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The economic value of cutting prices should not be underestimated. In March 2004, Procter & Gamble cut prices of Tide by 47% and Ariel by 28%, challenging Hindustan Lever’s pole position in this market. HLL responded in like and a furious battle ensued. How this ended is another story. What’s relevant is this: P&G’s volume growth did increase, but HLL’s growth did too, and so did its market share. Continue Reading →
The Reserve Bank of India (link) did the predictable by holding on to rates at current levels in its quarterly monetary policy review. The repo rate has been retained at 7.25% and the reverse repo rate has been kept at 6.25%. Repo is when banks borrow from the RBI to meet temporary funds requirement and the reverse repo is when banks park surplus funds with the RBI.
The Reserve Bank of India disappointed those who were looking to it, to complete a troika of measures to lift up investor sentiment. Last week, the European Central Bank said it would buy sovereign euro bonds without any limit, and the US Federal Reserve said it would launch a quantitative easing program that would continue for as long as economic conditions remained weak. Then, the Indian government followed up with a series of reforms, including cutting diesel prices and allowing FDI in a few high profile sectors.
Some large public sector banks have begun cutting rates of fixed deposits and loans, despite no change in the Reserve Bank of India’s stance towards interest rates. The RBI has held that inflation is an overriding concern, and holding interest rates high may affect growth but will help in curbing inflation. So, what explains the action of public sector banks?
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The Reserve Bank of India held benchmark interest rates constant and left liquidity untouched, and did not cut the cash reserve ratios, as was being speculated. But that was not the big takeaway from the credit policy announcements.
The central bank has indicated that it is done with interest rate hikes, given signs of moderating inflation and slowing growth, and will now shift to using interest rate cuts to jumpstart growth again.
The Reserve Bank of India’s credit policy announcements met expectations, except of those people who thought today will signal the end of the rate hike juggernaut. The few who feared the RBI may hike the repo rate by 50 basis points were off the mark, however. The majority were expecting a 25 basis point hike, which is what the central bank has done.
Inflation for the month of July shows a slight dip to 9.22%, compared to the 9.44% seen in the previous month. One could argue if a drop of one-fifth of a percentage point is significant, but lower inflation, however small the actual decline, is a good thing.
The government releases overall inflation data monthly, while primary inflation data (food and non-food) and fuel price behaviour is released on a weekly basis.
Is this a blip or something more? India’s primary inflation data –includes food and non-food articles or basic inputs- shows inflation for the week ended July 30 at 12.22%, marking a sharp upturn from 10.99% in the previous week.
State-owned banking giant State Bank of India yesterday announced a sharp hike in lending and fixed deposit rates effective May 12. Last week, the Reserve Bank of India acted to contain inflation, which stubbornly remained higher than its targeted range (even after being revised repeatedly). The central bank hiked the repo and reverse repo rates by 50 basis points and hiked the interest rates on savings bank balances to 4% from 3.5%.
The Reserve Bank of India (RBI) stuck to its trajectory of calibrated rate hikes in the current credit policy too. It hiked the repo rate by 25 basis points to 6.5% and the reverse repo rate also by 25 basis points to 5.5%. The repo rate is what banks pay to the RBI to borrow funds to meet short term liquidity needs and the reverse repo rate is what they get from the RBI, when they park surplus funds with the central bank.