t-zAVW_utoTCRUo_lLxrx7MFn0Q

Sunday, May 5, 2013

RBI:Unexpectedly Hawkish in May Policy?

The RBI cut the repo rate by 25 basis points as expected.The unexpected hawkish stance was a shock for most commentators,what with the inflation ebbing and international crude oil prices too coming down below the pschological $100 barrel level.
 
Difficult to assess the direction as RBI expects a shallow recovery in 2013.Investment flows into India have been negative in April after a stupendous inflow in the preceding 3 months.The rift between India's central bank and the Economic Advisory Council is well known.
 
"I think there is a little bit of disappointment because of the lack of a cash reserve ratio cut. The market will take some time to fully digest this statement"-Shubhada Rao,Chief Economist,Yes Bank.
 
The markets so far have not reacted too badly to announcement of 5.7% growth projected here the Finance Minister talks of reaching 8%.For what I understand of the policy put forth into the public domain there is room for a further 50 basis points cut in 2013 if growth continues to disappoint and providing inflation stays within 5-6%levels.
 
I expect the nifty to stay in the 6000-5600 range with bouts of volatility that will test the mettle of the best traders in the markets.Political compulsions are are negative burden on the economic scenario.If one looks at 2014,the elections are likely to throw up another hung house with the opposition yet to come up with a coherent candidate who can articulate a vision for growth.
 
From those in the business community my feedback is of Mr Narendra Modi being the frontrunner.I have in earlier blogs mentioned that Gujarat with its unique geography has enough barren land that can be offered as incentive to industrialists to set up huge plants.This policy might not be conducive to the rest of the country.Given the example of Bengal that is on tops in terms of malnutrition and food shortages.The cost of converting arable land that gives 3 crops a year into commercial industry needs a longterm study of the benefits.
 
Lets face it,India is facing a test internally with slowing growth,externally with an agressive China on its borders and politically with all the scams that keep happening almost at the rate of one a week!
 
With the Fed keeping rates down the worst fall in Gold in a decade has stabilized and inflows into emerging markets the India bourses may not see a bad year but do not be too optimistic.