RBI Monetary Policy Review

Appropriate Decision on rate cut by RBI

Yesterday all market analysts, government, and economist was eagerly waiting for  monetary policy review by Reserve Bank of India (RBI).  In my personal opinion RBI governor has done fantastic job. I congratulate him for doing balancing act although it is very tough task in present context. The finance minister is not happy yesterday’s RBI monetary policy review and has decided to go alone on reform agenda.  At the second quarter review of the FY2013 monetary policy the RBI reduced the cash reserve ratio (CRR) by 25 basis points to 4.25% but kept the policy rates unchanged. Due to the uneasy inflation and uncertainty in the commodity prices driven by global liquidity the central bank continues to hold the policy rates. 

According to the RBI, the inflation rate could moderate towards the beginning of 2013 quarter and after that the policy rate may easy. RBI has also revised the GDP (Gross Domestic Product) and inflation target 5.8% and 7.5% respectively. The RBI had two choices here whether he choose growth or choose inflation. No doubt growth has also declined when we compare it with other countries. It is clear that RBI much concern about control the inflation and in other words say, RBI governor is fighting against inflation. I also believe that bringing down inflation is necessary for sustaining our medium-term growth.  Why is inflation remain uncomfortable during entire UPA government tenure.  After analysing this there are two main reasons come out. One if inflation is due to supply side problem and higher interest rate are not going to help it easy. The other reason is increasing spending power of the people. The people are more spending on food and change in consumption patterns. It is also the main reason for inflation. Whether supply is less or demand is high it is the crucial assessment.

Obviously it is the complex challenge of supporting growth and control inflation for RBI. The CRR cut is to make sure that there is comfortable liquidity to allow the credit to go into productive sectors and that liquidity is in deficit, but that deficit is small enough for transmission to take place. Managing inflation is as important as the growth. If we success to achieve low and stable inflation then consumers and investors can make informed decisions.  Fpr investor stable inflation will ensure their  medium term growth. It may be possibly because our currency exchange rate is depreciating and possibly because we have a higher fiscal deficit. So there are number of reasons our country is having high inflation in our growth model.

From government’s newly provided roadmap of reforms till 2017 the RBI has got some comfort on the fiscal figure. We expect the RBI will reduce the CRR rate by another 50 basis points and also cut the key policy rates by the same measure in the remaining part of the fiscal year. 

If you have any query regarding investment please feel free to ask.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

RBI Cuts CRR and leaves Repo Rate Untouched

Today, The Reserve Bank of India (RBI) left interest rates unchanged but cut the cash reserve ratio for banks by 25 bps, saying the primary focus of monetary policy remains fighting inflation, days after the government unveiled a string of reforms to boost growth and improve its fiscal position.

The RBI left the policy repo rate at 8 percent. The RBI cut the cash reserve ratio (CRR), the share of deposits banks must keep with the central bank, by 25 basis points to 4.5 percent in a move it said will inject about 170 billion rupees of liquidity into the banking system.

The rupee and bond prices weakened immediately after the RBI decision, with the yield on the 10-year bond rising 5 basis points from before the RBI statement to 8.17 percent. The one-year swap rate rose 8 bps to 7.68 percent from before the release. The sensex and nifty have also seen some decline from their respective high after immediate RBI policy announcement.

"The government's recent actions have paved the way for a more favourable growth-inflation dynamic by initiating a shift in expenditure away from consumption (subsidies) and towards investment (including through FDI). However, in the current situation, persistent inflationary pressures alongside risks emerging from twin deficits-current account deficit and fiscal deficit -- constrain a stronger response of monetary policy to growth risks" the RBI wrote in its policy statement.

On Thursday, the government announced a sharp increase in the price of heavily subsidised diesel. It had unveiled a slate of measures to rein in a ballooning fiscal deficit and avoid a credit rating downgrade to junk. However, for common man it has become very difficult to run their daily life expenses and govt has its own target to control fiscal deficit devil.

The RBI has held borrowing costs steady since a deeper-than-expected 50 basis point cut in April, and has repeatedly called on the government to do its part by improving its fiscal position, which had fuelled some expectation that it might cut rates as a gesture in reply to the government's moves.

Govt’s diesel price hike decision had initially prompted market participants to speculate that the RBI may lower interest rates on Monday, but a spike in August inflation data on Friday from July's near three-year low put a damper on such expectations. India's wholesale price index rose a higher-than-expected 7.55 percent in August from a year earlier, mainly driven by higher food prices.
The govt seems serious about reform this time. The diesel price rise will aggravate short term inflation. But, along with the measures unveiled Friday to liberalise ownership of supermarkets and other industries, it shows the government is serious about fiscal consolidation and encouraging investment, and may make RBI more inclined to ease monetary policy sooner than later.

The government kicked into gear late last week after a wave of corruption scandals had weakened it and led to months of little substantive policy action, souring investor sentiment and putting at risk India's investment-grade credit rating.
So we can say, RBI has made a balancing act and kept an eye on inflation also. Now it is important how well and soon govt’s reform measures for growth would be implemented. There is also a strong fear that the announced measures may be stuck in opposition’s strong movement against these reform policies.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Fine Balancing  Act of RBI

From last one week all economic analysts have been given their opinion about RBI interest rate. Economists polled by Reuters had forecast a rate cut, most likely of 25 basis points, while some government officials had also been calling for a rate cut. In my personal view, RBI has done fine balancing act and my sincere thanks to RBI governer for the appropriate decision at this crucial time. There was no need to rate cut at this moment when inflation no. is not comfortable.


After unchanged interest rate many analysts and economist will be certainly disappointed about growth. India's economy has been slowing sharply due to a combination of factors such as high borrowing costs, government inaction on key policies and sluggish global environment. 


The RBI kept its policy repo rate unchanged at 8 percent and left the cash reserve ratio for banks at 4.75 percent.The RBI obviously feels that inflation pressures remain too strong to ease policy further from here. The RBI has taken a very cautious step and has given a signal that it would like to wait for comfortable inflation figure.  Although it is very tough to contain both factor inflation and growth simultaneously. In my point of view, inflation is serious threat to us. First, inflation should be controlled because in last couple of  years inflation has been uncontrollable. Every person has been affected from this serious problem. 


Earlier in the day, CLSA economist Rajeev Mallik summed up the situation pretty well when he compared India's economy to a truck which was having problems. "The problem is in the gear box (government policies), adding more fuel in the tank (through interest rate cuts) is not going to solve the problem," Mallik told CNBC-TV18.


There are many reasons, cited by the RBI for not reducing interest rates:


* Estimates suggest that real effective bank lending interest rates, though positive, remain comparatively lower than the levels seen during the high growth phase of 2003-08. This suggests that factors other than interest rates are contributing more significantly to the growth slowdown.


* There are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small. Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could increase inflationary pressures.


* Should there be an event shock (in the Eurozone), central banks in advanced economies will likely do another round of quantitative easing. This will have an adverse impact on growth and inflation in emerging and developing economies (EDEs), particularly on oil importing countries such as India, through a possible rebound in commodity prices.


* Though international crude prices have fallen significantly from their levels in April 2012, the rupee depreciation has significantly offset its impact on wholesale prices.


* Moderation in wholesale price inflation has not transmitted to the retail level. Notwithstanding the moderation in core inflation, the persistence of overall inflation both at the wholesale and retail levels, in the face of significant growth slowdown, points to serious supply bottlenecks and sticky inflation expectations.

Regards,

Arvind Trivedi

Certified Financial Planner


(The above article based on money control news)

Will RBI going for another rate cut......?

Now market experts, industry leaders, economists are thinking about that “Is RBI going to another rate cut on this 18^th June ?” This is the big question in mind of everyone. The People’s Bank of China, the central bank, cut the official one-year borrowing rate by 25 basis points to 6.31 percent and the one-year deposit rate by a similar amount to 3.25 percent. Now that China has done, India which has seen its economic growth take a major hit, is now under more pressure to follow suit. Ever since RBI Deputy Governor  Subir Gokarn hinted that there is now more elbow room to cut policy rates thanks to lower global crude oil prices and weakening core inflation, hopes have been running high.
India’s economic growth slumped in the January-March quarter to a nine-year low of 5.3 per cent confirming an economic slowdown and sending negative signal across the industry. The disappointing GDP figures require an immediate action by the central bank while the market is also expecting the government to roll out certain measures.

In the last monetary policy, RBI cut the repo rate (its main policy rate) for the first time in nearly three years in April by a steeper-than-expected 50 basis points (100 basis points = 1 percentage point.) At that time, the central bank warned that further rate cuts could be difficult because of persistent threats to inflation from food and fuel prices.

Due to sharp slide in growth, there might be pressure on the central bank to place the issue of growth before inflationary concerns. While expectations for a rate cut grow, many economists and traders say only policy reforms by the government can revive growth. Now interest rate cuts by the RBI are only a quick fix to growth. Without fiscal tightening only rate cut in RBI monetary policy will likely increase inflation further and lead to economic instability.
Now time has come our government should make some major policy decision and should not depend on our central bank’s policy.

Regards,

Arvind Trivedi

Certified Financial Planner