The much anticipated RBI Credit Policy came out today and turned out to be less hawkish than most peoples expectations with the increase in policy rates as well as Cash Reserve Ratio (CRR) by 25 basis points as against the widely expected 50 basis points. The statements of RBI of being concerned about inflation as well as wanting growth to continue with proper credit availability is a positive one. The RBI under the current Governor seems to be much more open to the external environment and less apologetic about growth than what I have seen over the last 15 years. I have infact always maintained that given the fact that the inflation in India is largely impacted by the movement of commodity prices and the fact of the matter is that most global commodity prices are really not impacted by the monetary policy in India but in the larger economies it is futile to target inflation. The only place in which the monetary policy works very well is in controlling asset bubbles, where infact RBI has a very successful track record. Unless the inflation is domestic demand led and an increase in rates or reduction in liquidity can control the demand side so as to bring down prices the only thing that higher rates and lower liquidity does is to slow down growth.
That is not to say that rates should remain excessively low so as to promote speculation and easy money led asset bubbles, but only that the limitations of India’s own monetary policy should be well recognized so as to not reduce the high growth potential of India over the next few years. The policy rates still have to move up by around 50-75 basis points so as to remove the accommodative stance so that we move back to a neutral stance. RBI clearly recognizes that there are still risks to growth in the global economy and as such it has to move in a calibrated manner.
On the other side we have seen the results season start with a big bang with most of the results coming out of Technology, Banking and Auto companies that have reported till date being extremely positive with strong guidance’s and outlooks. I believe that the strength in the results season should continue going forward and this will be very supportive of the markets on any down swing and as such the downside risks to the markets are reducing substantially.
The only challenge we have right now on a local basis is to see the movement of the monsoon and a normal monsoon will be very supportive of strong growth over the next year. Incidentally I had written on astrology in one of my previous articles, the astrological prediction for this years monsoon is very positive. Let’s see how it pans out.
The other big issue that hit the markets over the last couple of days has been the Goldman Sachs issue as well as the property crackdown in China. Here my view is that the Goldman incident is with reference to something that happened a few years back and is a civil suit that will be decided in its own course of time. As such its impact on the markets will be extremely limited. Markets will move on current economic and earnings growth prospects which look robust at this point of time. The Chinese move also should not have much impact as Chinese markets are very closed and regulated markets with limited impact on other global markets. The Chinese economy is much more important than the Chinese stock markets which are still in an evolutionary stage.
Overall prospects look good for the Financial, Capital Goods and Infrastructure as well as Oil & Gas sectors.
Markets could be volatile in the near term without impacting the positive long term trend. The downside risks should keep on reducing as the results season moves forward.