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Business News/ Money / More rate cuts likely, but Street unfazed
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More rate cuts likely, but Street unfazed

More rate cuts likely, but Street unfazed

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The key takeaway from the HSBC Purchasing Managers’ Manufacturing Index (PMI) for April was not so much the high headline number, which at 57.2 showed continued month-on-month expansion, though the pace has been slackening.

What’s more important are the clues for higher inflation. The problem is that high growth has already started leading to higher output prices for firms. The April PMI release says that output prices registered their strongest reading in three months. That means manufacturing companies now have pricing power.

HSBC’s senior Asian economist Robert Prior-Wandesforde has pointed out: “Surveys of capacity utilization and skilled labour shortages point to significant and growing product and labour market constraints."

The continued rise in output prices will not be a source of comfort to the Reserve Bank of India and it increases the chances of another policy rate hike coming through sooner than expected, perhaps before the next credit policy meeting. It’s no wonder then that the yield on the benchmark 10-year government bond is hovering near an 18-month high.

The equity market, however, seems to be taking a more optimistic view of RBI tightening. The Bombay Stock Exchange’s auto, bankex and realty indices, representing the interest-rate sensitive sectors, have all outperformed the benchmark Sensex index as well as the BSE 500 index in the past one month.

Investors are betting that interest rates are still too low to slow growth.

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Published: 03 May 2010, 10:40 PM IST
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