Traders worry that Indian rate policy is too slow

The Reserve Bank of India is on the longest campaign of interest rate tightening in recent memory, but traders are still moving away from both Mumbai stocks and the rupee.

Today’s 25-basis-point move is the tenth in a row, bringing the benchmark repo rate to 7.50%.

Unfortunately, inflation in India is also accelerating — faster than interest rates are rising to counter it — and this is part of what has been driving the country’s stocks down 14.3% from their November peaks.

Consider this: the Indian wholesale price gauge recently marked an annualized increase of 9.06%.

Indian interest rates are only 7.50%.

In other words, real interest rates are still negative. Assuming that all the parameters remain relatively steady, every rupee you borrow today stands a good chance of being worth less when you pay it back — even after adding in the interest.

Granted, there is nothing to guarantee that inflation will remain so robust. But in the meantime, it seems that the only impact of all these rate hikes is that it has become a lot more expensive for Indian companies to borrow or refinance their existing debt.

This, in turn, slows these companies’ expansion and erodes their profitability.

And with India’s central bankers warning that “short-term deceleration in growth may be unavoidable,” the odds of a slowdown for Mumbai are rising.

Bottom line: Not a happy scenario for Indian funds like INP (quote) or PIN (quote):

While the technical situation may provide opportunities for chartists to move in or out and make money, the global markets simply need a sense that the central banker in India are ahead of the curve — not behind it.

Meanwhile, the rupee (quote) and funds like ICN (quote) will have tough sledding ahead.

  • Andrew

    Was wondering why you would recommend buying Tata Motors now on Fast Money if the Indian economy has accelerating inflation and negative real intrest rates?