Advent of New Year witnessed fresh reporting of heavy losses by financial majors resulting in more than 10% fall in global equity indices. US Fed, focused on heading off a recession once again succumbed to the demand of financial market by cutting their target for the overnight lending rate by half a percentage point. The action was in addition to the surprise 75 basis points reduction in the third week of January. Fed has so far cut the benchmark rate by 225 basis points since Sept’2008 down from 5.25% to 3%. It is to be noted that policy action has come with a caveat that the downside risk to growth remain signaling further rate cuts in future
Fed Fund futures are already discounting further rate cut of 75 basis points by July’08. However its pertinent to note that inflation number in US is not benign at above 4%. In case the fear of confirmed recession in US economy is unfounded or signs of recovery are seen, it may lead to sudden reversal in Fed action on accommodative policy
Unchanged local interest regime:
Amidst increasing monetary easing by central banks in developed markets to assuage concerns of economic slowdown and credit crunch, Indian Central Bank has stuck to its domestic theme. RBI in its January policy has maintained status quo in terms of policy direction and highlighted liquidity management, upward inflationary risk and growth moderation in certain industrial segments
Recent months witnessed liquidity tightness due to repetitive CRR hikes, MSS auction, and outflow on account of IPOs. This led to RBI infusing liquidity through Repo auctions. So fare RBI has been successful to moderate inflation and credit off-take without affecting growth rate. Recent sharp rate cuts announced overseas and dovish views expressed by ministry officials had infused the rate cut expectations among a segment of market. Against this background, policy seems to be a dampener for exuberance exhibited in debt market over last one month
Fed Fund futures are already discounting further rate cut of 75 basis points by July’08. However its pertinent to note that inflation number in US is not benign at above 4%. In case the fear of confirmed recession in US economy is unfounded or signs of recovery are seen, it may lead to sudden reversal in Fed action on accommodative policy
Unchanged local interest regime:
Amidst increasing monetary easing by central banks in developed markets to assuage concerns of economic slowdown and credit crunch, Indian Central Bank has stuck to its domestic theme. RBI in its January policy has maintained status quo in terms of policy direction and highlighted liquidity management, upward inflationary risk and growth moderation in certain industrial segments
Recent months witnessed liquidity tightness due to repetitive CRR hikes, MSS auction, and outflow on account of IPOs. This led to RBI infusing liquidity through Repo auctions. So fare RBI has been successful to moderate inflation and credit off-take without affecting growth rate. Recent sharp rate cuts announced overseas and dovish views expressed by ministry officials had infused the rate cut expectations among a segment of market. Against this background, policy seems to be a dampener for exuberance exhibited in debt market over last one month
Interest differential & growth exhaustion:
Interest rate differential is expected to attract additional capital flows, however risk aversion could temper the momentum. Fresh inflows would augment trouble for Central Bank in balancing exchange rate and liquidity, requiring interventions
There has been no signal in change of RBI preference for inflation containment and it maintains growth being good in India. However, RBI falls short in recognizing explicitly that slowdown is underway. Slowdown in consumer durable segment and lower index of industrial production indicates the exhaustion in growth of economy
RBI has clearly stated that policymaking is driven purely by domestic factors and is not depending on global developments. However, undertone remains cautious due to global uncertainty and possible inflationary pressures on account of global commodity and food prices
Expectation:
Developed markets are expected to under perform the emerging markets while triggering the correction in asset prices globally. Rally in precious metals appears stretched and is expected to witness corrections
Its likely that Central bank maintains a neutral policy stance and interest rates to have a downward bias. Whether RBI cuts rates in coming weeks would depend on softening of base metal and crude prices. Going ahead country is expected to have a softer interest rate regime and interest rates are expected to move downwards over coming quarters
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