Hi Alchemist,

Can you give your views on how the market is gonna react to CRR hike and the 31Oct Fed move for 25 or 50 basis point Cut?

Thanks,
Manik2012

One of the important tasks for central banks around the world is to balance inflation and growth.

When there is growth, inflation follows.

RBI has hiked the CRR today.

By this move, the RBI has reduced the liquidity with banks.

When banks make deposits with RBI as a CRR commitment, they do not get any interest for it.

Thus their profits go down marginally.

Sometimes banks pass on the CRR hike to the customers by increasing interest rates on loans. However, this is not likely to happen this time as demand for credit is already sluggish compared to last year.

At the same time, it means interest rates are unlikely to go down in the short term.

This move will have a minor negative impact on banks and interest-sensitive sectors like automobiles.

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The problems that the Federal Reserve in the US faces, are much more serious than that faced by the RBI.

India has to slow down its economy to prevent inflation from getting out of hand.

US is facing a risk of recession and inflation. It has to worry about boosting its economy without increasing inflation. This is a more difficult task.

Every time the fed will cut the interest rates to boost the US economy, inflation will increase.

Inflation will increase not just because of increased money supply, but also because of the falling dollar.

Rate cuts in US mean money flows out of US treasuries and into economies with higher interest rates. As a result US dollar falls and imports become expensive.

My personal opinion is that US economy has come to point of no return.

Falling dollar, rising oil prices and inflation will not allow the fed to cut interest rates beyond a point. A recession in the US economy is just a matter of time.

If the fed cuts rates again, one can expect more money flowing into India and the rupee gaining strength.

This will be bad for exporters. It is better to avoid such stocks in the medium term.

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This week the US Fed, Euro Central Bank and Bank of Japan are lined up to announce policy changes.

The US Fed is like to announce quantitative easing (= printing money to buy long term bonds.) to drive down long term interest rates.

The RBI has announced 25 basis points increase in repo and reverse-repo rate. The most interesting change is limiting home loans to 80% of the home value.

It will be interesting to see how the markets react.

Will the 80% cap have an effect on realty prices?

I assume this will also mean that the interest on FDs will go up, right?

I am planning to go for some FDs in the next few weeks. How long would I need to wait to see the effect of this hike to get a better rate on FDs?

The US Fed has announced that it will buy $600 Billions worth of long term treasuries. The buying will happen at a rate of $75 billion per month.

This will have two effects:

1. Yields on long-term bonds will drop. The US Fed hopes that this will drive down long-term interest rates that it cannot control directly.

2. Long-term treasury holders (as a collective group) will find themselves with $75 billions of money every month and they will have to figure out how to invest it.