Current Market View from a Newsletter

The RBI has increased the interest rates twice this year in a surprising manner both on Fridays after the closure of the market. In both occasions the market reacted in the same way by coming down crashing. This time the fall was still higher as the Sensex lost 646 points. After the hike every expert analyses the situation and predicts a big fall. Even SMS are sent by many warning a disaster to strike the market on Monday.

MARKETS BOUNCED BACK: Investors should take a lesson from the behaviour of the market in the last two falls. In both the occasions the market has recovered and the recovery has come within 24 hours. Never that the market continued falling in the same fashion even for two or more days. This is a clear indication that there are buyers at lower levels. No one has the courage to go short when the fall is severe. This time banks autos and cement shares had a very sharp fall just to recover in 24 hours. It is better to remain with cash expecting such falls in the future as well.

WHY THE CENTRAL BANKS HIKE THE INTEREST? It is not only in India but all over the world the banking rates have gone up recently. Chinese central bank said it would raise the amount that lenders must hold in reserve for the sixth time in 10 months time since last June, in an aim to further control liquidity and curb lending. The 0.5% point increase in the reserve requirement ratio would take effect 16 April, the People's Bank of China added. The main reason for hiking the interest rate is the spiraling of prices or inflation. In India the rate of inflation was around 3% last year and it has gone up by over 100% to 6.39 % in the current year as on this week.

INDIAN ECONOMY IS TOO HOT TO HANDLE: Every analyst was delighted with the GDP growing at an amazing speed 8 t0 10%. In other words there is so much of economic growth all around and lots of money is being spent on consumption like buying cars, two wheelers, white goods and other fast moving consumer goods. Money came in the form of loans to buy land, housing and other luxuries as well. These are the signs of prosperity but growth also comes with a price and that is inflation. The demand for goods is so much and they are made affordable to you by the bank loans. Banks were cash rich and even tele marketed by calling on mobiles and offering personal loans.

Since demand exceeded supply mainly in agriculture the cost of food sky rocketed. Pulses like toor dhall and udad became unaffordable to the masses. What was worse is no where in the world these pulses area available to even import .Only in the Asian countries people consume dhal. Then politics took over economy as seen in the latest budget proposals where the Govt wants manufacturers to reduce prices of Cement and steel. With elections in UP and the general elections too around the corner the Govt is forced to settle for lower growth rather than higher inflation.

WILL THE HIGH INTERST HARM INDUSTIRES? It is said that because the rate of interest has gone up in the recent months from 8% to 12% demand for various loans like auto and home will fall. Economic actions are never that straight forward. When the demand for loans come down the prices of homes too may fall in the beginning say by 10 to 20% this will attract people to rush for loans even at higher rates. Once again the home prices will rise. This goes with other products as well. In other words RBI measures can harm the industry only for a while and the growth story continues to remain in tact in long run.

Most of the big industries do not borrow from the local banks at all they are global borrowers and get interest at nominal rates. The Bank of Japan still gives loan at 0.5%. It is the small to medium industries that will get affected by such interest rate hikes. Just seven years back the bank rate for home loan was at 18.% and the banks just started giving loans for buying automobiles at 18% then the Indian GDP jumped to 5% and at that time too it was considered that the growth was too high and the economy was getting over heated. Now at 10% GDP the economy is red hot?

RBI is forced to hike the interest rates to curtail money supply and reduce the rate of inflation. Already the inflation is showing signs of coming down once it falls from current levels to 5% one can expect RBI to reduce the rate of interest once again.

THE NEXT TRIGGER TO MOVE THE MARKET: The result season is about to begin. The Q4 results are expected to be the best in the recent years. With many of the cos having paid more than 50% higher advanced tax it is expected to be a great performance. All eyes are on Infosys whose results are on the 13th of this month.