Real interest rates reasonable compared with other countries

The real interest rate on the 10-year bond, taken as the difference between the nominal yield and CPI, is one of the highest for India, at 2%, after the UK's 2.4%

The Reserve Bank of India (RBI) undoubtedly has its reasons for not lowering interest rates. With money supply (M3) continuing to grow at 23.9% year-on-year and with high international fuel and wheat prices, the central bank's caution is understandable.

But is RBI being too cautious? Compare the consumer price index (CPI) with the yield on the 10-year government bond for a number of countries. The real interest rate on the 10-year bond, taken as the difference between the nominal yield and CPI, is one of the highest for India, at 2%, after the UK's 2.4%.

Consider, by way of contrast, the negative real rates for China at -2.6%, Singapore at -2.1%, Thailand at -0.6%, the US at -0.4%, and South Africa at -0.3%. At first glance, this comparison does seem to suggest that interest rates in India are too high.

But the real interest rate is the difference between the nominal yield and the expected rate of inflation, rather than current inflation. If we take the inflation forecasts by the Economist Intelligence Unit/Economist Group polls for each country, the picture that emerges is very different. With inflation forecast at 6.1% for 2008, the real yield on the Indian 10-year government bond dips to a more reasonable 1.4%. That's lower than the real yield (computed on the basis on inflationary expectations) for South Korea, the euro area, the UK and even South Africa and Brazil.

In short, if you agree that the current inflation rate is not sustainable and prices are going to rise faster in the future, then Indian real interest rates are not too high. To be sure, the real yield in India will still be much higher than in China, Singapore, Thailand, the US, Japan, Indonesia, Malaysia or Russia. But it could be argued that the monetary policy in some of these countries is too loose. In short, RBI's stance does not now seem quite so out of whack with that of other central banks.

The bitter-sweet truth about sugar stocks
In the recent market correction, India's largest sugar mill, Bajaj Hindusthan Ltd, fell by 57% in three trading sessions.
The stock has since gained by 62%. Another large sugar company, Balrampur Chini Mills Ltd, fell 47% from its highs and has since gained by 35%. The difference between the intra-day high and low has averaged 15.7% this calendar year for Bajaj Hindusthan and 13.2% for Balrampur Chini. Leave alone investors, such sharp movement could even cause even traders to go weak in the knees. Last week, Reuters reported that sugar production in Maharashtra is likely to drop 30% compared with the production estimate for the year, based on its interview with the commissioner of sugar, Maharashtra. The news should have led to a rise in sugar stocks since a shortfall in production usually leads to a rise in prices. Instead, Bajaj Hindusthan fell by 9.6% and Balrampur Chini fell by 5.6% on the following day. The bitter-sweet truth about sugar stocks is that more than fundamental factors, such as demand and supply, they are driven by government policy on cane pricing, ethanol and the like. Throw in some court cases relating to these matters, and what one ends up with is extremely volatile stocks. The three-day crash in mid-January, which coincided with the overall market crash, was actually triggered when a Supreme Court ruling relating to cane pricing went against sugar mills.

As a result, market experts are advising an entry into sugar stocks only for gains, which means buy when the bout of selling intensifies and exit when stocks bounce back. In any case, it doesn't make much investment sense to enter the sugar sector a year ahead of general elections, since the government is likely to arrive at liberal cane prices for farmers.

Check Important Tools: Source : HT Mint

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