RBI’s 50 - 50 MOVE and ITS IMPACT

MEASURES:

Reserve Bank of India on 24.06.2008 announced: (1). Hike in LAF-Repo Rate by

50 basis points to 8.50 per cent with immediate effect; and (2). Hike in Cash
Reserve Ratio (CRR) by 50 basis points, in two phases, to 8.75 per cent.

RATIONALE:

RBI’s stated objective of using the above policy instruments in a rather blunt
manner is to contain inflationary expectations in the economy.

IMPACT:

On Macro Economy:

GDP growth, which has averaged 8.80 per cent between 2003-04 and
2007-08, will decelerate to 7.5 per cent in 2008-09. The chances of GDP
growth further slowing in 2009-10 and 2010-11 are extremely bright!

Direct Tax collections will come down due to sharp fall in corporate profits
and personal incomes; investment demand will decrease leading to lesser
imports and lower customs duties; and one can expect cut in excise duty
collections due to lower sales revenue.

Now the clamour for increasing administered rates of interest for Public
Provident Fund (PPF) scheme, National Savings Certificates (NSC),
Senior Citizens’ Savings Scheme and other interest rates like, EPF, will
go up with a view to moving in line with other deposit rates.

All the above will put further pressure on the rising fiscal deficit which will
exaggerate the problem to a greater extent leading to higher market
borrowings by the Government.

On Loan rates:

Loan rates across the board, starting from auto, housing, corporate to
personal loans, will rise sharply

Corporates’ interest burden will go up leading to a dent in their profits

On Deposit rates:

Short-term deposits are likely to fetch higher interest rates even though
the deposit rates may be lesser than the rising inflation rate

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On Stock Market:

Sensex will try to catch up with the January 2008 peak achieved by Nifty;
whereas Nifty will make all attempts to catch up with the Sensex lows
recorded in September 2001!

One good thing is that stock prices that were once available at triple-digit
PE ratios are so cheap now that investors can lap them up at single-digit
Price-Earning multiples. A truly wonderful chance to lose more money!
On Job Market:

India Inc. may resort to some job cuts

Salary and wage cuts also can be expected (please note that the annual
salary of Mr. Azim Premji of Wipro was quietly slashed by a staggering 63
per cent in 2007-08 compared to his salary in 2006-07)

So, employees across the entire spectrum of the economy have to brace
themselves for some real tough and trying times

On Social Life:

Job losses and salary/wage/incentive cuts will lead to family tensions
ending up with higher divorce suits and putting increased pressure on the
fragile Indian Judicial System

Due to mounting family tensions, the need for anti-depressant drugs will
shoot up leading to higher profits for selected pharmaceutical companies

One silver lining for insurance companies will be that they can turn this
adversity into an opportunity by selling more insurance policies,
especially, health insurance products for which Union Budge 2008-09 has
given a strong boost.
On Micro Life:

Conveyance (petrol etc) allowance may be cut down as part of the

austerity drives undertaken by employers

Shoeshine boys also will earn less as employees will be encouraged to

come to office in a disheveled attire to beat inflationary impact and a five-
day week is likely to be introduced to cut down oil demand

… With malice and prejudice against the policy makers …

--- A jaundiced view of the state of affairs by Rama Krishna Vadlamudi, MUMBAI
prepared for ‘aam admi’ at 7.30 am on 25.06.2008 before reading the morning
newspapers! (More in store about the political impact!)

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