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RBI expected to cut rates for first time in four years
Mumbai India's central bank is widely expected to cut interest rates this week for the first time in four years, but this is unlikely to lift fragile sentiment in the stock market and calm panicky investors who have seen the benchmark Sensex lose more than half its value this year.
- By Geetha Bhaskaran, Special to Gulf News
- Published: 00:03 October 19, 2008
Mumbai India's central bank is widely expected to cut interest rates this week for the first time in four years, but this is unlikely to lift fragile sentiment in the stock market and calm panicky investors who have seen the benchmark Sensex lose more than half its value this year.
The Reserve Bank of India (RBI) is scheduled to review policy on Friday, but it could take the plunge even earlier and lower rates if markets tank again. The authorities have been on a firefighting mode to ease a severe cash crunch and to boost confidence among banks to lend to each other.
In a little over a week, the RBI has slashed the amount of deposits that banks must keep in reserve with the central bank by 2.5 percentage point to 6.5 per cent, releasing Rs1 trillion in funds. The move has brought down overnight call rates to below nine per cent from a high of 23 per cent, and pumped up liquidity in the system.
However, it has failed to arrest a slide in the stock market and downward pressure on the rupee as foreign portfolio investors flee in droves - partly due to heavy redemptions in their countries following the global financial turmoil.
While many central banks across the world were quick to cut interest rates and pump up liquidity, the RBI has been conservative and cautious, mainly because of inflation, which is easing but still in double digits.
It can ill-afford to stand by any more. The Sensex plunged below 10,000 on Friday to 9,975.35, its lowest close since June 20, 2006, and 53 per cent below its record high of 21,206.77 on January 10.
"We expect that in the current extremely difficult global environment, with tight liquidity, weakening activity and falling commodity prices, the RBI should prioritise financial stability and growth concerns over inflation," Goldman Sachs econ-omist Tushar Poddar wrote in a note.
He expected a half percentage point cut in the short-term repo lending rate on or before a central bank rate review on October 24.
Weak wicket
The Sensex, which shed 5.2 per cent last week following losses of almost 16 per cent the week before, is on a weak wicket with the earnings outlook for companies dented by the global economic problems.
"We believe the market will find its bottom at close to 9,000 levels based on an earnings per share forecast of Rs930-Rs950 for fiscal year 2009. Last time too, markets bottomed out at a PE of about 9-10 times," said Amitabh Chakraborty, president of equities at Religare Securities. "But retail investors needn't rush to buy now as the market may stay at the bottom for some time."
Quarterly results have been mostly above market expectations, but their outlook is a big concern. Satyam Computer Services, like its bigger rival Infosys Technologies, lowered its revenue guidance for the full year, citing troubled markets in the US.
"The near-term environment remains challenging because of the global slowdown and continued instability, notably in the US banking and financial services sector," Satyam Chairman Ramalinga Raju said.
In a quarterly review of Indian markets, HSBC said growing risk aversion among investors worldwide would weigh down prices.
"We would expect markets to pick up when there are signs that growth in India is holding up well. This may not happen in the next three-four quarters," it said in a report.
Foreign funds have dumped $2.5 billion of shares in October, taking the total outflow to $11.8 billion this year. The withdrawal has pushed the rupee down for 10 weeks, falling to 48.88/89 against the dollar on Friday, its weakest close since June 25, 2002 and swelling losses to nearly a fifth this year.
-The writer is a journalist based in India
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