Market Watch

Monday 16 December 2013

Stock Market News WPI Inflation Accelerates in November



NEW DELHI: With the Wholesale Price Index (WPI) for the month of November rising to a 14-month high of 7.52%, the case for a rate hike by the Reserve Bank of India (RBI) in its upcoming monetary policy review seems to have strengthened, say analysts.
The repo currently stands at 7.75%, while the marginal standing facility is at 8.75%, maintaining a corridor of 100 bps. An interest rate increase will be critical in another respect: as a protection from the effects of the withdrawal of ..the stimulus programme by the US Federal Reserve.

The repo currently stands at 7.75%, while the marginal standing facility is at 8.75%, maintaining a corridor of 100 bps. An interest rate increase will be critical in another respect: as a protection from the effects of the withdrawal of the stimulus programme by the US Federal Reserve.

Abheek Barua, Chief economist at HDFC BankBSE -1.12 % said that RBI's actions will be data dependant rather than some predetermined action on the trajectory of inflation. "What I can say is that the WPI does not give any room for comfort. Based essentially on the CPI, there will be rate action, and we are expecting 25 basis points," Barua said.

Barua however is of the opinion that a rate hike may not be the right solution to help bring down inflation. "The irony is that raising rates isn't helping. I think the government will have to get down to more active supply management because the problem is largely with vegetables and meat and fish, which is the protein basket," he added.

Sujan Hajra, Chief Economist at Anand Rathi Securities feels that a 25 basis points rate hike is likely. "I am looking at a total 50 bps of hike for the financial year. I don't think the government will be completely averse to a rate hike as it has said that inflation remains its biggest worry," he opined.

Echoing the same sentiment, Rupa Rege Nitsure, Chief Economist at Bank of BarodaBSE -0.39 % said, "Earlier I was expecting only 25 bps hike in repo rate, but now I am looking at either a 50 bps CRR or a 25 bps hike in repo and 25 bps in CRR."

According to Nitsure, "The pressures are across the board. Rupee depreciation, diesel price increases are all pushing up inflation. If the RBI really wants to have effective monetary policy transmission, they should hike CRR ( cash reserve ratio) by 50 bps as liquidity is sloshing around and that is adding to aggregate monetary demand."
Saugata Bhattacharya, Chief Economist at Axis BankBSE 1.67 % feels that the language of the monetary policy statement will be very tough. "The bulk of the probability is still a 25 basis point rate hike, but given the significantly higher CPI and WPI number a 50 basis points cannot be ruled out."

"Earlier we were expecting the RBI to pause in December policy and raise the rate to 8 percent in January, but after the CPI and WPI data we expect two more rate hikes - one in December and another in January taking the repo rate to 8.25 per cent" Bhattacharya added. 


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