The Hindu Business Line : Bearish undertones

Only when there is a significant drop in inflation, which in turn is connected with crude prices, would the equity market see more liquidity inflows.

— Paul Noronha

Lull for a few more quarters.

Sandesh Kirkire

The RBI’s Credit Policy for the first quarter of 2008-09 was largely an extension of the central bank’s stated intention in its annual policy document.

The approach and outlook adopted by the RBI is largely being dictated by the urgent need to rein-in inflation through monetary management. And the tactic adopted is: liquidity tightening.

The RBI has increased the repo rate by 50 basis points to 9 per cent, while increasing the cash reserve ratio by 25 basis to 9 per cent. The latter measure would however, be effective only from August 30.

Targeting inflation

Through the repo rate hike, the RBI aims to increase the overnight rates, and thus arrest monetary expansion and loan off-take from 20 per cent to 17 per cent. The CRR hike is aimed at sucking up near-term liquidity bulge expected to develop due to bond maturities by late August.

It is expected that these set of measures may prove ample in restricting inflation. Inflation has already tapered-out from 11.91 per cent to 11.89 per cent.

With international prices of crude on a decline, and a rejuvenated monsoon setting in, the possibility of inflation taming down is likely to be sooner rather than later.

However, on the flip side, these measures would make capital borrowing dearer for industries and households alike; this in turn could hurt corporate earnings.

Hence, the present set of measures is seen as detrimental for the equity markets. On the backdrop of worsening local fundamentals and turbulent overseas markets, lack of liquidity would continue to hurt the equity markets.

Despite these factors, the ‘savings’ and investment’ cycle remains largely buoyant. Currently ‘savings’ constitutes 36 per cent of GDP. The spate of rate hikes would impact the credit off-take and dent the savings and investment cycle.

Equity markets

In such troubled times, while investors can find value in select stocks, the overall market may continue to have bearish undertones for a few more quarters.

Only when we see a significant drop in inflation, which in turn is connected with the crude prices, would the equity markets see more liquidity inflows.

Investors should consider investments in equities through systematic investment plans for a relatively longer period of 2-5 years. Any investments with horizons shorter than that should be considered in short term/fixed maturity funds.

(The author is CEO, Kotak Mahindra AMC. The views expressed are personal.)

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