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RBI unlikely to lift the key stock indices
Monday, Nov 17, 2008

Well, the outcome of the much hyped G-20 summit over the weekend was a bit of a damp squib. Leaders of the world's leading nations (advanced and emerging) failed to announce any major breakthrough initiatives, except for a symbolic appeal for a coordinated global action to tide over the unprecedented crisis. However, India can take some solace from the fact that the G-20 summit unanimously decided to shun protectionism and give more say to developing economic powers like China and India in managing the global financial architecture.

Back home, the RBI decided to take few more steps to limit the damage on the Indian economy. It has announced measures to boost dollar inflows by raising interest rates on NRI deposits. It has also decided to ease the liquidity pressure on Real Estate and NBFCs by lowering the provisioning and risk weight on loans to these battered sectors. The central bank will consider proposals for buy back of FCCBs, besides allowing registered housing finance companies to raise short-term loans overseas and extending the special repo for MFs and NBFCs.

The latest attempt by the RBI to ease the credit crunch is not a surprise given the extraordinary situation facing the Indian economy. It may at best bring some relief to the beleaguered financial markets, but is unlikely to lift the key stock indices beyond a few hundred points. The case in point is last week's trade, when the improved data on industrial production and a surprisingly sharp drop in inflation failed to perk up the markets. The fear is that the macro-economic numbers for the coming months may be even worse. The one bright spot could be further fall in inflation, could allow the RBI to announce more rate cuts.

Having said that, the recent past has shown that any measures announced by governments and financial regulators have had only a temporary effect on markets. The same trend may play out again today. The key indices might gain some ground after last week's rout (Sensex and Nifty down over 5% in four sessions!). But, one must be ready to see more red than green on screens, as the global economy is in dire straits, and may well remain bogged down for several months to come. For India, another factor could play spoilsport with markets; the slew of state polls in Nov-Dec and the general elections next year.

 

 

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