Business Today

D-Street loses sheen as rate hikes start to bite

On the domestic front, economic slowdown is expected to accelerate, with higher lending rates pulling down demand for goods and services further.

BS Srinivasalu Reddy | September 19, 2011 | Updated 15:09 IST

The deadlock over the means to resolve the Greek debt crisis and actions of the US Federal Reserve ( US counterpart of the Reserve Bank of India) on Tuesday hold the key to the movements of the global and the Indian markets in the short term. But expectations on the future course of inflation and RBI actions are likely to haunt the domestic market in the coming weeks, if not months.

The positive signals emanating from the euro zone finance ministers' meeting helped the Indian market shrug off the policy rate hikes by RBI on Friday, and end the week in positive territory. But the same meet ending in a deadlock adds to the uncertainly of the already volatile market in the coming week.

Expectations are being built over the announcement of the third tranche of quantitative easing (QE- III) by the US Fed when it meets on Tuesday and Wednesday, to prop up the US economy. There is a possibility of Bernanke, the US Fed chief disappointing the markets again as he did a couple of occasions in the past.

On the domestic front, economic slowdown is expected to accelerate, with higher lending rates pulling down demand for goods and services further. RBI has already made it clear that as long as inflation is at elevated levels, it would have to continue with policy rate hikes.

Inflation measured by the wholesale price index ( WPI) for August was at 9.78 per cent, nearly double the RBI comfort zone of four to 4.5 per cent. The main challenges for bringing down inflation include the recent hike in petrol prices and the fall in the value of the rupee, both of which add to high inflation concerns.

Economists are also perplexed by the course of inflation. They expected inflation to start moderating in July 2011. The current expectation is that it would start moderating only in December.

"The immediate impact of the hike will be felt by the consumers as banks gear up to pass on the impact of the hike in their cost of funds, to consumers. Commercial, auto, home loans and corporate loans will become dearer," said Abizer Diwanji, head of financial services and executive director of global consulting firm, KPMG. High bank lending rates have already affected the capital investment cycle, rendering many projects unviable at these high lending rates. Those who have borrowed at floating rates have seen their interest commitments multiplying.

"Further lending rate hikes are likely to moderate the already slowing trend in credit demand. But more than that, the key concern for the banking sector would be the increase in asset quality risks," said Vaibhav Agrawal, vice- president (research), Angel Broking.

This year so far, the Indian markets have underperformed (down -22 per cent) vis-a-vis the emerging markets (EMs) (down  -10.3 per cent), opening up a relative underperformance gap which is the highest in the past 10 years.

" Earnings trajectory, meanwhile, continues to deteriorate. The RBI's tight money policy has started dampening demand even though its full impact has not yet been played out," said Diwanji of KPMG. The formation of lower high and lower low on the weekly chart remains alarming with Nifty strength faltering as it remains near 5,177 levels. "Hence, a clear positive trend is likely to occur on a close of above 5,200 in the near term," said Amar Ambani, research head- PCG, IIFL.

Courtesy: Mail Today

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