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Higher growth rates in the US cast doubts on the rate easing

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Higher gross domestic growth (GDP) reported in the United States have forced the markets to turn skeptical about the rate easing cycle in India. The US economy grew at its fastest pace in over a decade with the economic output rising at an annual rate of 5 % in the third quarter according to the data put out by the US commerce department, sharply revising its earlier estimate of 3.9 %.

This led to both, the government bond and the foreign exchange markets in India, to believe that the pace of interest rate easing in India may be impacted as India will be forced to keep interest rates high to make foreign institutional inflows and other investments into India attractive.

Rajat Monga, senior group president and chief financial officer, YES Bank told dna, "there is a shadow in the rate easing cycle but rates will certainly be eased in India, the extend may be less though. The revival of growth in US will certainly impact rates in India but it is not an overbearing development to curtail the easing cycle here."

The rates in US are less than 1 % while in India it's over 10 % while the repo rate at which the central bank lends to banks is at 8 %. If US rates go up in US, foreign institutional institutions that keep our equity and debt markets buoyant could pull out thereby creating a havoc in the markets.

The rupee traded on a weak noted tracking stronger revision to Q3 GDP growth of US, in turn raising concerns over the rate tightening cycle. Strong demand for dollars from corporates also impacted the rupee negatively. The rupee closed at Rs 63.53 to the dollar at close of trade on Wednesday. The G-Sec market opened slightly weak in the backdrop of strong US data and the resultant hardening of treasury yields.

The market then held levels and improved slightly in the wake of official announcement by government over the cabinet approval for ordinance route for coal and insurance reforms. However, the market then fell tracking weakness in the domestic currency, amidst a shortened trading week and muted volumes. The yields thus closed 3-4bps higher over previous day. The benchmark 10-year bond with a coupon rate of 8.40% closed at Rs 102.90 implying a yield of 7.96%.

However, slowing growth in various economies may still be saviour for India. According to NS Venkatesh, executive director, treasury IDBI Bank, "it may not impact the rate easing cycle in India as growth is decelerating in most major economies like China, Eurozone, Russia. With inflation coming down it is but inevitable that interest rates in India is poised to come down."

The government bond market improved slightly in the wake of official announcement by government over the cabinet approval for ordinance route for coal and insurance reforms. However, the market then fell tracking weakness in the domestic currency.

With retail inflation at 4.3 % and whole sale price inflation (WPI) at zero for the month of November, as it remained at the same level as last year, there was growing hope that the interest rates may be eased in India. Reserve Bank of India hinted at easing interest rates when it unveiled its fifth bi-monthly credit policy on December 2. It said, "if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle."

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