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

Impact of Deposit Rate cut by Country’s largest bank

The country’s largest lender, State Bank of India (SBI), has cut its deposit rates by one full percentage point. Many believe others bank may follow suit, and we may even see banks cutting their minimum lending rate, or the base rate, finally, as the cost of money for them will come down. Till now, SBI and a few others have selectively cut loan rates in certain segments such as mortgages, auto loans and education loans but none has cut the base rate, which will drive down the cost of loans for borrowers across segments.

It took six months for the Reserve Bank of India’s policy rate cut to be transmitted into the system. In April, the Indian central bank cut its policy rate by half a percentage point. The apparent reason for cutting the deposit rate is easing liquidity in the system. The average bank borrowing every day from the Reserve Bank’s repo window is testimony to that. In April, the average borrowing per day was Rs. 1.01 trillion. That came down to Rs. 99,000 crore in May and Rs. 92,000 crore in June. Since then, there has been a dramatic drop to Rs. 46,000 crore in July and Rs. 45,000 crore in August. In the first few days of September, it has been a mere Rs8,000 crore. Clearly, the banks are more comfortable with the liquidity conditions.

The government has borrowed Rs. 3.09 trillion or 54.2% of the annual gross amount so far. Its net borrowing has been Rs. 2.34 trillion, or 48.9%. On 22 September, there will be redemption of bonds worth Rs11,000 crore and another Rs5,000 crore will come up for redemption in November. But the money released through redemptions will be soaked up by new bonds. Besides, around Rs50,000 crore will leave the system when Indian corporations pay their advance income tax in mid-September. This means the comfort on the liquidity front will not last long and not too many banks may feel encouraged to cut deposits rates and eventually loan rates.

At the same time, the system may not see the kind of liquidity tightness that it had witnessed last year. The government will start spending in the second half of the year and that will neutralise the impact of advance tax outflow.

One reason behind SBI’s decision to cut the deposit rates could be the lack of credit offtake. All banks have been shedding their high-cost bulk deposits in the absence of credit offtake. Till 10 August, year-on-year, credit offtake has been 16.5% against 20.3% in the previous year. Deposit accretion too has been less than the previous year but in the absence of credit offtake banks are deploying money in government bonds.

If indeed the credit offtake picks up in the second half of the year, there may not be any scope to cut deposit rates further and the base rate cut may still remain a mirage. Until now, the central bank has infused Rs. 81,580 crore through its bond buying programme or so-called open market operations (OMOs). It will continue to conduct OMOs to keep the cash deficit in the system within 1% of bank deposits, around Rs. 63,000 crore, which has been its stated objective.

In sum, SBI’s deposit rate cut could be an isolated event and it’s too early to expect a base rate cut by banks even though we may not see a severe liquidity crunch.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

(Above article from livemint.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