Today, the Reserve Bank of India hiked the Repo Rate by 25
bps, moving the Repo Rate to 8%. The Indian market was shocked at the RBI’s
move! But, why was the market surprised? Wasn’t it blatantly obvious?
Here are the reasons why the market shouldn’t be surprised and should already have priced that in instead:
1) The CPI and the WPI have been riding high, even though the General Election is about to come. The ruling government would not like to piss the voters off at the eleventh hour of the General Election. Both Inflation Indices need to be reined in. Obvious, right?
2) The INR has, of late, been sliding down against the Greenback, touching 63.3, and making the Indian pain points – already-large fiscal deficit and current-account deficit -- worse off.
3) Of late, other emerging economies have also been witnessing a sort of exodus of “loose” foreign money back to the developed economies, as developed economies promise seemingly -- but arguably -- brighter future.
4) The Turkish Lira hit record low against the Greenback yesterday – TL 2.39 to the USD. But, on the back of confident market speculation, which was apparently based on an urgent meeting called upon, between the Turkish Central Bank and the Turkish Government, for discussing the interest rate, the Turkish Lira rallied to 2.29 to the USD. The market expects up to 2.25% hike to the current interest rate of 7.75%. Of course, Turkey has its own pain points – it has a USD 60 billion current-account deficit, has foreign-exchange reserves of meager USD 38 billion, and owes short-term, foreign-exchange debt of USD 168 billion!! Ooppss…. It’s really too much for Turkey to handle all at once, without raising the interest rate!!
5) The Brazilian Real slid to its lowest level -- in past 5 months -- against the Greenback. The prime reason for the sliding Brazilian Real was a promising interest rate in the developed economies, and this “promise” triggered a sell-off by foreign investors of Brazilian assets! The Brazilian reacted in a classic way by increasing the interest rate, and using foreign-exchange reserves as buffers to defend the local currency and to tame the increasing inflation. Awesome, isn’t it? :-)
6) Last week’s surprising devaluation of the Argentine Peso, which was also the victim of the same global phenomenon – “loose” foreign money exiting the local economy for a promising future in the developed economies.
7) Almost the same kinds of market activities have also been witnessed in some other emerging markets. The pattern has, of late, been so, so obvious!
So, should the Indian market be surprised at the Reserve Bank of India’s today’s move? Of course, not! The global game of interest rate, which was started off by the US Federal Reserve for taming the Great Recession, is STILL full on! Enjoy “the party,” as it won’t last long…
Here are the reasons why the market shouldn’t be surprised and should already have priced that in instead:
1) The CPI and the WPI have been riding high, even though the General Election is about to come. The ruling government would not like to piss the voters off at the eleventh hour of the General Election. Both Inflation Indices need to be reined in. Obvious, right?
2) The INR has, of late, been sliding down against the Greenback, touching 63.3, and making the Indian pain points – already-large fiscal deficit and current-account deficit -- worse off.
3) Of late, other emerging economies have also been witnessing a sort of exodus of “loose” foreign money back to the developed economies, as developed economies promise seemingly -- but arguably -- brighter future.
4) The Turkish Lira hit record low against the Greenback yesterday – TL 2.39 to the USD. But, on the back of confident market speculation, which was apparently based on an urgent meeting called upon, between the Turkish Central Bank and the Turkish Government, for discussing the interest rate, the Turkish Lira rallied to 2.29 to the USD. The market expects up to 2.25% hike to the current interest rate of 7.75%. Of course, Turkey has its own pain points – it has a USD 60 billion current-account deficit, has foreign-exchange reserves of meager USD 38 billion, and owes short-term, foreign-exchange debt of USD 168 billion!! Ooppss…. It’s really too much for Turkey to handle all at once, without raising the interest rate!!
5) The Brazilian Real slid to its lowest level -- in past 5 months -- against the Greenback. The prime reason for the sliding Brazilian Real was a promising interest rate in the developed economies, and this “promise” triggered a sell-off by foreign investors of Brazilian assets! The Brazilian reacted in a classic way by increasing the interest rate, and using foreign-exchange reserves as buffers to defend the local currency and to tame the increasing inflation. Awesome, isn’t it? :-)
6) Last week’s surprising devaluation of the Argentine Peso, which was also the victim of the same global phenomenon – “loose” foreign money exiting the local economy for a promising future in the developed economies.
7) Almost the same kinds of market activities have also been witnessed in some other emerging markets. The pattern has, of late, been so, so obvious!
So, should the Indian market be surprised at the Reserve Bank of India’s today’s move? Of course, not! The global game of interest rate, which was started off by the US Federal Reserve for taming the Great Recession, is STILL full on! Enjoy “the party,” as it won’t last long…
