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RBI unlikely to cut rates till March


With RBI passing up another opportunity to cut the rates, the window on where it can act is rapidly closing down. This assessment was up in the air, for we felt RBI might use the opportunity to move the rate a little lower. 

The coming months will see some serious events in terms of the market and geo-political scenario, add to it the fuel of liquidity, high commodity prices and inflation, add to it the inefficiency and inability of government to push through any reforms and add to it the beginnings of posturing for the elections in early 2014.

RBI is now unlikely to come ahead a cut interest rates as we are in the high-inflation risk zone for next some months. And given the government's lip-service of rate-cut but the secret desire to hold-high-rates, its unlikely RBI too will have any pressure to bring down rates.

Therefore effectively, RBI has very slight chance or opportunity to cut rates until March/ April. This will suit the governments heading into elections, this will also suit RBI heading into inflation storms but this will be very bad for the businesses and enterprises reeling under high interest rates.

The inflation risks are:
  • Global QE
  • Higher commodity and oil prices
  • Cutting or capping of subsidies of essential commodities
  • The uncertainty of the monsoon progress and its consequent harvest
If this scenario plays out, look out for:
  • Higher unemployment and layoffs
  • Higher business closures and lower new business ventures
  • Lower retail sales and consumer confidence
  • Lower Private sector investments, Credit off-take,
  • Lower FDIs
  • Lower sales in discretionary spending especially like durable goods, automobiles. [The so called EMI-goods]
  • Real-estate too would remain low
  • Lower and restrained inflation
  • Lower stocks markets
  • Lower Rupee
  • Worse fiscal deficit 
  • All leading to lower GDP growth

All the able scenario need not play out in text book fashion, but I would consider them to be a high probability. All these are assumptions as of now and will remain unless there are something unexpected events or policies.




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