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Commentary

RBI Raises Rates – Why Are We Surprised?

RBI raises rates in two phases – the repo rate, which is what is most related to your loan rates, is up to 8.5% now, a 50 basis point hike. The Cash Reserve Ratio (CRR) is up to 8.75% in two phases, from 8.25% – remember we had a 50 basis point hike earlier this year too.

This is breaking the back of inflation all right. In the 70s Paul Volcker did the same thing, but to really do it he had to take rates to 16%. It took the US two recessions (which means high unemployment) in the process. Will we follow? If inflation doesn’t subside, there won’t be much alternative. The idea behind an interest rate increase is sacrificing growth, but neither the RBI nor the Finance ministry was okay with that.

Till now. It’s getting evident that for prices to drop, growth has to be moderated. We aren’t going to see much more of “India grows at 10% GDP”.

And why, as it seems on TV, are we surprised? This is the ONLY reaction possible, to inflation rates of 11%. My guess is that in tandem they will hit the dollar hard to push it below 40 again in the next few months, and inflation will look moderated.

The rate increase is bad for auto and real estate first, then banks. After that, everything else.

Disclosure: I am trading systems so I will be long or short some stocks based on our system, and I don’t know the reason (it’s a mathematical formula that figures it out, not my macro analysis). I will therefore have positions in the market regardless of my opinion.

  • Anonymous says:

    >The disclosure stmt was interesting Deepak. As the maker of the system, do you at any given point in time know what positions you have? If you are working with ultra short term trends I think you might not. And frankly if it’s even short term you are just spotting trends which in a way is reacting to market. So RBI rate hike or not, your system is kind of insulated unless you have a way of feeding in cnbc :D.

    –Arpan

  • Deepak Shenoy says:

    >Arpan: We aren’t ultra short term yet, as we lack the capability to execute in a reliable manner. But one of our systems is intraday and in that we get in and out of positions daily.

    I would know all positions we are in at any time as we currently monitor everything closely.