Divergent views on new monetary policy

MUMBAI: Confusion over the direction of interest rates, ahead of the monetary policy review on January 29, and a weak global market dragged down the Bombay Stock Ex­change index extending loss­es for the fifth straight session on Wednesday.

Interest rate sensitive sec­tors such as banking, realty, metal and automobile wit­nessed a sell-off in the equity markets. Lower opening in European markets triggered further selling.

The BSE 3O-share sensitive index, Sensex, opened 72 points lower at 16708 (the day's high), extended its loss­es and touched the day's low of 16231 before closing at 16289.82, down by 490.64 points. The 50-share Nifty of the National Stock Exchange breached the crucial 5000 and 4900 levels before clos­ing 154.80 points lower at 4853.10. All sectoral indices were down led by realty which lost 7.97 per cent on the BSE. Metals were down by 5.82 per cent, automobiles 4.78 per cent and bank stocks dipped by 4.19 per cent.

Of the 2,944 stocks traded on the BSE, 2,581 declined, whereas 338 stocks advanced. Twenty-five stocks closed unchanged.

All the major Asian indices closed lower with the Shang­hai Composite breaking the 3000-level, closing at 2986. SGX Nifty fell 153 points. Ja­pan's Nikkei closed at 10252.08, down by 73.20 points. European indices were trading lower in early trades on Wednesday and the U.K.'s FTSE-100 closed 60.28 points down at 5216.57.

While writing this report, U.S. market indices — Dow, Nasdaq and S&P 500 - were down marginally.

The central bank (RBI) has to do a balancing act on rein­ing in inflation while sustain­ing overall growth momentum.

Already, the Government has announced a slew of fiscal measures to mitigate infla­tionary pressure on essential food items, through public distribution system.

While the central bank re­views monetary policy, it is widely expected to raise the Cash Reserve Ratio (CRR) to suck out excess liquidity in the system which market par­ticipants view as a negative measure. However, the hard reality is that the RBI has to contain liquidity in the sys­tem which is giving a push to inflationary pressures.

There are pergent views on the expectations of the forthcoming review on mone­tary policy, which are sending confusing signals to the market.

"The most probable scena­rio is a 50 basis point hike in CRR. This will be the next logical step in the scheme of things as per the 'second phase of exit' and recent RBI rhetoric on vigilance on in­flation and imbalance in the pattern of growth," said Dee-pali Bhargava, Chief Econo­mist, ING Vysya Bank.

"Even as the domestic economy is set on the revival mode, there are some chal­lenges that have emerged on the policy front. One of the most urgent concerns per­tains to mounting inflation­ary pressures, and RBFs possible response to the same," said Kaushal Sampat, COO, Dun & Bradstreet.