Thursday, May 5, 2011

Slow Down Before You Fall Down !

The RBI raised lending (repo) and borrowing (reverse repo) rates by 50 basis points to 7.25 per cent and 6.25 per cent, respectively. RBI has not been shy of sacrificing some growth in the process and they have reiterated that they would take further action if inflation does not ease off following these steps. Inflation, especially core inflation is at uncomfortable levels and RBI will have to continue policy tightening in the months ahead to contain it from becoming generalized at elevated levels.

Aggressive RBI action is likely to help slowdown credit off-take and reduce demand in the system which will help counter the rising fuel costs and associated increases in production costs. However, we feared this will dampen the growth estimates of the economy and capital inflows will stay subdued.

As the system slows down, the EPS growth estimates will slowly be revised down and the markets will therefore, stay capped and not rise rapidly above the recent levels of 5,800—5,900 in the near-term, until the global commodities rally subsides in any meaningful manner. RBI actions on the monetary policy for 2011 have been fairly aggressive and the intent has been made clear to fight the inflationary trends in the economy. Facing downside risks from the sovereign debt crisis in the euro-zone nations and high oil prices, the Indian economy is likely to grow 8 per cent in 2011-12.

The International Monetary Fund and the World Bank had forecast that India’s economy would grow at 8 per cent and 9 per cent, respectively. Should the global recovery will impact our economy through trade, finance and confidence channels.
An environment of price stability is a pre-condition for sustaining growth in the medium-term.

The Inflation is new equation to be dealt with. Slowdown and fall down is the new normal to live with.


Atul Sikrai

Sr Vice President & Head Equities

wiTdom investment advisory.

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