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RBI announces a CRR hike by 0.75% to 5.75% to tackle Record Food Inflation at 17.40%…Interest rates must rise soon !…Equities will React

I have been increasingly impressed by this RBI Governor,D Subbarao…..his thought process is very inspiring and rational and intellectually stimulating and challenging…..A few days ago,he humbly stated that what happened to the Financial System in 2008 in the USA taught a lot of lessons and challenged traditional assumptions

And today he showed his assertive and no-nonsense decision making ability….In light of the record Food Inflation figures of 17.40% that came in yesterday for the week ending January 16,2010,it was indicative that RBI will surely raise the Cash Reserve Ratio (CRR)….and he raised it by 75 basis points,that’s 0.75%,more than expected.The CRR is being raised in two phases in February 2010 to 5.75%.This will reduce the Liquidity by Rs 36000 crs

…..and Interest rates will firm up strongly in the coming months

The Repo Rate and the Reverse Repo Rate has been left untouched at 4.75% and 3.25% respectively

While GDP Growth Rate Projections have been raised to 7.5% from 6 %,Inflation Rate Projections too have been raised from 6.5% to 8.5%…that would indicate Food Inflation rising yet further to 20%!…I think our Agriculture Minister,Sharad Pawar will continue facing a harrowing time and calls for his resignation will intensify….Anyway,he seems to hold his position as BCCI Cricketing head and President in Waiting of ICC in higher priority…so maybe we should let him concentrate only on Cricket and relieve him of Ministerial Duties!

Credit Growth Offtake and Deposit Mobilisation rates Forecasts have been lowered

RBI is clearly aware of the potential risks of Oil Price Surges,that caused us great agony and high Fiscal Deficit in 2008 and 2009…Search for my earlier blogs on this Impact

Stock Markets initially bounced back briefly…Sensex was down 200 points at 16100 levels before the announcement but recovered…..This may just be a short bounce and Sensex will challenge 16000 shortly…maybe even today

So now the Monetary Policy is behind us…now February 26,2010 will see the Fiscal Policy thrust when Pranab Mukherjee announces the Union Budget

BUT KEEP AN EYE ON THE FII FLOWS…already US $ 2 BILLION sales have been effected in the past few days….Statistics clearly show that when there have been strong Inflows,the Sensex has sought record highs…When US $ 13 Billion reversed out in 2008,the Sensex tanked

It’s going to be a very interesting tussle between FII outflows and Induced Domestic Buying in an attempt to maintain Buoyancy to facilitate PSU Disinvestments

As I had blogged a few Days Back on ABC of Investments…(A)merica,(B)harat and (C)hina….(B) ,that is we, is sandwiched between the East and the West…we are coupled strongly and cannot be insulated from what happens at either end of the Globe…..Recovery in America is years away and there is real fear of double dip recession…..China is strongly arguing that no asset bubbles are forming in light of excessive lending

We,Bharat,despite our exciting Infrastructure and Domestic Consumption Stories and High GDP Growth Rates being intact need to be very cautious

……Monetary Policies like twitching CRR,Repo and Reverse Repo rates can have only a limited impact as India has no control over Pricing of Commodities,be it Oil,Sugar,Gold, Grains or Pulses or Metals….Price Explosion in these have played havoc with our Fiscal Deficit and raised Food Inflation rates to record Levels….search an earlier blog on this  

So don’t be in any hurry to Invest in Equities… matter what Experts and Anchors and Brokers scream out at you from the Stock Channels !……Look for strong sub 16000 Sensex levels for better Opportunities to Buy into selective scrips which you have identified as having strong growth potential to leverage into the India Story and have a Long Term View

Cheers !



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