Dr Y Venugopal Reddy, Governor, RBI, today presented the First Quarter Review of Annual Statement on Monetary Policy for the Year 2008-09
RBI has raised the repo rate by 0.5% to 9% and the Cash Reserve Ratio by 0.25% to 9% to curb Inlation
This was inevitable with Inflation trying to cross 12%…. Expect some more rate hikes in August too!
But what struck me a little amusing is this…….
The Reality is that Inflation is because of the runaway spiral in Commodity Prices, notable that of Crude Oil… Oil raced away from US $ 70 in Feb 2008 to double past US $ 140 a few weeks ago
The Reality is also that RBI has simply no control on Inflation as it has no control on Oil prices!….. It can merely tinker with rates to match Inflation… This is has done at the cost of Growth rates
The Reality is also that Mr Reddy had to apologise to the Media for wrongly blaming it for leaking out the Policy earlier than he had announced It !…. Their inquiry showed that the culprit was the Web Manager who released the soft copy half an hour earlier than Noon when he made the Announcement
The Reality is that neither is RBI in control of Inflation nor is it in Control of Secured Release of Important Information… the leak gives an unfair advantage to the reader and with the Sensex closing 558 points lower today there indeed was some opportunity there to be exploited
As always, the common man will get the short drift…. not only has he got to combat High Inflation… but also that he finds himself in an unreal situation which may last a year atleast where the real rate of Interest on his Deposits is negative…. in that he gets 7.5% -9.6% (Upward hike likely) on his Deposits and just 3.5% on his Savings Account while Inflation is expected to remain in double digits till next year… If he has to Borrow, the bank may not extend credit as it has been reigned in by RBI who has set even tighter limits for banks advances… even if the bank did lend the Interest rate would be leaning towards 18%….. The Prime Lending rate is 13.25% and a “BBB” rated Corporate would have to bear a 16% to 17% Interest rate…. and the Common Man’s rating is lower than “BBB”
The Common Man seems to have no option really…the only rational choice in his mind would be to protect the Principle with a Fixed Deposit in a Good Bank even if the real rate is negative… Cash is non productive ….. and as for Equity, it has slashed and chopped off so much wealth this year that even wild horses would not drag the Common Man back to Equity
And here lies the Irony !…… Equity alone over a longer time frame of atleast three years would offer the best bet to grow wealth,beating Inflation as wellas negative real rates from Bank Deposits…… Alas! there is a scarcity of all the “Cs”…. of credibility, confidence, conviction and contrarion thought….. Consequently “C”ash will not come into Equity… in fact may move out of it!