MAGIC’S IN THE AIR Is It Us or The Rain?

The Economic Times - - Companies - Joel Re­bello & Ram Sah­gal

Mum­bai: Fall­ing in­ter­est rates, lower EMIs on ev­ery­thing from cars to houses and fall­ing prices of ev­ery­day items. You may not have to pay through your nose for pulses and veg­eta­bles this year and the stock that you bought last year at the height of the boom may start show­ing signs of re­vival af­ter be­ing down in the dumps so far. What’s not to like in the IMD’s mon­soon forecast for 2016. Its pre­dic­tion of abovenor­mal­rain­sacross­much of In­dia boosted ru­ral-fo­cused stocks and stoked hopes of another in­ter­est rate cut this year.

Growth: Bet­ter mon­soon means stronger agri­cul­ture growth. Mon­soon may push farm growth higher to more than 3% which will add 25 to 50 ba­sis points to In­dia’s GDP.Spinoff ef­fect­sof high­er­ru­ral de­mand could en­sure that growth could cross the mag­i­cal 8% mark.

In­fla­tion: A bet­ter mon­soon will en­sure enough wa­ter for ir­ri­ga­tion which will keep food prices down and lower food costs will en­sure house­hold in­fla­tion ex­pec­ta­tions are in check.

In­ter­est Rates: Lower in­fla­tion will give the RBI more room to re­duce its bench­mark lend­ing rate which means lower bor­row­ing costs for com­pa­nies. Mar­kets ex­pec­ta­tions are that the RBI will re­duce rates by at least another 25 ba­sis points. If in­fla­tion is low, it could mean rate cuts will be more.

Gov­ern­ment bonds: Lower rates could re­flect on gov­ern­ment bond yields. The yield on the 10-year bench­mark bond has eased to 7.40% al­ready. Lower rates and the re­cent liq­uid­ity mea­sures by RBI could pull the yield down fur­ther.

Ru­pee: High growth and bet­ter cor­po­rate earn­ings could at­tract for­eign in­vestors to the lo­cal equity mar­ket which will push the ru­pee higher. The cur­rency could rise to­wards ₹ 65 a dol­lar.

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