RBI's 50-50 MOVE and ITS IMPACT ON INTEREST RATES-VRK100-24062008

RBI’s 50 - 50 MOVE and ITS IMPACT ON INTEREST RATES:



MEASURES:

Reserve Bank of India on 24.06.2008 announced:

(1). Hike in LAF-Repo Rate by 50 basis points to 8.50 per cent with immediate effect; and

(2). Hike in Cash Reserve Ratio (CRR) by 50 basis points, in two phases, to 8.75 per cent.



RATIONALE:

RBI’s stated objective of using the above policy instruments in a rather blunt manner is to contain inflationary expectations in the economy.



IMPACT:

On Macro Economy:

GDP growth, which has averaged 8.80 per cent between 2003-04 and 2007-08, will decelerate to 7.5 per cent in 2008-09. The chances of GDP growth further slowing in 2009-10 and 2010-11 are extremely bright!

Direct Tax collections will come down due to sharp fall in corporate profits and personal incomes; investment demand will decrease leading to lesser imports and lower customs duties; and one can expect cut in excise duty collections due to lower sales revenue.

Now the clamour for increasing administered rates of interest for Public Provident Fund (PPF) scheme, National Savings Certificates (NSC), Senior Citizens’ Savings Scheme and other interest rates like, EPF, will go up with a view to moving in line with other deposit rates.

All the above will put further pressure on the rising fiscal deficit which will exaggerate the problem to a greater extent leading to higher market borrowings by the Government.


On Loan rates:

Loan rates across the board, starting from auto, housing, corporate to personal loans, will rise sharply

Corporates’ interest burden will go up leading to a dent in their profits


On Deposit rates:

Short-term deposits are likely to fetch higher interest rates even though the deposit rates may be lesser than the rising inflation rate


On Stock Market:

Sensex will try to catch up with the January 2008 peak achieved by Nifty; whereas Nifty will make all attempts to catch up with the Sensex lows recorded in September 2001!

One good thing is that stock prices that were once available at triple-digit PE ratios are so cheap now that investors can lap them up at single-digit Price-Earning multiples. A truly wonderful chance to lose more money!


On Job Market:

India Inc. may resort to some job cuts

Salary and wage cuts also can be expected (please note that the annual salary of Mr. Azim Premji of Wipro was quietly slashed by a staggering 63 per cent in 2007-08 compared to his salary in 2006-07)

So, employees across the entire spectrum of the economy have to brace themselves for some real tough and trying times


On Social Life:

Job losses and salary/wage/incentive cuts will lead to family tensions ending up with higher divorce suits and putting increased pressure on the fragile Indian Judicial System

Due to mounting family tensions, the need for anti-depressant drugs will shoot up leading to higher profits for selected pharmaceutical companies

One silver lining for insurance companies will be that they can turn this adversity into an opportunity by selling more insurance policies, especially, health insurance products for which Union Budge 2008-09 has given a strong boost.


On Micro Life:

Conveyance (petrol etc) allowance may be cut down as part of the austerity drives undertaken by employers

Shoeshine boys also will earn less as employees will be encouraged to
come to office in a disheveled attire to beat inflationary impact and a five-day week is likely to be introduced to cut down oil demand



… With malice and prejudice against the policy makers …


--- A jaundiced view of the state of affairs by Rama Krishna Vadlamudi, MUMBAI

prepared for ‘aam admi’ at 7.30 am on 25.06.2008 before reading the morning newspapers! (More in store about the political impact!)