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The Reserve Bank of India announced the monetary policy review for second quarter of FY2011, in which it hiked the Repo rate and Reverse Repo rates by 25 bps.
Highlights of RBI Monetary Policy Review for SECOND quarter of the financial year 2010-11
The
structural nature of the
food inflation is caused mostly by changing food consumption patterns
of
Indians, where in Indians are increasingly consuming a high protein
diet consisting
of pulses, milk, eggs, fish and meat. Although, the protein based food
items
have a weight of 6.4% in the WPI, the level of inflation is very high
in such
items. The inflation for protein based food items peaked in May 2010 at
34% and
in September 2010, it was still high at 23.9% The
6.0% WPI inflation
target for March 2011 was set when the base year of WPI was 1993-94.
Due to the
change in the base year of WPI from 1993-94 to 2004-05, the RBI has
revised its
inflation target for March 2011 to 5.5% from 6.0%. Policy
action: Higher margins from the
borrower, higher provisioning by banks for housing loans
Except
for the first step,
all the other two steps taken by RBI on housing loans may not have
direct impact
on the borrower.
The other two steps are
taken with the view to discourage banks to lend housing loans over Rs.
75 lakhs.
Also, this move would ensure higher provisioning in the bank books for
teaser
rate home loans to take care of default by the borrowers when the
interest
rates increase after the first few years. The banks would have to
decide whether
to pass the burden on the borrowers but, considering the increased
margin
requirements, the banks may not pass on the extra burden to the
borrowers. Cause
and Effect
Interest
rate sensitive
sectors like Automobiles, Real Estate and higher risk lending sectors
like
Aviation, Infrastructure and Capital Goods might face the heat as banks
have
already started to increase both lending and deposit rates. On
the other hand, the
depositors will get higher interest rates on their fixed deposits. Real
estate sector would also
get affected as the buyers decide to postpone their home purchases if
they are
not able to arrange for the 20% margin money. With
this rate hike, the
interest rate differential between the developed economies and India
has
increased by 25 bps, which may lead to higher inflows by Foreign
Institutional
Investors (FIIs) into the debt sector. With higher FII inflows, export
dependent sectors like Textiles and IT may also get negatively affected
as the
Rupee may witness appreciation in the short to medium-term due to the
rate
hikes. Fundsupermart
House View
The
rate hikes were in line
with the market expectations. Although RBI expects the economy to grow
by 8.5%
in the current fiscal year, the major domestic cause of worry is
inflation and
in particular, the structural nature of food inflation. The
next mid-quarter policy
view is to be held on 16 December 2010. We are of the view that RBI may
not go
for a rate hike in the December meet. However, RBI may decide to
continue the
monetary tightening in the third quarter of FY2011 based on the level
of
inflation in December 2010 and the subsequent impact of the earlier
rate hikes on
inflation. Fundsupermart
Fund Picks Investors
with 6 to 12
months time horizon can continue to invest in short-term funds because
the liquidity
situation is expected to remain
tight in the short term. Investors
having a 12 months
to 18 months time horizon can invest in FMPs and long-term Gilt funds
as it is
a good time to lock-in yield at the current high levels. |
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Manjunath Gaddi is an Analyst with iFAST Financial India Pvt Ltd. | ||
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