The Hindu Business Line : Through the magnifying glass

The Indian economy and equity markets continue to be resilient. Third quarter growth dipped only slightly to 8.9 per cent compared to 9.3 per cent in Q2. True, the same period last year saw double digits, but the ‘sacrifice’ is small when seen in the context of the halving of inflation. The Government and the Reserve Bank of India, it seems, have engineered a winning growth-inflation combination. Moreover (and this is important), it has been achieved with tolerable levels of volatility in currency and bond markets.

Will at least this put to rest the armchair critics of exchange, interest rate and monetary policy?

Key issues

Actually, the key issues are different. The appreciation of the rupee is a body blow to exports just at the time when our manufacturing and marketing (eg. creating an Indian brand) are becoming competitive (in a broad sense) in global markets. Allowing erosion of these gains to accommodate portfolio investments at the expense of trade competitiveness does look unfortunate.

The GDP statistic considerably dilutes the possibility of the RBI softening its interest rates policy even if the Fed launches a rate cutting spree, the odds for which improved last week with the continuous stream of weak data – consumer spending and confidence, business conditions, cap ex and, of course, housing – on the US economy and the Fed Chairman, Mr Ben Bernanke’s and Vice-Chairman Donald Kohn’s dovish speeches on the risk of a downturn caused by the credit and liquidity crisis. A 25 bps cut can be taken for granted with 50 bps likely if the employment data ahead of the Fed meeting is weak. Decision-making has been made easy by the clear signs of a perceptible slowdown threatening to develop into a full-blown recession. The Fed has enough excuses (and reasons) to cut rates without being accused of pandering to the demands of Wall Street and bailing banks and hedge funds out of the mess they have gotten into.

The good news last week was the drop in the price of crude as it sliced through $90 - a huge relief after the prospect of $100 oil. There cannot be a better palliative for the energy-hungry consumer and business. A prolonged phase of significantly lower prices will have larger stimulative effects than lower interest rates.

The RBI seems satisfied with the present corridor of repo and reverse repo rates. It is unlikely to allow the market to move too widely out of this range.

Bond yields will face upside pressure from the now-established habit of the Government issuing bonds for all extra-budgetary requirements, the latest being to finance its investment in the forthcoming SBI rights issue.

Financial engineering is not confined to the corporate and financial sectors.

More Stories on : Financial Markets | Economy | Financial Scan

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

Stories in this Section
Syndicate Bank puts MTN issue on hold

Award for TNSC Bank

Real inclusion

Rupee gains 12 paise

Fullerton India bets big on retail loan market

Health policy for senior citizens

Through the magnifying glass

Vijaya Bank meet on official language

Bond prices up as liquidity eases

SEBI eases norms for corporate bonds

Call rates tad lower

2 banks cut FCNR, NRE deposit rates

Section of officers may join SBI strike

Urban co-ops getting more deposits: Report