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Markets to remain bearish, and consumer loans to get higher
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Markets to remain bearish
On Thursday, India's benchmark index, that is the Sensex,
after rallying over 300 points in early trade, shed about 100 points when the
inflation data trickled in. For the month of October, while WPI inflation was up 7%;
food inflation came in at a worrying figure of 18.19%. This data was in line
with expectations, but it became worse when the same day the government revised
the August WPI inflation to 6.99% versus 6.10%.
A day before, CPI inflation, what is referred to as retail
inflation, also came in at a pretty disappointing figure of 10.99%. The Reserve
Bank has been saying for long that taming inflation tops its priority list, and
the only plausible way of doing that would be some belt-tightening, which for
the time being translates into another repo rate hike.
Again, this is something the markets have factored in. A 25
bps hike in repo rate along with a cut in MSF
rate. But then analysts say that it could well be a 50 bps
hike, and that one should brace for more such hikes in the coming year.
"The data that came out was a little higher than what
we had expected. More worrisome was the revision that they did for the previous
data. This is the second upward revision in this data. This is a clear signal
that the inflation number is getting very structured in this economy
and if Governor Raghuram Rajan continues his stance on the inflation numbers,
then we could see a far higher hike in the rest of the financial year. Right now,
the expectation in the market is that there will probably be a 25 to 50 bps
hike in the repo rate by the end of the financial year. If inflation does not
come under control, then people will start factoring in a higher hike and that
would be negative for equities and especially for some of the banks," says
Sonam Udasi, IDBI Capital.
A hike in repo rate
would be bad for the markets, which have been trading amid uncertainty given
the QE factor along with the coming two deadlines of January 15 and February 7. At the same time, a relaxation by way of a status quo from
the RBI on policy rates would mean a runaway inflation. "The RBI governor was quite vocal; and in
his verbatim that we heard yesterday, he was very clear that CPI is at a
worrisome number at 10% and beyond. I do not think there is any elbow room to
give any kind of relaxation as far as interest rates are concerned," says
Gaurang Shah, VP, Geojit BNP Paribas Financial Services.
Last time when the RBI went for a 25 bps rate hike along
with a cut in MSF rate, experts were of the view that the hike won't translate
into higher interest rates on loans for commsumers as the two - repo rate hike
and cut in MSF rate - balance out. But it was so for just a day or two, and
banks hiked their consumer loan rates in sync with the hike in repo rate,
ignoring the cut in MSF rate.
Thanks to infaltion figures and RBI's stance on reining in
inflation, it is a given that the central bank will go for a rate hike - 25 or
50 bps - at its next meet. As Sonam Udasi pointed out, if there is no relaxation in
inflation figures, which does not seem so, the trend would continue,
effectively translating into higher interest rates for consumer loans.
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