Reserve Bank’s move may not check inflation

Reserve Bank’s move may not check inflation
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First Published: Thu, Feb 15 2007. 01 14 AM IST
Updated: Thu, Feb 15 2007. 01 14 AM IST
Mumbai/New Delhi: A day after India’s central bank reduced the amount of money available with banks to lend out by Rs14,000 crore, the stock market, on Wednesday, shrugged off concerns that this would make it difficult for companies to grow, and closed just 80 points down at 14,009. This was a gain of over 200 points from the day’s low of 13,805.
Most analysts believe that while companies will now find it difficult to finance their expansion plans, this will not affect their earnings. Even the bond market, where yields were expected to soar after Tuesday’s move by the Reserve Bank of India (RBI) that forces banks to raise their interest rates, reacted in a muted manner. Yields on benchmark 10-year paper rose to 8.13%, but settled down at 8.08%.
The central bank’s move on 31 January, to raise the short-term lending rate and then again, on Tuesday, to raise the reserves banks need to maintain with it, were targeted at containing inflation, as fears that the Indian economy may be overheating surfaced. According to figures provided by the International Monetary Fund, the growth rate of the Indian economy, as expressed as a moving five year average (an accurate measure of sustained growth), is higher than it has ever been.
Economists admit that while RBI’s efforts to contain inflation will reduce borrowings, prices would continue to rise. Inflation, according to Bimal Jalan, a former governor of the central bank himself and now a member of India’s upper house of parliament, is yet to peak. “Inflation is a function of rising expectations and going by that, we have some amount of inflationary steam left in the economy,” he told Mint.
While the central bank’s efforts may have achieved part of their objective, of slowing down credit growth, it clearly may not have done enough to curb inflation. Chetan Ahya, an economist at Morgan Stanley, estimates that growth in bank credit will slow to between 20% and 22% by the end of 2007 from the current level of 30%. That may not be enough.
“We don’t think that policy has been tightened enough to cool demand sufficiently,” added Robert Subbaraman, senior economist at JP Morgan’s Hong Kong office. The economy, going by what Jalan and Subbaraman said, will continue to grow at almost the same rate as it was before RBI’s efforts to reduce money supply. Some economists, however, believe that this will help reduce demand in some sectors. “This will moderate growth in sectors such as real estate, personal loans and some commodities,” said Rupa Rege Nisture, an economist with Bank of Baroda.
Companies, some analysts say, could look for borrowing opportunities abroad, or through equity dilution of placements with private equity firms. Access to such alternative sources of funds, analysts said, would ensure that companies could continue to grow and meet their earnings targets.
“We do not see any revision in earnings estimates at this point,” said Vasudeo Joshi, the head of institutional equity research at Man Financial, a brokerage.
A former government official, who has been involved in policy making, said the opinion that the economy was overheating was “not too out of line” and that the government’s response to this had been “too ad hoc”. “There is obviously a lack of understanding of the source of the problem,” he said.
saumya.r@livemint.com
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First Published: Thu, Feb 15 2007. 01 14 AM IST
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