RBI's Third Quarter Monetary Policy

RBI’s Monetary Policy

Yesterday’s RBI’s monetary policy has surprised almost economic experts and advisers as majority of them had not anticipated the increase in interest rate. In its third-quarter review of monetary policy RBI has hiked the repo rate to 8.0% . CRR has remain unchanged. RBI has emphasised on bringing down CPI (Consumer Price Index) inflation to 8% and further bringing down to 6% in next 24 months.

It clearly indicate that the future move of interest rate depend on CPI mainly. I expect CPI inflation would be around 8.5% during 2014-15. However, in December headline CPI came down due to falling vegetable prices but core CPI inflation was still high at 8%. WPI (Wholesale Price Index) had also picked up in December 2013.

Difference between Headline CPI and Core CPI:

Very often we read and listen about headline CPI and core CPI but many people do not understand it. Core CPI index mainly consist with housing, clothing, bedding, footwear & miscellaneous items but it does not include food and fuel item. In the other side headline CPI includes food and fuel item also.

Along with inflation there is some weakness in currency front so it is another important factor for RBI for further monetary policy. There are still downside risk of rupee against dollar exist.

For more detail and any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

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

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

                                          RBI Monetary Policy Update

Today the Reserve Bank of India (RBI) cut the repo rate by 50 basis points from 8.5 per cent to 8.0 per cent but did not touch the cash reserve ratio, which remains at 4.75 per cent. The cut in the repo rate is an indication that banks could reduce the interest rates on home and car loans.

Today's rate cut announced by the RBI in its annual monetary policy for 2012-13 is the first one in the last three years. The reverse repo rate under the liquidity adjustment facility, determined with a spread of 100 basis points below the repo rate, stands automatically adjusted to 7.0 per cent.

In another good news for the consumers, the RBI has abolished the pre-payment penalty on home. Accepting the Damodaran Committee recommendations to abolish foreclosure charges levied by banks on prepayment of home loans, the RBI has instructed permit banks to not levy foreclosure charges/pre-payment penalties on home loans on a floating interest rate basis.

While announcing the credit policy RBI Governor D Subbarao said that the liquidity conditions were moving towards RBI's comfort zone and added that there was a need to increase fuel prices for macro economic stability.

After hiking policy rates for 13 consecutive times between March 2010 and October 2011, the regulator took a pause to support India’s falling growth momentum. On April 21, 2009; the apex bank had last reduced its key policy rates by 25 basis points. But, it cut the CRR by 125 bps so far in 2012 to ease the tight liquidity situation.

The latest rate cut move came in line with market expectation. Many felt, RBI would give equal importance to growth after a series of rate cuts to stem the rising rate of inflation. Consequently, the rate of inflation eased to 6.9 per cent in March from 10 per cent during the fiscal year. The average inflation rate in India was 7.99 per cent between 1969 and 2010.

Regards,

Arvind Trivedi