An ease in the Reserve Bank of India’s (RBI) monetary policy, coupled with slowing growth and decline in global commodity prices, are likely to have a positive impact on the country’s economic fundamentals like interest rates, inflation and trade deficit in a highly unforeseen way in the next 12 months, said a Credit Suise report.
The report said economic data, which were worrying in mid-2008, could improve at a substantial speed by mid-2009 on account of the monetary policy support and the pace of domestic economic adjustment, along with changes in commodity prices.
“The monetary policy support being provided (in India) is truly extraordinary and as things normalise — as they surely will — deposit and lending rates could fall by 300-400 basis points, if not more, by 2009,” the report said. Monetary measures such as reduction in the Cash Reserve Ratio (CRR) by 250 basis points and a strong possibility of further cuts in Statutory Liquidity Ratio (SLR) and short-term repurchase rates, would result in a decline of cost of capital by 300-400 basis points in the next three months.
With steel and petrol prices expected to come down, the report also argued that the headline inflation could fall to 3 per cent by the third quarter of 2009, and this would further help in reduction of cost of capital.
Again declining growth and commodity prices could cause trade deficit to the current account deficit by mid-2009.
“A mending of these vulnerabilities would prepare the ground for an excellent economic revival and a market climb, post-elections. The more the market falls in the near term, the more long-term investors should focus on the possibility of reversals while bearing in mind three major interim risks: currency, politics and banks’ asset quality health,” the report added.