The Hindu Business Line : Market View

The central bank has adopted a cautious tone and is looking to strike a balance between containing inflation and maintaining the economic growth. Since its last policy review, headline inflation numbers (WPI) have surged over the 7 per cent mark and this has become a political issue ahead of national elections. The government has announced various fiscal measures including reduction in import duties and export bans in various sectors. The GDP projections have come in at a higher-than-expected level and are probably reflecting expected growth in the services and agriculture sector. The services sector in particular is not capital intensive in nature and this could explain the lowering of credit growth projection. The higher 5.5 per cent inflation growth is an indication that the Reserve bank of India expects higher economic growth to keep prices at a relatively higher level. The 25 bps hike in CRR, following the recent 50 bps hike is aimed reflects the central bank’s efforts to reduce systemic liquidity and thereby anchoring inflationary expectations. The latest hike will take out around Rs 9,000 crore from the system and pegs the CRR at a seven-year high.

Global interest rate direction remains mixed with rates moving down in the US, Canada and the UK, but central banks in Europe and Japan have been on hold. Asian economies have been witnessing monetary tightening, especially in China. At this juncture, economic data showed weakness in the US and growth in other regions, albeit at a more modest pace. Central banks have been injecting liquidity to prop up credit markets and avoid systemic failures.

Commodity and oil prices remain the key factor at this juncture. The RBI is also looking to provide Indian companies with hedges against the rise in global prices by allowing Indian companies to invest in natural resources companies overseas and allowing domestic oil companies to hedge.

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Sameer Kulkarni, portfolio manager for the Fidelity Cash Fund and the Fidelity Short-Term Income Fund, says that given the current conditions of surging inflation amid slowdown in growth, the policy action by the RBI is aimed at controlling inflation by draining out excess liquidity without affecting economic growth. He also said the RBI has made it clear that it seeks to ensure a monetary and interest rate environment that accords high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to continuation of the growth momentum.

Mr Kulkarni believes that the uncertainty in the fixed income market is likely to continue over the short term as the market is expected to closely watch such factors as government borrowing, money supply, prices and how policy measures play out in the next few months. While linkages between the sub-prime issue and domestic markets are still unclear, further trouble from those quarters could possibly trigger a re-pricing of risk premiums across the board, including for emerging markets, with ramifications for capital flows in the short term.

FIDELITY INTERNATIONAL

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