>KARVY BAZAAR BAATEIN 23 MARCH to 29 MARCH'09

On the road to deflation?
The week was marked by a historic event when inflation came in at a low of 0.44% as of March 7 against 2.43% recorded the week earlier. Clearly, this low inflation level can be attributed to the high base effect considering that this is a year-on-year indicator. The meltdown in commodity prices, including crude oil and base metals, has been so steep that input prices fell sharply during the period, bringing inflation to near-zero levels. Over the next few weeks, inflation is expected to turn negative, as the commodity decline seeps into the system. However, economists are of the view that we will once again revert to positive inflation levels given that commodity prices have more or less bottomed out and a huge amount of liquidity has been pumped into the system. In other words, while we may be technically entering into a deflation—with negative inflation—due to the high base effect, there is little to indicate that the macroeconomy will undergo the severe pains of a typical deflationary scenario.

So with inflation at 0.44%, do we see the RBI cutting rates further now that it has even more leeway to do so? Well, the RBI has been aggressively reducing interest rates, but the banks have not responded in equal measure, preferring to park their funds rather than lend it out. However, while lending rates may fall in future, banks believe that any delay in economic revival, say, in the second half of the current calendar year would result in a short-term rise in NPAs.

Meanwhile, it was an eventful week in the global markets, when the dollar hit its two-month lows against the euro on the Federal Reserve’s plan to buy bonds and long-term treasuries to revive the economy. Besides raising inflation levels, this move was perceived to put pressure on yields, which would prompt investors to look elsewhere for higher-yielding assets. With the dollar taking a hit, dollar-denominated assets, including gold, crude oil and base metals, witnessed a rally during the week. Ditto for equity markets worldwide. For the week, the Nifty and the BSE Sensex rose 3.23% and 2.40%, respectively. The Nifty is expected to hover in the 2700-2900 range until expiry, and any instability on the global front should again induce profit-taking from the highs.

To see full report: BAZAAR BAATEIN 230309