There are 3 topics I would like to discuss in my following posts:
1. The valuation crap
2. Bubble in the making continued (Final part)
3. Start with options trading
But for today let's discuss in brief the implications of RBI monetary policy. Well I believe RBI missed a trick by not reducing rates or may be it's adopting a wait and watch policy and take cues from the Fed announcement today. The differential between Indian and US interest rates is about 4% add to this the annual rupee appreciation of about 10%. So in essence the foreign investors are getting 14% of effortless returns. No doubt they are being attracted to Indian assets.
Cutting interest rates would have meant hitting 2 birds with one shot. The credit growth is slowing and this might impact growth so with cut in rates the credit growth would have taken off and the Indian assets may had become a bit sour for foreign investors. On the inflation front although the CPI is high but its not very interest sensitive unlike the WPI which looks under control and add to this the Central governments reluctance to increase the oil price. So the ingredients were right for a rate cut by RBI.
One can ofcourse sympathise with the Central Bank here because they are trying to break the problem of impossible trinity, which is that a country cannot have a fixed exchange rate, almost full capital convertibility and independent monetary policy at the same time. While the trinity cannot be broken it can always be tweaked by trying to do a little bit of all and I believe thats what our policy makers are trying to do i.e. trying to mantain not a fixed rather an exchange rate in a relatively moderate band, introducing some capital controls P-Notes, ECB curbs (though I am totally against this particular move) and hence cutting of interest rates would have been the final throw of dice. Well maybe the RBI would like to reserve this final throw for some later date. Let's hope that time never comes because if does the World Economy would be soon reaching a flashpoint all thanks to the Big Ben................