Handling inflation in desperate times

rnThe Reserve Bank of India (RBI) hiked the key policy rates by just 25 basis points on estimated lines, but the RBI Governor admitted that given the dire circumstances the central bank did contemplate a 50-basis-point hike also. Apart from the rate hikes, what took the market by surprise was the honesty and helplessness that stood out in the governor’s address that inflation issue was far from over and it would really be an uphill task to rein in inflation by not affecting growth. Despite a hike, which was mostly factored in, the markets came off one way in the remaining part of the trading day, estimating difficult days ahead for Indian equities. Hawkishness of the monetary policy review which was released one day prior to the policy day was totally missing in action, say the experts. While they were not surprised that the inflation target for this year was moved higher from 5.5% to 7%, the RBI’s admission of the fact that it has limited ammunition to fight inflation, which is mainly supply side, is what surprised some. Experts expect the rate hikes to continue and anticipate a total of 75-basis-point tightening by RBI in this new calendar year. The ball now moves to the government’s court, how it aims to handle the situation by fiscal measures. Hence, the importance of this year’s budget to be announced in February will go up even further, some say. The RBI also hinted at the possibility of the gross domestic product (GDP) growth rate slowing down in FY2012, which will surely not go down well among the foreign investor community who had been chasing the “India growth story”. The RBI also sought more policy initiatives to attract long-term capital in India mainly in the form of foreign direct investment (FDI), as pure portfolio flows may find developed markets attractive currently.  Some experts, however, believe the Indian central bank has been hugely behind the curve and needs to speed up its act. Hence, two consecutive policy meetings may see further rate hikes. The capital markets, however, may remain nervous for some time until there is clear action from the government to improve the current account deficit, which has also emerged as a key concern, and to handle supply-side issues to tame food inflation. Moreover, not compromising on the growth, the FY2011 GDP estimate, which has been maintained at 8.5%, also has downside risk according to some experts. Corporate India meanwhile may have some rough weather to ride as the RBI asks banks to restrain credit and focus on quality. As cost of capital edges higher companies’ balance sheets may come under strain, if the rising commodity prices were not putting enough pressure on their raw material cost. In such an environment the message to investors will be, not to rush in to buy stocks, stagger the investment and stick to blue chip stocks in time of sharp cuts as challenging times may last for some time. Sharekhan with his years of experience will help you through each step. From the right tools to the right information. He will simplify financial jargons like Equities, Commodities, Mutual Funds, Derivaties or IPOs. So that you know exactly when, where, and how much to invest.