Another Stimulus Package: Rate cuts

Reserve Bank of India cut Repo and Reverse Repo Rate by 50 bps. Repo rate, the rate at which central bank (RBI) lends to banks is now at 5%. Reverse Repo is the rate at which central bank takes money from banks is now at 3.5%. This was very much expected for quite some time with growth as a key issue and inflation quite low (As Rate cuts can take inflation higher, but inflation is already at a low of 3.2% now) RBI cut rates to infuse more credit. Banks are now expected to cut lending rates. Though there is no change to CRR, as RBI believes there is enough liquidity in the system.

This Rate cut is done after worse than expected figures across the globe. The global cues for this were:

1. US real GDP contracted sharply at an annualised rate of 6.2% in the fourth quarter of 2008
2. Unemployment rate in the US has moved up to 7.6%
3. The real GDP in the euro area also declined by 1.5% in the fourth quarter of 2008
4. Japanese exports fell by 45.7% in January 2009
5. Japanese economy also contracted sharply by 3.3% in the fourth quarter of 2008

In short the major effect of these cuts could be:

1. Cheaper loans and lower deposit rates by banks
2. Better GDP figures for the 4th quarter
3. Increase in inflation by small amount
4. Weakening INR against USD

There have been series of rate cuts since Dec '08:

Reverse repo rate (%)
Jun 8 ‘06	5.75
Jul 25 ‘06	6
Dec 8 ‘08	5
Jan 2 ‘09	4
Mar 4 ‘09	3.5

Repo rate (%)
Oct 20 ‘08	8
Nov 3 ‘08	7.5
Dec 8 ’08	6.5
Jan 2 ‘09	5.5
Mar 4 ‘09	5

28February2009

GDP growth of Indian at 5.3%

GDP growth of India (12 largest GDP of the world) is estimated at 5.3% for the October –December 2008 quarter, which is a 6 year low. This is mainly caused by 2.2% decline in agricultur and 0.2% decline in manufacturing sector.

First 9 months of this Fiscal GDP growth now is 6.9% (Q1: 7.9%, Q2: 7.6%, Q3: 5.3%). Projected growth for this year was 7.1%. Now to get this projected growth last quarter should have 7.7% growth. Considering recession, growth of last quarter is expected to be around 5% and so we"ll miss the projected growth by quite a margin.

How GDP is calculated?

The method of Calculating India GDP is the expenditure method, which is,

GDP = consumption + investment + (government spending) + (exports-imports)

i.e. GDP = C + I + G + (X-M)

The other two methods of calculating GDP are Product wise (Calculating the total production) and Income wise (Calculating the total incomes received by factors of production - labour & capital)

Meanwhile, US economy shrunk by 6.2% for the same period of October-December 2008. This is its worst hit since 1982.

INR at 51.12 against Dollar

INR reached its all time low of 51.12 per dollar. This is mainly due to heavy demand for dollars. Dollar gained against Euro and Pounds yesterday. So, this gave opportunity to investors to buy dollars from India and sell it outside. Widening of Fiscal deficit from 2.5% to 6% already led Re to fall below 50 mark. Taking measures for growth RBI may further cut rates. This will further bring Re down. Another impact would be on inflation which has already reached to a low of 3.2%. We might see further fall in inflation in view of rate cuts and annualisation factor.