28 September 2007
n a session where each speaker had a different view on where the market was headed, there was near unanimity on one issue. Interest rates in India may have peaked out and the Reserve Bank of India is likely to lower benchmark rates sooner than later.
The participants were all praise for RBI’s job of taming inflation without hurting growth in the economy. This is stark contrast to the scene in the US where the economy appears to be headed for recession after a severe jolt from the crisis in the subprime loan segment.
Nirmal Jain pointed out that currently, interest rates are so high that in spite of inflation being under 4%, companies with good credit quality are still borrowing at over 10%. “This could apply brakes on the industrial growth that is otherwise growing at a healthy pace. At these rates, it is difficult for a productive enterprise to justify investments over the longer term,” he said.
Vallabh Bhansali also argued in favour of a cut in interest rates, on the grounds that developing economies, which face the problem of a stronger currency, should ideally have low interest rates. However, the lone dissenter was the self-professed student of behavioural finance in India — Parag Parikh. He was of the view that interest rates should not be lowered for the time being.
“Today, interest rates are so low, that money is not being channelised to productive enterprises and consequently there is a lot of wastage,” said Mr Parikh, who had a contrarian view on every issue. He said that cheap money was stroking asset price inflation and this is the biggest challenge before our policy makers.
The session saw a healthy debate between the two chartered accountants over the state of real interest rates and inflation numbers. Mr Jain suggested that real inflation numbers reported by the government may not be all that different, implying the real interest rates may be very high.
Nilesh Shah did not agree with this assessment. “I don’t get any comfort from looking at our inflation data. If you look at the past year, the number of items that have remained unchanged is mind boggling. The WPI numbers are not in sync with today’s time,” said the always articulate Mr Shah. He summed up by saying that this could mean that actual inflation numbers may be very high and real interest rates not that high.
Commenting on the current state of affairs, Mr Shah said policy rates will not change in the near future. “Markets will try to bring down yields on government securities, although RBI has the lever to pull it back, especially by reducing SLR. Yields for retail borrowers (interest rate on loans) will also come down. However, corporate yields will go up as ECB window for corporates has been closed and companies are still in capex mode,” he said.
Mr Bhanshali had an interesting take on what the benign rate scenario would mean for the investor. “As benchmark rates come down, net return on equity will also fall. Although, this is not good news for the market, it is great news for a long-term stock picker,” he said.
He felt that lower interest rates should spell good news for companies that are in the process of innovation.The benchmark Sensex today rose by 140.54 points to reach a new closing high of 17,291.10, continuing its record setting spree for the ninth straight session, on the Bombay Stock Exchange.
The BSE 30-share index reached its new intra-day peak of 17,361.47 and touched the day's low of 17,152.31 points.
Tracking the firm trend, the wide-based National Stock Exchange's Nifty moved up by 20.80 points to 5,021.35, after touching the day's high of 5,055.80 and a low of 4,996.45 points.
by erectusplus at 15:26:00 |
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