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RBI’s Reddy to the rescue

RBI’s Reddy to the rescue
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First Published: Wed, Apr 25 2007. 12 53 AM IST
Updated: Wed, Apr 25 2007. 12 53 AM IST
At first glance, the markets on Tuesday seemed to have cast central bank governor Y.V. Reddy in the unlikely role of a knight in shining armour riding to their rescue.
The stock market had been jittery for months, as the Reserve Bank of India (RBI) slowly tightened the monetary screws and engineered a slowdown for the economy. Small wonder then, that it heaved a sigh of relief when RBI decided to leave interest rates unchanged in its monetary policy announcement.
But apart from Tuesday’s relief rally, the fact of the matter is that the Sensex had already gone up more than 12% from the low it touched on 2 April, after the central bank suddenly raised the amount of money that banks have to park with RBI. That’s not all: even the Bombay Stock Exchange’s (BSE) index of banking stocks, the Bankex, which is supposed to be interest-rate sensitive, has risen by more than 11% this month.
Is the market trying to fight the central bank? Not really. There are several reasons for the rebound in the markets this month.
One, the quarterly corporate results have been pretty good. Two, markets across the world are rallying—the Dow Jones Industrial Average touched a record high a few days ago—and India comes across as one market ripe for some inflows simply because it has remained almost flat this year.
Foreign institutional inflows have, therefore, strengthened. And finally, some investors have already started looking beyond the rate hikes, on the assumption that, with growth slowing and RBI’s earlier tightening measures starting to bite, inflation too will start coming down. That, in turn, would mean an end to higher interest rates.
It’s on that basis that some broking firms have started to recommend stocking up on interest-rate sensitive stocks, such as those of banks and auto firms, in anticipation of a change in the interest-rate cycle.
In short, the bulls are already looking beyond the interest rate hikes to the day when liquidity will be back.
Is the theory valid? Not really. The monetary policy statement clearly says that “demand pressures appear to have intensified alongside robust growth and there are increased supply-side pressures in evidence”.
Most economists expect the central bank to raise rates one more time and/or increase the cash reserve ratio. In other words, Reddy is determined to slow the economy down.
If the measures have already worked, that’ll be fine. If they don’t, he won’t hesitate to slam the brakes. The sooner the market realizes that, the better.
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First Published: Wed, Apr 25 2007. 12 53 AM IST
More Topics: Money Matters | Global Markets |