The Hindu Business Line : US rate cuts: RBI will not follow suit now

Both stocks and bonds rallied — the former on both domestic and foreign buying ahead of the big IPOs (Reliance Power leads the pack) and the latter on bearish US data and the Fed chairman, Mr Ben Bernanke, saying the Fed will go the distance necessary on cutting interest rates, responding to economic weakness and uncertainty.

Also, liquidity turned positive and the Reserve Bank of India put the brakes on new auctions (having no need to, given the Government’s cash balances of Rs 50,000 crore). 10-year yields dropped to 7.5 per cent plus levels — a fall of almost 40 bps in less than a month.

Stock market buoyancy was supportive of the rupee which settled around Rs 39.25 after central bank intervention to support the dollar.

Inflation data stayed comfortable around 3.5 per cent, but will be pressured by oil prices to the end of this fiscal.

Stark contrast

Talk is rife of an RBI rate cut, following the footsteps of the Fed. However, the contrast between the US situation and India’s couldn’t be starker. The American economy is on the verge of recession. House prices are falling and financial markets are in liquidity crisis.

Indian property, on the other hand, is booming as are manufacturing and stock markets. Money markets are flush with liquidity.

It is difficult to imagine the RBI embarking on rate easing in these circumstances. In fact, if money rates drop much further (from current 6 per cent ), a CRR hike is a distinct possibility.

Thus, rates have probably reached their lower bounds. Of course, if the US economy gets into a sharp downturn, the Fed will cut rates steeply and that will inevitably have its fallout on Indian rates but that is some time away.

Stocks seem unable to pierce 20,000 territory decisively. All eyes are on the Reliance Power IPO. The market is swaying back and forth (corporate warfare on stock turf?).

50 bps cut likely

The US situation is alarming enough for Republicans and Democrats to put aside their differences and talk of an immediate stimulus package. An inter-meeting Fed cut cannot be ruled out.

In any case, a 50 bps downward move at the next FOMC meeting (January 29/30) is more or less certain.

The good news is that oil has failed to sustain $100. It fell to $92 last Friday on worries that a US and global slowdown would be a significant demand dampener. Gold, however, was on its own trip, rising to $900.

Heightened risk concerns (geopolitics, the US economy, dollar) are driving up the price. Has the positive correlation between the two broken for now?

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