The Hindu Business Line : Oil price a global economy risk

The big picture of rising economies after the recent upheavals is intact. This bodes well for stocks and not so well for bonds. The dark cloud continues to be oil.

S. Balakrishnan

As the stock market and the rupee soared, the Finance Minister thought it was high time for some ‘greenspanspeak’, on the lines of the former Fed Chairman’s famous 1996 speech on ‘irrational exuberance’.

The result was an attempt to talk down stocks and the currency. It succeeded, at any rate on Friday. Despite favourable inflation data and far better-than- expected growth in industrial production in September, both fell.

Monetary management is now reduced to liquidity-creating forex market intervention to slow the appreciation of the rupee, followed immediately by MSS bond issues to sterilise the liquidity.

While the government bears the debt-servicing costs, it cannot access the bond proceeds; in a crunch, investors in these bonds are eligible for collateralised borrowing from the central bank.

CRR hike certain

Thus, the sure-fire way (and incidentally the zero cost route) to constrain liquidity is a CRR increase and, as things stand, one seems certain in the coming weeks.

The Government has more or less given up the idea of increasing petroleum product prices for the present. So there would be no inflationary pressures from energy.

The flip side is an increase in the deficit (although temporarily disguised through the device of ‘oil bonds’ issued to the oil companies to compensate their losses).

Banks are on a rate cutting spree. Borrower resistance to rates is probably a reason. Besides, the market is funds flush, with tendering for the RBI’s daily reverse repos in tens of thousands of crores of rupees.

Credit growth picked up in September. Coupled with the likely CRR increase, short-term rates could harden in the coming weeks.

The Indian market boom is echoed in the US, where the Dow went up well beyond 14,000. So far, data suggest little spill over of the housing crash into the rest of the economy. Last month’s retail sales exhibited positive, though modest growth. Exports are improving, thanks to a weak dollar. Consumer confidence fell only a bit.

Bets off

The logjam in the asset-backed segment of the commercial paper market could see early resolution if the efforts of money-centre banks to revive the market on the initiative of the US Treasury bears fruit. In that case, one could see a quick run-up in both stock and credit markets.

All bets on another Fed rate cut in its end-October meeting are clearly off. A message here for RBI-watchers?

The big picture of stabilising and indeed rising economies after the recent upheavals is intact. This bodes well for stocks (and not so well for bonds).

The dark cloud continues to be oil, which jumped to $ 88 on rising consumption and Middle East political tensions.

More Stories on : Petroleum | Financial Markets | Economy | Financial Scan

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page