RBI hikes interest rates

Tue, 2 Nov 01:30 pm

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Strong buying activity led the Indian markets to rise above the dotted line during the previous two hours of trade. Currently stocks from the capital good, consumer durables, FMCG and IT spaces are leading the pack of gainers, while those from the realty and auto spaces are amongst the top underperformers.

The BSE-Sensex is trading up by about 50 points (up 0.3%), while NSE-Nifty is trading about 15 points (up 0.2%) above the dotted line. The BSE-Midcap Index is up by 0.4% while BSE-Smallcap Index is trading higher by 0.3%. The rupee is trading at 44.41 to the US dollar.

The RBI once again raised the rates at which it borrows from (reverse repo) and lends to (repo) banks by 0.25% each. Although the cash reserve ratio (CRR) has been held constant, the repo and reverse repo rates are expected to make short term liquidity dearer. The stubborn inflation number that has shown no signs of receding has compelled the RBI to raise rates for the sixth time this year. The overall hike in repo rate has been 1.25% so far while that in reverse repo has been 1.75%. Amongst its Asian counterparts, the RBI has been the most aggressive in terms of containing liquidity.

The benchmark measure of price rises - the wholesale price inflation (WPI) - rose by 8.6% in September, the last data considered for the review. This was backed by 13.8% rise in food prices. Thus the number is well above the RBI’s comfort zone of 5 to 6%. The RBI also sees such price pressures persisting. That is because while demand remains buoyant in emerging markets, the steep rise in commodity prices due to foreign fund flows may exert pressure on prices. Lending by banks to the commercial sector has also been in line with the RBI’s estimates. In fact several banks also used this opportunity to raise their lending rates. Interestingly, however, the RBI has kept the projected WPI for March 2011 intact at 6%.

Stocks of capital goods companies are trading firm led by AIA Engineering, L&T and Jyoti Structures. Engineering and construction major, Punj Lloyd announced its numbers recently. As compared to the corresponding quarter last year, consolidated revenues and profits decline by 31% and 55% YoY respectively. While the company did well to keep its costs under control, it was impacted by higher depreciation and interest costs. At the operating level, the company’s profits decreased by 12% YoY only. This was on the back of an expansion in operating margins which stood at 9.2% during the quarter as compared to 7.2% last year. The profit before tax for the quarter ended September 2010 was lower by 68% YoY. But due to a lower tax outgo, the company’s net profits (after minority interest and share in profits of associates), were lower by 55% YoY. During 1HFY11, revenues were lower by 36% YoY, while the company recorded a loss of Rs 67 m at the net level (as against a profit of Rs 1.8 bn last year).