Arun's Comments

Good information Naveen, but the RBI base interest hike, will make commerial banks to raise the mortgage and will impact the real estate sector. Over all does this help stock market ? May be yes, as banks may do good, isn't it catch 22?

My Response:

Well I believe RBI was in pressure from all the quarters due to reasons like Inflation, Recovery in economy like IIP data, good auto sales numbers in Jan & Feb (so auto stocks soared) & etc.

But I don't think Banks will immediately rise the lending rates as they are falling short of RBI minimum requirement of credit & from other end they have to take care NPAs(Non Performing Assets) which have increased due to recession.

And coming to stock market obviously you know better than me that market is not only dependent on RBI policy, of course due to RBI action market (Nifty) opened some 80 points down with a gap down. But obviously market is more dependent on world markets now & how the European economy will shape up from CDS problems & what China will do for its interest rate & export policy (currency pegging) & etc.

So as usual rate sensitive stocks(like real estate, banking stocks & auto stocks) have been beaten down on Monday because of sentiments.

But what I feel is if RBI is increasing repo & reverse repo only because of inflation, then it may not be correct decision? Because I feel(most analysts feel) inflation is due to spike in primary food articles which is supply side problem & distribution problem. And if you see the last year February inflation which is acting as base now, there is a sharp dip in Feb. So there is also BASE EFFECT in this inflation numbers. And also I think nobody will stop eating due to increase in interest rate!

If RBI is seeing food price hike is spreading to manufacturing side (IIP data) then their action can be substantiated, because monetary policy action will take some time to slow down the things in the overall economy. And also of course RBI cant allow formation of new bubbles in the economy by cheap credit what US did in Dot com bubble burst in 2000-01 (kept interest rate very low) & ultimately lead to real estate bubble which in turn lead to sub prime lending & following problems.