Musings - II

Finally, as expected, China has raised bank's reserve ratio by 0.5%, which means that the Chinese banks will have to deposit an additional 0.5% of their total deposits with the Chinese central bank. This is expected to suck out nearly USD 50 bn from the Chinese financial system, which will help in keeping inflation in control / even reducing inflation. 

Now, this move is mostly to account for excess cash flowing in from the US, courtesy US Fed (QEII - in which US is printing over USD 600 bn of paper currency). But US is going to release this money in phases till April next year...so expect China to keep an upward pressure on interest rates and RRR (Reserve Requirement Ratio) to keep absorbing this money.

As yet, RBI has kept quiet regarding reaction to QE II funds flowing in into the Indian economy. However, if RBI feels "compelled" to do something about it, they will also likely hike the reserve ratio to suck out liquidity from the system, just like China, and not  tinker with the interest rates as it will directly hit the growth rate.


[Also, regarding such opinions given in Economic Times "...Realty Stocks are showing signs of life"...if I were you, I would not believe it much, 'coz if RBI takes any liquidity tightening measures, realty stocks will be the first to go down.]

Besides, Europe's problems are far from over...once the Ireland insolvency issue is sorted out, Poland / Spain will crop up...probably in that order ! And once again the world will be looking at Euro as an unsustainable currency and the ensuing chaos.

These factors, in my view, are going to be some of the biggest factors in keeping upward moves in markets in check...As I've pointed out in my previous posts here and here, the markets are expected to move down some more before pointing up. RBI still shows no signs of doing anything about curbing the inflow of QE II money, which will probably be the stance till the IPO  / FPO calendar is mostly done (MOIL, SCI, SAIL, ONGC, EIL, OIL, and some more) coming up between now and March 2011. So expect some see-sawing in the markets for the next months...with markets going up with QE II money pouring in and coming down as China increases its interest rates  giving markets jitters about the demand. I don't know (or think) if the markets are going to go majorly in any direction in the near term (now - 6 months), but I think the volatility is going to increase from here.