Beyond RBI's Rate Hike

I was in All India Radio studios last evening again as an expert to comment on news developments. As luck would have it, RBI raised the interest rates for the 13th time yesterday and most of the anchors' questions moved around the event. While asnwering the questions, one or two interesting things struck me. Apart from the usual things that a rate hike typically does, such as raising the rates for retail loans and fixed income options, which this move will obviously do, there are a few other things that are possible. First, if things get real bad on the global economic front such as a deeper mess in Europe and the US and there is a credit squeeze in India with forex moving out and back, the RBI could reverse the rate regime as an emergency measure. The state of government finances is such that instead on the fiscal side, fire-fighting might have to be done on the monetary side. Second, it is now quite clear that corporate earnings  will suffer for some quarters. This means that in the absence of increasing revenues and profitability, companies will try to cut costs. First, future investments, travel, promotion and advertising. Then, manpower. During a Diwali party, some people told me the kind of job losses taking place in the telecom industry. Of course, bloodletting on the manpower front in mutual funds and insurance industry is now known to all. What a reversal of fortune? Maybe a case of "what goes up.......".

Fireworks Before Diwali

The industry and the banks may not be wanting any further hike on interest rates but to me it seems another one is in the offing on October 25 when the Reserve Bank of India will make a policy announcements. The main reason for this is the stubbornly high inflation. It seems economists have advised RBI to keep tightening the screws. This will surely men crackers exploding a day before Diwali and take some light out of the "Festival of Lights" the next day. Having said that I would expect this trend of rising rates to continue for some more months at the most. At a certain point, every cycle turns and this one seems fairly near that point. The RBI at a juncture in the near future, will start getting the evidence it wants and that is likely to happen through lower demand. Supply side issues such as infrastructural bottlenecks, which need the help of the government--which is near-absent at the moment--don't get sorted out so soon as they need policy changes, investments and so on.