The RBI Action:
The Reserve Bank of India (RBI) said on 4th March 2009 that it was lowering the repo rate, at which it lends to banks, to 5% from 5.5%, effective immediately. It also cut the reverse repo rate, at which absorbs excess cash from the banking system to 3.5% from 4%. This is also with immediate effect.
The Impact on Stock Markets:
In my blog post yesterday I mentioned that the rate cut was coming soon. So this decision was not a surprise for most analyst and economist and might not be a big booster for the stock markets as well.But the Indian Stocks are oversold in the near term and this means that the probability of getting some short term rally is high now boosted somewhat by this news. So if global markets also remain robust for few days one can expect some good moves for our markets which would be good short term trading opportunity in my opinion.
I would particularly look at stocks which have been beaten down the most in the recent carnage as good trading opportunities other then rate sensitive stocks and sectors. Some banking stocks can also make good moves and in my opinion ICICI bank can make some good moves from these levels. Infrastructure stocks can also rally in the short term and investors again can look at the most beaten down stocks to make some short term gains.
The Impact on the Indian Economy:
It will be difficult to judge to what extent the rate cut by RBI will help improve the economy in the near term. My opinion is that the rate cuts will not really help in getting the economy back on high growth track so soon.
It would largely depend on the willingness of banks to lend in this high risk enviornment and also the willingness to consumers to take loans in a scenario where many are not sure about their jobs. It is loans which lead the process of money creation in the economy and the current scenario is not favorable for credit growth to be robust.
So interest rate cuts would not help the economy much and thats why I believe that even if the stock markets rally for a few days it will again go down when people realise that robust economic growth is not going to come so soon.
Related posts:
- Prime Minister Said Interest Rates May Be Cuts In Future
- Govt may borrow through MSS route
- RBI sets 6.4993% cutoff yield for 10-year bond auction
- ‘A’ Group Stocks Touching New 52 Week Lows
- US mkts recover from the previous day’s deep cuts; benchmark indices close flat; Indian ADRs ended mixed; MTNL up 3.99%