Lower interest rates, cheaper dollars—what does all this have to do with us?

Madhu T
THREE events stood out in financial market events last week.

First, the US Federal Reserve’s cut the Fed Fund Target rate by 50 basis points to 4.75%, saying the action was “intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.” Predictably, financial markets worldwide greeted the news happily, registering gains. India’s favourite market barometer, the BSE Sensex, was no exception, providing the second highlight of the week.

The market benchmark posted its largest single-day gain of 653 points to zoom past the psychologically-significant 16,000 mark.

And thirdly, the rupee breached the Rs 40 per dollar mark, its highest level in nine years.

As you probably reckoned, the first development has implications for the interest rate scenario worldwide, including India. The second development is directly linked to all our long-term investments in stocks. And the third one, the rise in the rupee, will have different effects on different sectors of the economy: exporters will feel the most pain, while importers and those who travel abroad will save. “These events clearly demonstrate how interlinked the global economy is. A rate reduction in the US had a huge impact on the global financial market, including our country, which is still largely considered a closed economy. And look what robust foreign inflows have done to the rupee—it is appreciating in value every passing day,” says a senior banker. “This shows that investors need to be aware not only of domestic events, but also of major developments abroad,” he adds. Let’s look at the past week in a little more detail, and consider what impact it might have on your investments and borrowings. Interest rates With the US central bank cutting its interest rate after nearly four years, will the RBI also follow suit? Journalist Sujit Raj, who had hesitated to take a home loan a year and a half ago because interest rates were rising, wants to know just one thing: “Will the interest rates on housing loans come down?” Now, he wants a loan as soon as interest rates come down, because there is no other way he can afford to buy a home. “I don’t think the real estate prices will come down drastically, especially in Mumbai. Prices have declined a bit, and seem more or less stable. Now I don’t want to wait anymore; I want to buy a house this year,” he adds. Says a money market analyst, “I don’t think the Reserve Bank is going to follow suit anytime soon. It is still concerned about robust growth in some areas, like retail loans and real estate prices. That means asset prices continue to be a problem.” He adds: “Also, since industry is growing at 9%, it wouldn’t want to slash rates. You have to remember that there is not much of a drop in the credit offtake from banks, and also asset prices haven’t fallen as much as the RBI would like. Real estate prices are a case in point.” Aravind Chari, fund manager, fixed income, Quantum Mutual Fund, feels it is “way too early to even think of a benchmark interest rate cut. The growth is strong, credit off-take is picking up, and concerns remain on inflation. Depending on the liquidity and credit off-take situation, the RBI has the leg room to alter the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) in the coming months.” That means if Sujit Raj waits until rates drop before buying house, he may still be a tenant for quite a while. However, experts advise first-time home buyers against timing the market: since you are buying a house to live in, price appreciation or depreciation shouldn’t be your primary concern. Of course, if you’re buying a house for investment purposes, it makes sense to buy at the right time. Stock market That brings us to our second question: what is in store for stock market investors? Actually, it looks as though the market has already answered that one. “The market is going to go up further,” says a mutual fund manager. “A slew of good news is pushing it to new highs. I think the uptrend would continue for a long time, say, at least five years.” “Apart from the Fed, the government approval of Reliance’s gas pricing has sent a positive signal to the market,” says Kisan R Choksey, chairman, KR Choksey Shares and Securities. “Now you know what it takes to set up power plant or a fertiliser factory. It cleared up a lot of uncertainty about the government policy. This is clearly reflected in the huge gains made by all the Reliance group shares.” Experts expect foreign fund inflows to continue to be robust, as the economy looks set for continued growth at a strong pace. Says Choksey, “Going by company order books, it is evident that domestic demand is strong. Now, the only question is whether these companies have the scalability to meet the demand. If the monsoon is normal, I don’t think we have much reason to worry about the growth of the economy.” And what words of advice do the pundits have for the average investor? “Stay invested. The whole world is bullish about the Indian economy. So have faith that the economy will deliver goods,” says the fund manager. “The Indian economy is going to grow at a great pace for the next eight to 10 years. Invest in good companies and you can earn handsome returns,” says Choksey.

(Source: TOI Mumbai, Your Money, 25th Sept.2007)