We have heard a number of investors and top
managements in the corporate sector arguing that the RBI has made an inappropriate move by lifting interest rates in response to currency instability. We think lifting short-term real rates was the most appropriate response to recent external developments. * Low real rates since the credit crisis only supported repression, decline in saving and higher gold * *imports: *The RBI has been managing interest rates at levels lower than warranted all through this cycle. Though private investment did not respond to low real rates, the RBI's accommodative monetary policy gave the government continued support to run a high fiscal deficit – one of the key factors behind high inflation. While high government deficits meant a decline in public saving, negative real rates for savers caused a further decline in household saving. As saving declined faster than investment, the current account deficit kept widening. ** *Fixing real rates is inevitable: *In the context of the quick and sharp rise in US 10-year real yields, we believe India had no choice but to lift its own real rates to address the funding stress. More importantly, in the context of the government's inability to quickly augment public saving by aggressive pro-cyclical fiscal tightening, hiking real rates was the only credible way to demonstrate a commitment to reduce the saving-investment gap. * Bottom line: the key to the outlook for risk assets * *will be the spread of real GDP vs. real rates: *Even as we expect saving to rise and investment to slow over the next 12 months, the current account will still be in deficit (i.e., India will still be short of saving). Hence, trends in US real rates/the US Dollar will remain the key driver of domestic real rates. We thus believe the key will be to lift real GDP growth with policy reforms and change in expectation of the returns on investment for entrepreneurs by systematically addressing the issues related to the business environment. -- -- NIFTYVIEWS.COM NOW A FREE OPEN SOURCE WEBSITE. http://www.niftyviews.com/ Disclaimer :- "The opinions expressed by the members on this board are based on their individual experience and perceptions and to share information with other members with the best of intentions to help fellow members in investment decisions as equity investment is a risky venture.The administrator of www.Niftyviews.com just provide a platform for the authors to express their opinion and take no gurantee for the genuineness of the same." --- You received this message because you are subscribed to the Google Groups "TEAM STOCKRESEARCHERS" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. For more options, visit https://groups.google.com/groups/opt_out.
