Shares, inflation, interest rates ………everything is soaring!!!

The RBI’s credit policy, announced today, was quite in line with the expectations. The new rates are a part of the first scheduled mid-quarterly review of the monetary policy. The raised interest rates are a measure taken by RBI to keep up its fight against inflation, but at the same time it is a signal that it may be nearing a pause in its current tightening cycle.

The RBI raised short-term borrowing rate i.e. reverse repo by 0.50% points to 5% and lending rate i.e. repo by 0.25% to 6% to curb the rising inflation without hurting the growth of the economy. The hike will lead to a rise in cost of funds for the banks which will eventually make loans expensive, thereby reducing consumption. The banks have been advised to raise the fixed deposit rates to compensate small investors for rising inflation. This would also enable the banks to acquire more funds to meet their lending needs. The tightening over this period has taken the monetary situation close to normal.

The Central Board of Trustees, the highest policy making body of the Employees Provident Fund Organisation (EPFO), has also raised the interest rate on provident fund deposits for 2010-11 to 9.5% from 8.5%, highest in the last five years. The CRR and Bank rates are retained at 6%. SLR is also retained at 25%.

Inflation is still the dominant concern in economic management but, current and expected macroeconomic conditions will be the more important considerations going ahead.

Moreover, the yield on India's benchmark 10-year bond rose by 4 basis points after the rate increase while the 1-year swap rate jumped by 9 basis points.

India is on the track to grow at 8.5% for the current fiscal.
With inflation expected to ease due to base effect and good monsoon, we foresee that the growth will remain steady, although industrial growth trajectory remains quite volatile.