Economic Times in an article today reported that the based on the lower the expected Inflation numbers (0.44% ) the Reserve Bank of India must further cut its Repo, Reverse Repo and may be CRR rates to provide necessary stimulus to the economy. We all remember that RBI already has cut its rates to record minimum, the latest cut being announced on March 4th, which led to repo rate being brought down from 5.5 to 5%, and the reverse-repo down to 3.5% from 4%.
What do the rate cuts serve to achieve? – Encourage banks to ease consumer and business borrowing by offering lower lending rates.
Well this makes sense in theroy, but is the consumer ready to borrow? Is he or she ready to invest in a car or home or decide to increase their discretionary spending? I do not think so.
The consumer has retreated in to a shell, from where it is difficult to spend money. But why are they consumers so wary of spending? The underlying problem is the fear of uncertainty about tomorrow. If we take a back in to the past 6-8 months, the words slowdown and/or recession were being mocked at in India. The so-called pundits helped build a wall around peoples minds telling them that India will remain more or less unaffected by the ills of the credit crisis plaguing US and much of the major economies. This mis-information shrouded us for taking precaution and preparing ourselves for the upcoming misery. And when the truth dawned up on it was too late to take any evasive action and because it was so sudden the impact has been far more worse.
But who is to blame for all of this. The pundits, the media, the newspapers, TV programs? The onus lies on each and every one of us. If it is our hard earned money we are investing in the market, then we cannot blame someone else for our losses. We had to stay more informed and follow information without verifying and applying logic to it. In one way we cannot even trust the government. If you remember the speech in Feb-08 from P Chidambaram he was very confident of India continuing on the pace of 8-9% fiscal growth. Even 6 months in to 08 the finance ministry did not forewarn or raise flags of possible reactions to the credit crisis of US and Europe.
Today the condition is so bad that business big or small, individuals rich or poor, in one way or other are feeling the pinch. The Elections provide another reason for the consumer to push oneself further deep in the shell. The announcement of the Third Front, Mayawati being projected as the prime ministerial candidate, Congress and BJP not being strong enough to win a majority leads to many investors to believe that the economic stimulus, change in fiscal policy needed to fight the downturn may not be able to come till July-August time frame.
So should the RBI cut rates again? Will this have a big impact on the current state of the economy? Will bank easing borrowing rates encourage people to buy new homes or new cars?
It is the weekend, definitely something for all us to think about !
You can find me at Stockezy.com – or tushar@stockezy.com
India is projected to witness a growth between 7-7.5% during the current financial year, after remaining in high growth path constantly for the last four years, said Ashok Chawla, secretary, department of economic affairs.
Whereas, the pace of growth next year is dependent upon how long the global recession lasts and how quickly capital flows return to normal, he added. With the presence of strong domestic demand stimulus, he added further that the India expected to maintain a strong pace of economic growth despite continuation of global recession.
India has taken a number of steps to inject liquidity into the financial systems, recapitalized banks and other systemically important institutions to tide over the crisis, he said.
Chawla identified banking sectors and capital markets as areas where the expert teams of India and China to jointly work and evolve a time-bound strategy for closer engagement.
Financial sector reform process would play as a key to improve productivity, efficiency, profitability and coverage of the system, he emphasized. – MyIRIS.
So you quickly repaid a big part of your home loan because the interest rates went up did you? Welcome to the world of fluctuating interest rates!
Interest rates play an important role in your personal finances. The RBI tries to raise or lower key interest rates that trickle down and affects everything – from your housing equated monthly installment (EMI) to the interest rates on your savings bank account.
As rates begin to fall, what should you do?
Accept that experts also only guess!
First of all it is necessary to understand that interest rates are a function of inflation, interest rates in other countries, money supply, government spending, government policy, demand and supply of money – from 
businesses and households, etc.
Even for experts being able to predict the US meltdown, the slowing down of growth in Asia, Brazil, etc. is not really easy. So generally they take a 2-3 month view – which is not useful when you are planning investments for the next few decades!
Planning for interest rate changes requires that you understand why RBI makes these decisions in the first place. In a democracy (in an election year that too!) governments are particularly sensitive to inflation. So the RBI is pressurized to reduce inflation – by sucking our liquidity in the market. Interest rates increase in an effort to make borrowing money less-attractive and slow a rapidly growing economy. Exactly the reverse is done to make the economy go faster! Lowering the rate will make money flow more freely and hopefully stimulate economic growth.
Not always a blessing!
When interest rates go down, there is a sense of happiness amongst the consumers. Please remember you are a producer too! Decreasing interest rates is normally in response to a slowing economy. As we have seen the last few months have not been kind to anybody`s portfolio. All asset classes have done badly – we are only measuring how badly. If somebody told you cash is king, well it is because the others are paupers! Remember somewhere in your family your father, father-in-law, mother etc. are worried about lower bank interest rates.
Your strategy does not change!
Will you buy a bigger car because petrol prices have come down by Rs 5 a liter? Exactly so for your interest rates coming down. If you have a lot of debt, tackle the highest interest rate loans first. It still makes sense to cut down on loans. Especially if you realize that last years` bonus figure is now in the history books. If your HR does not call you to “discuss“ a voluntary separation, treat that as a bonus! A rate change by RBI does not automatically reduce your interest rates.
Call your bank and ensure that your housing loan, credit cards, personal loans, etc. are all charged at a lower rate. A consumer is no longer the king unless he/she is well informed! Also realize “we will get back to you“, “we are examining your requests“ are all nice answers which actually does not reduce your debt! Try refinancing your loans if you must. Act tough – a few “reputed“ organizations need more than a nudge to change!
Floaters rejoice!
For those who are looking to buy an asset (on borrowed money), or those on a floating rate already, decreasing rates is certainly a good thing. While housing EMI rates aren`t directly linked to RBI`s rate cuts, the signaling surely helps. Of course, do not get carried away and buy a house much bigger than what you actually need. Even those of you who have kept your savings in floating rate funds are now getting a higher return on your monies. If you already own a home and purchased it when the rates were a bit higher, this could be an opportunity to refinance. Even being able to reduce your borrowings by One point of interest can make a lot of difference, in the total price that your asset!
What about your savings?
Clearly, low interest rates are great for borrowing money, but when it comes to trying to earn money on your savings, it isn`t to your advantage. However, if you have invested in HDFC Prudence or Templeton India Pension Plan, the debt portion would have appreciated in the last couple of weeks – a falling interest rate regime is benign for older portfolios. However, it will not happen continuously unless the interest rates keep falling. If your bank fixed deposit rates are dropping you should quickly tie-up for 18-36 months. Banks are as likely to reduce fixed deposits as they have done on home loans. You could perhaps look at some Income funds – with a 2-3 year view! Instead of a savings account, you should look at a floater fund or a liquid fund if you are not sure of how long you want to keep the monies there – Income funds have an exit load! Also remember dividend distribution tax, short term capital gains tax and income tax while dealing with savings. Investments on the other hand are more tax efficient. My IRIS.
India`s central bank, the Reserve Bank of India (RBI) stepped in again to inject more liquidity into the system and slashed the key rates today in line with market expectations.
The reverse repo rate and repo rate have been slashed by 100 basis points each.
With this the repo rate will come down to 6.50% from the previous level of 7.50%, while reverse repo rate will come down to 5% from the previous level of 6%. The SLR and CRR have been kept unchanged. The rate cuts would be effective from Dec. 8, 2008.
Besides, the Small Industries Development Bank of India (SIDBI) and the National Housing Bank (NHB) are slated to get refinance facility of Rs 70 billion and Rs 40 billion respectively.
Prior to this, on November 1, the RBI had cut the repo rate by 50 basis points to 7.5% from the then prevailing level of 8% and on October 20 the RBI had announced a reduction in the repo rate under the Liquidity Adjustment Facility (LAF) by 100 basis points from 9% to 8%. The cash reserve ratio (CRR) of scheduled banks was reduced by 100 basis points from 6.5% to 5.5% of net demand and time liabilities (NDTL).
CRR is the minimum amount that banks must keep with the central bank in the form of cash or near cash securities, whereas the repo rate is the rate at which the RBI lends money to banks. Reverse repo is the rate at which RBI borrows money from banks.
Announcing the fresh measures, RBI governer, D Subbarao said that “taken together with earlier measures, these would step up demand and arrest the growth moderation.“
The primary liquidity made available to the system through these measures is worth over Rs 3,000 billion, he added.
He was also confident that the government`s decision to lower petrol and diesel prices would further ease inflation. – MyIRIS.com
Inflation fall marginally at 8.90 compared to 8.98 last week.
Inflation slipped to single digit after 21 weeks at the beginning of this month.
Analysts said a decline in global commodity prices, robust domestic agricultural output and a fall in demand in a slowing economy helped bring the rate to single-digits well ahead of earlier expectations.
The Reserve Bank of India is monitoring the economic situation and will take action at the right time, its governor, Duvvuri Subbarao, said on Tuesday.
Subbarao, who met Finance Minister P Chidambaram and senior finance ministry officials, told reporters: “We are constantly monitoring the situation. We will take appropriate action at the appropriate time.” He did not elaborate.
Asked about the possibility of a cut in key rates, Subbarao said: “Nothing to say on policy”.
The government will take steps to stimulate the economy to offset the impact of the global economic slowdown, the finance minister said, adding he expected to end the fiscal year with decent growth.
India has already cut interest rates and taken a series of measures to boost liquidity in its banking system after the credit crisis spilled into its markets in October.
“We will take steps to stimulate the domestic economy to compensate for the downside caused by the downturn in the world economy,” Palaniappan Chidambaram told the World Economic Forum’s India Summit on Tuesday.
Chidambaram said India was likely to end the year with a satisfactory growth rate, despite the downturn in advanced economies, although he declined to put an exact number on the expected rate.
“Next year, we will bounce back to a much better growth rate,” he said, adding growth could reach 9 percent by the second half of fiscal 2009/10.
India has grown at an annual rate of 9 percent or above for the past three years but is expected by many private economists to grow at about 7 percent this fiscal year to March 2009.
Chidambaram said Asia’s third-largest economy could miss its annual export target of $200 billion for this fiscal year as the slowdown in developed nations trims overseas demand.
He urged companies to cut real estate prices and prices of goods such as cars as a way to stimulate domestic demand, saying state-run banks had assured him they were ready to lend to borrowers.
He said it would be good if interest rates trended down although he cautioned that India had still not quite licked the problem of subduing inflation.
Chidambaram said he would be meeting the Reserve Bank of India governor later on Tuesday.
Source: – Reuters
