Expert Zone
Straight from the Specialists
Why the RBI should cut rates again
(Any opinions expressed here are those of the author and not of Thomson Reuters)
In May, the Reserve Bank of India (RBI) had hesitatingly cut the repo rate by 0.25 percent, which made no impression on the stock market or commercial banks. That was because both expected the cut to be more substantial. But the RBI had not obliged.
Perhaps the monsoon, which arrived on the dot and is progressing satisfactorily, may make some difference to the RBI’s expectations of food inflation – which had been its principal reason for hesitancy. While it’s too early to predict monsoon behaviour for the rest of the season and the likely improvement in agricultural production, it does appear the improvement should be significant and inflation dampened perceptibly. Reduction in inflation, however, is not the only reason why the interest rate should have been cut.
The other reason is to stimulate investment and enhance growth that is necessary to generate employment. Higher interest payments eat into earnings and reduce net profitability. In the quarter ending March 2013, interest payments were 29 percent of profits before tax. A 2 percent reduction in interest rate would increase net profits by 6 percent.
Interest rate matters. Most countries within sight of recession have taken every possible measure to reduce the interest rate. In countries such as Japan, even the nominal interest rate has been close to zero. In the United States, the real interest rate (nominal interest rate minus the rate of inflation) has been negative. We are among the few with an over 7 percent rate.
Critical steps for a faster recovery
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The economy seems to be heading for a hard landing. The problem is not entirely of our making; partly it is the spillover of the crisis in Europe. Other Asian countries have also been affected but we were hit the hardest.
Gold prices: Bubble or fundamental
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Suddenly all eyes have turned to the yellow metal. Some say that it’s a bubble while others give a lot of demand-supply reasons. Fall of the dollar and other economic reasons suggest that it has miles to go.
Signs of cooling in Indian economy
(The views expressed in this column are the author’s own and do not represent those of Reuters)
This was not unexpected. The RBI has taken every care to cool down the economy with successive increases in interest rates. The results are now beginning to show.
Will higher interest rates lower growth?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The Reserve Bank of India (RBI) increased the repo rate by 50 bps on May 3 and there was an outburst of opinions that the rate of GDP growth will drop. The consensus seemed to be that it would drop to 8 pct, a 100 bps less than what we had been used to.
Of course, May 3 was the first time in two years that the RBI raised the repo rate by a hefty 50 bps. In the earlier eight installments, the increase was only 25 bps.
Lower profits, uneasy market
(The views expressed in this column are the author’s own and do not represent those of Reuters)
On April 11, the CSO announced a further dip in industrial growth to 3.6 percent, bringing the Sensex down 189 points. That index was for February, the expectation about March is no better — which leaves the market a little cold.
