Before the market opens there are 3 main issues that is going to determine this week ahead. Result of the Greek elections , Reserve Bank of India (RBI) credit policy review later today — if a rate cut is not going to stimulate investment, but has the potential to stimulate inflation. Not to forget clarity on the likely successor to finance minister Pranab Mukherjee.
From Greece‘s pro-euro conservatives win election, official estimate says which looks positive to the Asian markets. The Euro cup 2012 also lands in to the irony Germany vs Greece in the next round of Euro 2012 otherwise known as “The Bailout Game 🙂 .
Returning back to India the probability is high that RBI may cut the benchmark interest rates, all of us know that it will not be effective to fix the problems of the economy, why ? A slowing economy, falling industrial output. GDP growth hit a 9-year low of 5.3% for the March quarter. IIP for April was a muted 0.1%.
The Private investment or the productive capacity addition has been dried up in the last 4 years. Monetary policy will be less effective in dealing with the effects of a stagflation-type environment. For an effective reduction in the cost of capital, the efficient cycle would be reduction in public expenditure (fiscal deficit) which helps to reduce consumption; increase savings and thus lowers the current account deficit and inflation pressures.
Govt. present policy stand will keep the fiscal deficit high and therefore the current account deficit and inflation will remain a challenge will it difficult to lower the short-term cost of capital.This might lead to degradation in the growth . A rise of hope could be if the PM takes charge of things as the government finalizes the new finance minister with Pranab Mukherjee seen as India’s next President. The market is hoping that the Prime Minister Manmohan Singh will take charge of the finance ministry too to push through some much-awaited reforms.