Close Gaps...

Article;
Not congress not BJP markets want a stable government.

Comment;

The market is yet to factor-in the effect of repo-rates hike which will be done in October. Economists forecast a 50 basis points hike in the repo-rate. The Taylor-Rule says we need to increase interest rates 1 per-cent if we have to reduce inflation by 1 percent. Therefore if we consider WPI (6.5%) as the main gauge of inflation, because so far the RBI has, we need to increase repo-rates by almost 50 basis points. But when we look at more developed countries they follow CPI as the main index. Therefore if we consider CPI we need to increase repo-rates by 1 per cent every extra percentage of inflation. As far as MSF is concerned the RBI has stated that it wants to close the gap between MSF and repo-rates by 100 basis points which is currently 150 basis points. The Governor is reducing MSF. Either he can reduce and increase MSF and repo-rates by 25 basis points, respectively, or, he can go for a 50 basis points cut in MSF or increase repo-rates by the same (basis points). But as far as the weight on inflation placed by the Governor is concerned he would go for a 50 basis point hike in repo-rates, more expected... The reduction in MSF has received a bit of criticism for stoking inflation. But if the Governor delays rate hikes he would only kick the can down the road, if the market expect 50 basis points hike he should do it without delay. Repo-rate will also affect our savings/deposit growth rate which is less than the lending growth rate. We also need to close this gap, too…