Tuesday, 3 May 2011

Interest rates increase in India

Why should you care about interest rates increasing in India? Well, all economists know that India is one of the 'big four', part of BRIC - Brazil, Russia, India and China. These countries are thought to be at a similar stage of newly advanced economic development. Therefore, many, many companies are finding that they are expanding into these countries and hence an understanding of what is happening in their economic market will lead to a better understanding of how this will affect companies.

Reserve Bank of India (RBI) hiked the repo and reverse repo rate by 0.5% (50 basis points or bps) ( Click here to read a short simplistic article on the meaning of repo and reverse repo)

The increasing prices of staple foods in India has helped push inflation to almost 9%. This is the ninth time in 15 months that there has been an increase in interest rate inn an attempt to at least plateau inflation.

The repo rate, at which the RBI provides credit to banks, increased from 6.75% to 7.25%. The reverse repo rate, which from now onwards will be 100 basis points below the repo rate as a rule, has also gone up by 0.50 percentage points to 6.25 %.

Finance Minister Pranab Mukherjee on Tuesday said the increase in the key rates was necessary to contain inflation. He stated that "this (rate hike) was necessary to contain inflation. Inflationary pressure in the economy is still very high."

RBI has pegged the year-end inflation at 6 % (hopefully!)

 ''Reward for investors won't be very high in rate sensitive stocks and bearish on these stocks in the near term. The rate hike will hurt companies without pricing power," said Ramdeo Agarwal, co-founder and director, Motilal Oswal on ET Now. 

The extent of how much these companies may be effected is only a prediction .(but only 7 out of 25 analysts predicted this increased interest rate, so who can trust what the predictions are anyway?) Watch this space for updates!

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