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Motilal Oswal

By Motilal Oswal 17-May-2010 | 10:43

The RBI’s credit policy for FY11 was largely on expected lines, but the quantum of hikes was lower than expectations of few market players. The latest monetary measures and policy review clearly reflect the increasing emphasis on reigning in inflationary pressures. While, economic growth has been strong; the central bank highlighted possible risks due to an uncertain global environment and erratic monsoons. The RBI has highlighted the shift in the composition of inflationary pressures from supply led constraints to demand led factors. Increased capacity utilization and higher global commodity prices are also concerns. The higher credit growth expectations seem to be in line with the 8% GDP growth expectations (with an upward bias). The economic growth is expected to be spurred by strengthening exports/service sector activity; increased fund raising activity, and improved corporate profitability

The strong economic growth and the potential for relatively higher earnings growth has led to increased fund flows into India leading to a strengthening of the currency. The ultra accommodative monetary policies in the developed world should lead to increased inflows into emerging market economies like India with strong growth prospects. The RBI doesn’t seem to be overtly perturbed about the quantum of flows, given the strong absorptive capacity of the economy compared to the past.

Also, given the lingering global concerns, RBI appears to be taking a sanguine view on inflationary trends by the end of FY11 and doesn’t want to impact the current growth momentum. The new norms for infrastructure-related companies and securities appear to be in line with this thought process and are aimed at boosting investment activity.

Bond yields eased from highs and closed below yesterday’s levels as the quantum of rate hikes was less than expectations of some market players .Equity markets have gained during the week due to absence of aggressive monetary tightening with interest rate sensitive sectors in particular moving up very sharply.

Outlook on the market remains that inflation and global oil prices will continue to determine market sentiment and direction.Nonetheless, bulls have an upper hand .I don’t see the rate hikes impacting upward direction of the markets just yet.However, inflation remains a overhang . One must also understand that inflationary pressures are still largely due to the low base effect and supply constraints along with poor rainfall last year . I learn from various reports that inspite of droughts last year, food grain production in FY10 has matched that of last year-thanks to a very good Rabi harvest . This instills some hope that inflation may not be allowed to go out of control due to better supply- chain management by the government.