On CRR hike .....says Economists

So long as economy is growing and GDP has not shown declining nos for even one quarter, there was no reason to panic and resort for monetary measures such as CRR rate hike to combat inflation. In 1992 when Mr Manmohan Singh was the Finance Minister we had a GDP
growth of 4% with inflation in double digit. But now due to huge inflow of funds and liquidity the economy is on roll and has taken off very well. We require bold reforms which can accelerate the pace of investments as well as FDI which can in turn lead to higher cycle of
GDP.

It is also argued that the inflation of 6.5% is in fact could have been 9% had Govt not resorted artificial curbs on steel, cement, sugar, fuel etc. Why is then Govt doing this even at the cost of
serious impact of slow down due to the reduction in credit expansion....?

The ruling Govt failed miserably in the recent elections in two states and chances that it may not fair well even in Uttar Pradesh in coming elections. SP has a strong hold irrespective of Hon'ble Supreme Court's direction to CBI to investigate assets of Mulayam Singh. SP
are the front runners. SP has a strong backing by India's leading corporate house and India's no 1 brand ambassador.

Only 2 years are left for election at the center and if inflation is not controlled then there could be big set back for the ruling party. This is simply because in India majority of the voting community is below poverty line and they do not understand growth, FDI, globalization, high standard of living etc. For them ROTI KAPDA aur MAKAN are three essentials of life and inflation has direct nexus with all these three elements. BJP lost last time only due to the single factor of wrong campaigning of FEEL GOOD FACTOR and holding the election in May where water played crucial role. Even Chandababu Naidu who created Cyderabad which is respected even by Washington got lost to this sole factor.

Naturally going forward, it can safely presume that political motto has taken over the country motto and therefore high priority has been assigned to inflation.

It is also asserted that the timing of this CRR rate hike is really a matter of debate...? Few economists say that Govt could have differed this CRR rate hike by at least one quarter to see the monsoon effect.
If monsoon is good once again then probably the inflation could have been tackled by higher agricultural produce. This is also due to the fact that this could be the last CRR rate hike and for Govt to raise further CRR rate is too difficult.

RBI is exhausting the monetary measures speedily which will leave Govt to take other measures.

How far this will impact market....?

The immediate reaction has to be knee jerk reaction as the timing was really unexpected. The banking stocks will be largely affected due to CRR shock whereas manufacturing sector could pass on its impact due to strong demand pattern.

However going forward, it will have neutral effect on the market for one that this could be the last rate hike and market always likes certainty.

One more aspect ought to have been taken into account is that Govt had already sucked Rs13000 crs couple of months back and now Rs 15000 crs but at the same time allowed to use 5 bn USD from foreign exchange reserve which is equivalent to the liquidity already sucked and hence can be a neutralizer.

The factors which are likely to govern market in coming days are monsoon, UP election, corporate earnings, central election and pace of fresh reforms. Most of the funds have increased their exposure to cash from 7% to 20% odd percentage.

Sectors to outperform are realty, pharma and steel. Mid cap and small cap will be on invent trajectory and will catch valuations of peers whereas A gr shares where FII ownership is large will be more or less capped or have limited upside due to portfolio churning.

Volatility will rise further in most dangerous way due to divided opinion of experts on market which could kill large retail clienteles indulging in speculation. The only way to survive will remain to educate yourself ...........