The CRR of 5.75% will be carried out from the fortnight beginning from Feb. 17 while the balance 25 bps will be effective from Mar.3. Consequently, an amount of about Rs 140 billion(Rs.14, 000 Cr) would be absorbed by RBI from scheduled commercial banks (SCBs), regional rural banks (RRBs), scheduled co-operative banks and scheduled primary (urban) co-operative banks. The central bank singled in its third quarter review of the monetary policy announced on Jan. 31 that it would use all policy instruments, including CRR, to ensure the appropriate modulation of liquidity in response to the evolving situation. While hiking the CRR ratio, RBI has noted the domestic developments that have taken place since the announcement of the third quarter review on Jan. 31, 2007.
These include the advance GDP estimates, which pegged the expected real growth rate to 9.2% for the current fiscal, annual inflation (6.58% for the week ended Jan 27) and non-food bank credit growth, accompanied with growth of aggregate deposits (30.2% and 23.2% respectively as on Feb. 2). Moreover, IIP also reported 10.8% cumulative growth for April-December, 2006 as against 8% a year ago. Additionally, in the money market, the call money rate which was ruling in the range of 7.72-8.35% during Jan. 8 to Feb. 7, 2007 declined to 6.59% on Feb. 13, 2007. The central bank had hiked the CRR to the same extent on Dec. 8, 2006. Following that CRR hike, the interbank call rates touched a record high of 19%, while banks also started dealing at RBI`s repo window, where they got money at 7%. RBI on Jan. 31 hiked repo rate by 50 bps to 7.5%. Following this CRR hike (proportion of bank`s net deposits that is deposited with RBI), the CRR rate has now reached the bank rate (the rate at which banks borrow from RBI) level. With the rate hike decision, the call rates are again expected to go up, while the bond prices are expected to slump.
Some Comments on Today's markets:
Today's markets will be trying as one hand we have Strong Global Clues, with both Dow Jones and Nasdaq registering gains and Japanese stocks gaining, paced by oil-related companies including Inpex Holdings Inc.; after the International Energy Agency raised its forecast for global oil consumption this year, driving the price of crude higher and on the other hand the complex situation arising out of RBI's current move. Yesterday, European markets more or less closed in the green. Considering FII and Mutual fund action of yesterday, it remains to be seen how the market assimilates all these activities and takes a coherant decision.
But I do not think the markets would go too below from here, as some of the negative effects of the hike in CRR rates is already factored in such a huge fall during the last few days. The moot point to be noted here is that except Inflation, all the factors governing Indian economy seems to be positive. As I have mentioned earlier also, some inflation will be there in the economy if it is to grow at such a supersonic pace of 9% plus. The European country named Turkey, even with a double digit figure of Inflation has a vibrant Capital Market, but India under the present FM (and under the Hammer of the orthodox and conservative policies of the Lefts) always have a habit of over-reacting to any situation (specially if they were slighly negative). The way they are still tinkering with the Diesel and Petrol rates, speak volumes of their "Mediavial approach"........ It is true that the price of essential commodities should not rise, but then the companies needs cash at attractive rates for growth, so that they can bring more supply to the markets, which would automatically decrease the price of the manufactured items. But what RBI is doing is just synthetic and I am doubtful if it would be able to curb inflation too much without bringing some changes in the supply side factors in the long run and hindering growth. Straighway what RBI wants is to cool down the economy even if it involves a "Hard Landing" where the economy's growth is fractured in between. IT is applying the identical approach of China, which took extreme steps, the last year to Cool down its economy.
ONE THING IS CERTAIN, THAT SUCH MEASURES WILL INVARIABLY BRING DOWN THE INFLATION TEMPORARILY; WHICH THE GOVERNMENT ALSO NEEDS BEFORE ELECTION. One can say this is a booster dose of some sorts and a last mile efforts from the RBI stable to bring some sanity to the inflation figures before they jump out of control.
Also, if one goes by the technicals, then then if the markets goes below the psychological level of 3800, then it could enter the bearish phase. BUT ALL DEPENDS HOW THE MARKETS REACTS TO THESE "MIXED BAG OF CLUES".
But I am surprised to see this sudden and swift RBI action of hiking the CRR, inspite of raising it, only some months back. As mentioned earlier in a number of my postings, that the inflation rose because of demand side factors in food items mainly fruits, milk etc. which are to some extent essential items and hence the demand for them is to some extent inelastic. By curbing the liquidity the RBI will only precipitate, a fall in the supply side factors, which might give rise in the price of commodities in the long run (temporarily this step is satisfactory and a no-brainer). If the rise was in the non-essential items like Real Estate etc. this move could have been more effective. But then the hike has been considered by eminent economists in RBI & from the Government and it remains to be seen, as I mentioned earlier as to how the markets view such developments.
Hence, my policy would be to wait and watch; unless someone is holding over levereaged position.
Those who are holding any scrip for the long term need not worry as all these are temporary phenomenon. I could not post anything yesterday, as I had no Internet link from 9 p.m. IST yesterday.
Best wishes,
Suman Mukherjee
India.
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