Andrew L D'Cunha

Mumbai, Dec 17: The Sensex closed the week on negative note down by 722 points at 15,491 whereas the Nifty closed at 4652, down by 215. Nifty has closed below the technical support level 4700 mark for the first time since November 3, 2009.

On Friday, sentiments were positive and market traded strong ahead of RBI’s monetary policy announcement. However, market witnessed a sharp sell-off during last 90 minutes on across the board selling. Investors started dumping stocks as RBI said that inflation remains on its projected trajectory with increased chances of downside risks to growth. During the week, the rupee is also fell to a low of Rs 54.20 per US$ before sale of $ by RBI pulled up the Rupee.

India's industrial output fell in October for the first time in more than two years as capital goods investment slumped. Production at factories, mines and utilities plunged 5.1 percent from a year earlier.

Inflation (WPI ) for the month of November stood at 9.11% against 9.73% in October.

For the week that ended on 3rd December, food inflation fell to a nearly four-year low at 4.35% reflecting a decline in prices of essential items like vegetables, onions, potatoes and wheat. This is the lowest rate of food inflation since the week ended 23 February 2008, when it stood at 4.28%.

RBI in its mid quarter policy review has kept the key rates repo and reverse repo rates unchanged at 8.5% and 7.5%, respectively while made important indications in terms of reversing the rate hikes going ahead. It also did not revise the cash reserve ratio (CRR), which stands at 6% and the statutory liquidity ratio (SLR) at 24%.

Since last two years RBI was focusing on controlling the inflation. Now, by keeping the key rates unchanged, RBI has shifted its focus towards Growth. In October, the RBI, for 13th time since March 2010, increased repo (the rate at which the RBI lends money to banks) and reverse repo (the rate at which the RBI borrows from banks) rates by 25 basis points (bps) each to 8.5% and 7.5%, respectively to control inflation. The series of rate hikes has cumulatively increased interest rates by 525 bps in the last 20 months. RBI expressed the concerns on the GDP growth due to deterioration in domestic and global environment.

While accepting that there is deceleration in growth due to past monetary policy tightening and domestic policy uncertainties, the RBI, said, “From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth.”

“However, it must be emphasised that inflation risks remain high and inflation could quickly recur as a result of both supply and demand forces. Also, the rupee remains under stress. The timing and magnitude of further actions will depend on a continuing assessment of how these factors shape up in the months ahead,” the central bank said in a statement. Welcoming the central bank's move, Mukherjee said the RBI has chosen to address the concerns on slowing growth. "... Governor has chosen to reflect his concern on growth which has altered in the past few months," the finance minister said.

"I am hopeful today's announcement will help in regaining our growth momentum with improved macro economic parameters in the remaining period of fiscal 2011-12," Mukherjee told reporters here while reacting on the RBI's mid-quarter review of monetary policy.

Andrew L D'Cunha, Managing Director, WinWin Fin Advisory Pvt. Ltd. Mangalore. Email: finadvisoryltd@yahoo.com