Reserve Bank of India tames high inflation

The Reserve Bank of India last week announced a steep hike in repo and reverse repo rates-short-term lending and borrowing rates of banks with the RBI-by 50 basis points. This is the third hike in three months to tame high inflation and the tenth time since March 2010.Never in recent times have consumers witnessed such frequent hikes in rates as well as in fuel prices. The year 2011 has that way been a bad year for growth as well as consumer spending.The benchmark indices shed nearly 300 bps but were much in line with market expectations following a hike in key rates by the central bank coupled with the growing debt crisis emerging in the US.The key 30-share BSE Sensex ended the week with a loss of 525.1 points or 2.8 per cent at 18,197, while the broader index, NSE Nifty, ended with a 2.7 per cent fall or 152 points at 5,482.The hikes though seen slowing growth rate, a closer look, however, tells a different tale- that of mismanagement of fiscal policies or government revenues. There is undoubtedly, a conflict between monetary policy of the RBI and fiscal policy of the government.The RBI’s focus this time was more on taming inflation and arresting the unrealistic soaring prices of real estate. The move will also break the politician-builder nexus and it is expected that real estate prices would align with salaries of targeted middle class consumers.The RBI had previously succeeded in arresting similar speculation in the early nineties, when the then governor, R Rangarajan tightened money markets that forced real-estate speculators to liquidate stocks.The recent RBI move has certainly hit existing home loans consumers of banks. Besides, the move will also act as a deterrent to those seeking home loans for speculation purposes. Home loan rates are now poised for an upward revision of another 75-100 bps from the current level of 11 per cent.Home loan defaults are also likely to occur because banks have revised their floating rates at least 10-12 times in the past 12 months. Most home loans are disbursed on a floating rate concept rather  than a fixed rate.Last week, realty stocks were the worst performers on the bourse following the rate hike. The BSE Realty index fell 7.39 per cent as of Friday.In the coming week, markets across the globe will focus on the developments in the US. August 2, is a crucial day that will decide whether the world’s largest economy would turn a defaulter or not. August 2, incidentally is the deadline for the US lawmakers to lift the $14.3 trillion debt limit and defer defaults.There is also a threat that US faces a downgrade by credit rating agencies from the present `Triple A’ status US enjoys, in case of a default.Back home, for the week ahead, the downward trend is likely to continue. If the US lawmakers lift the debt limit then, there could be some pullback rally across the board.Another interesting development to note is Nifty, at Friday’s close of 5,482, is at almost the same level of Lehman Brothers collapse in Feb 2008.As of Feb 5, 2008, Nifty ended at 5,483 and in the next five trading sessions, Nifty lost 644.75 points!  Are we likely to witness that in case US debt limit is not raised up ? In all probability a compromise is expected. But the coming week is certainly not for investors even though you could see stocks easing down to attractive levels.On the downside, support for Nifty is seen at 5,350 and if that is breached then 5,240 is the next support Nifty could slip to. On the upside, Nifty  5,555 is the first level to hit some resistance and the subsequent range is between 5,600 and ,5700.   From / Gulf Today