| Crude ($/barrel) |
84.51 |
1.2 ![]()
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(Source: www.reuters.com)
The deficient south-west monsoon rainfall last year, accentuated the pressure on food prices, taking food inflation to a new high of 17.65% for the week ended April 10, 2010.
In order to combat spiralling inflation, RBI has taken the following measures:
The other highlights of the monetary policy are:
Bank rate left unchanged at 6.00%
Statutory Liquidity Ratio (SLR) has been left unchanged at 25.00%.
It should be noted that Dr. D. Subbarao, Governor, Reserve Bank of India, has not ruled out another rate hike, before the first quarter review of the monetary policy 2010-11 (scheduled on July 27, 2010).
“There are two ways to look at this – one, as David Lloyd George said, ‘You cannot cross a chasm in two leaps’. The other is Deng Xiaoping’s ‘crossing a river by feeling the stones’. This time it looks like we will move several times”, Dr. Subbarao told reporters. We at Personal FN too prefer the “feel the stones” approach!
Reacting to the monetary policy, Finance Minister Mr. Pranab Mukherjee said that RBI will gently tighten money supply and help moderate inflation – which is hovering close to 10.00%. He also expressed the view that inflation has peaked and would begin falling, and will be lower than the 5.50% projected by RBI, for the end of this fiscal year.
The measures taken by the RBI indicate a calibrated exit from the accommodative policy adopted thus far. Such an exit will not hurt economic growth; however will not do much to combat inflation. We feel that a further hike in the repo rate and the CRR, of another 25 basis points, can be expected within the coming months.
Additionally, interest rates on Fixed Deposits are unlikely to go up due to this hike, until June 2010. We do expect that teaser rates will “stop teasing” by the end of May 2010.
 The controversy between Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development (IRDA) on regulation of Unit Linked Insurance Plans (ULIPs) may soon be laid to rest.
The Finance Ministry on Tuesday clarified that life insurance companies can do business in equity and bond-linked products, such as unit-linked insurance policies (ULIPs), as per rules laid down by the insurance regulator IRDA.
The Times of India (Mumbai edition), reported earlier this week, that, in a written reply to Rajya Sabha, Minister of State for Finance, Namo Narain Meena said, “The Insurance Regulatory and Development Authority has reported that every life insurance company registered under the IRDA Regulations, 2000, can transact life insurance business, which includes unit-linked business”. As we write, no one else has reported this , nor clarified if this is an extension of the now famous “status quo ante” of the Finance Minister or actually puts the controversy to rest and saves the courts from interpreting, what on the face of it, seems to be a “legal fuzziness”.
We also believe that the statement issued by the Finance Ministry may let insurance companies heave a temporary sigh of relief but SEBI is likely to seek a judgment from the courts on the regulation of ULIPs.
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INTERVIEW
In an interview with the Economic Times, Mr. S. Nagnath, President and CIO of DSP BlackRock Investment Manager shared his views on the global economy and its impact on the Indian equity market.
On the global economy he thinks that the situation is far different from that in late 2007-early 2008, when there was absolutely no recognition of impending risks among market participants. “Today there is considerable caution, and some people are concerned about the speed and trajectory of the rally. Leveraged positions in the system today are much lower than what they were in 2008”, he said. He feels that globally, if people are arguing that we are back to a period of sustainable recovery in the large economies; then that may not be easily achievable.
“I am just circumspect about the pace of recovery in some of the larger economies of the world, and the potential of the sovereign debt issue to create concerns in the coming months. I don’t think that has been fully resolved. There are still a few open issues that need to be addressed before we can say that the issue has been resolved fully. There is a degree of complacency developing internationally about the recovery”, he said.
On the Indian equity market he is less worried and believes that we are doing fine. However he also mentioned that “we had one of the steepest rallies last year and valuations are no longer cheap. The current uptrend is sustained because of easy liquidity. If economic growth picks up, central banks will want to withdraw some of this easy liquidity, and raise interest rates. This is one headwind for equity prices in the months ahead”.
Speaking about the impact of the global economic problem on India, he said “if there is a global sell-off, India will be impacted to some extent, but not as greatly as it was during the height of the crisis”. He justifies this statement by mentioning that our GDP growth is not reliant on exports. He also expects Foreign Institutional Investor (FIIs) to be positive on India, through continued inflows over the next few years.
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- Increased the Cash Reserve Ratio (CRR) by 25 basis points from 5.75% to 6.00% with effect from April 24, 2010
- Increased the repo rate from 5.00% to 5.25%
- Increased the reverse repo rate from 3.50% to 3.75%
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