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India’s Central Bank RBI finally throws the Kitchen Sink as Double Digit Inflation Rages on;Hikes Savings Bank Rate to 4%,Repo Rate to 7.25%,Lowers GDP Growth Rate;Stock Market Tanks

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India’s Central Bank has been steadily raising interest rates in 25 bps increments as inflation has raged at more the double digits for more than a year.However it has not stopped the inflation from coming down as high commodity prices keep the inflation at 9% which is much more than the target of 3-5% inflation rates.With Bernake money printing fueling oil and food prices globally,it looked unlikely that RBI’s timid measure would bring the inflation down anytime soon.So this time the Central Bank has thrown the kitchen sink at the problem raising the interest rates by 50 bps to 7.25% which is much more than what the market was expecting.The Central Bank also raised the interest rate on savings rate from 3.25% to 4% which was not expected by anyone.Note the low interest rate on savings bank had been a huge money spinner to top Indian banks which have large deposits of this low interest rate savings deposits.

General Inflation Cascading into Wage Inflation,Higher Inflation Expectations

RBI has ignored Food Inflation of >15% which is a major cause of concern for India’s huge numbers of  poor citizen.The reason was given that RBI could not control the rising food prices due to the shortage of food production from a weak monsoon last year.The industrial and service growth figures have been growing strongly despite recent hikes.With the general inflation cascading into wage inflation and higher inflation expectations,RBI has done the right thing.High inflation will ultimately derail India’s growth story unless it is brought under control fast.The Central Bank of India RBI has been dovish about raising Interest Rates as European problems have made the Reserve Bank cautious about a slowing of growth.However the prospects of higher inflation is becoming even more dangerous leading the RBI to raise rates aggressively now after more than a year of dovish policy

RBI hikes Repo Rate to 7.25%,Savings Bank Rate to 4%

RBI has also pegged the reverse repo rate to the Repo Rate at 100 bps from now on.Note these 2 interest rates were independent variables but now they have become dependent variables.Note at 4%,deposits on savings account are still -5% in real terms which means putting money into banks is a hugely losing proposition.The growth rate of GDP for FY12 was also lowered by RBI.Note the Central Bank has made it clear that they are going to now control inflation at all costs as persistent inflation is going to slow the economy anyway.By raising rates now,RBI hopes to do a soft landing.

Sensex sheds 463 pts as RBI hikes rates

The BSE Sensex plunged 463 points to 18,534 on Tuesday as investors dumped interest-sensitive stocks after RBI hiked key rates by an aggressive 50 basis points to tame inflation, and projected just 8 per cent economic growth for this fiscal.There was all-round selling pressure as the Reserve Bank of India (RBI), in a bid to rein in inflation, raised short term lending (repo) rate to 7.25 per cent, while lowering the economic growth projection to 8 per cent for 2011-12.RBI Governor D Subbarao made it clear that containing inflation would take precedence over growth, which has been pegged at a lower level of 8 per cent for 2011-12, as against the government’s projection of 9 per cent.Interest rate sensitive banking, realty and auto stocks led the decline.Banking stocks got an additional hit from the central bank’s decision to tighten provisioning norms on certain categories of non-performing advances (NPAs) and restructured advances.


Abhishek Shah

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