The highlights of the past week are :
- WPI rises to 7.52%. 14-month high.
- RBI keeps status quo on the interest rates.
- US Fed reduces monthly bond buying program by $10bn. Keeps interest rates low.
Close on the heels of the high CPI figures the WPI figures too shot to a 14-month high figure of 7.52%. Understandably the markets were on a low after such high figures were reported because it was felt that there is no choice left but to rise the interest rates once more in an effort to curb inflation.
But the RBI governor surprised everybody by keeping the interest rates unchanged on 18th December. However, there was a cautionary note that if the prices don’t ease then the interest rates may be raised. It seems that the RBI is confident that the good monsoons will show their beneficial effects and the prices will come down. Also, it is banking on the fact that the core inflation was steady at 2.6%. Also, by keeping the rates unchanged, the RBI has given a breathing time for the industry to improve and grow. The unchanged rates also signify that the economy has reached a state where we can adopt a wait and watch approach for however short a term.
The other development that was the highlight of the past week was that the US Fed finally reduced its monthly bond buying to $10bn signifying the much anticipated QE taper. But, in order to keep it light on the economy, it has decided to keep interest rates at a low for now.
Where the markets reacted to the RBI policy with much relief, at the same time the reaction to the QE taper was more cautious. The next week will bring in the full bearing of the QE taper and there is wide expectation that the effect will not be very negative. It is understood that though the taper may bring in some minor difficulties, the fact that the US Fed has decided to taper really signifies that the US economy is recovering and hence it is now not necessary to pump in easy money to support the economy.
As the year draws to a close we can expect the markets to have some more relief rallies as two of the most anticipated events of the month have in-fact brought in some sense of decisiveness into the market participants.
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