Inflation Drop Leads to Unscheduled India Rate Cut


IndusView, Thursday 15 January 2015 (London): The Reserve Bank of India (RBI) today pared its repurchase rate by 25 basis points to 7.75% from the current 8%, citing easing inflationary pressures.

In an announcement before the stock markets opened for trading, the central bank said inflationary pressures have been easing since July and the path of inflation has been below the expected trajectory.

“Oil importing countries like India, China, Brazil, Turkey, Indonesia and South Africa will be the big winners as oil prices continue to weaken in 2015,” said Bundeep Singh Rangar, Chairman on London-based consulting firm IndusView. “What is critical is for nations to use this window to usher in fiscal and structural reforms, which can boost long-run growth and inclusive development.”

India imports 85% of its crude oil requirement. Net oil imports at $95 billion accounted for 21% of India's total import bill and 64% of the trade deficit in 2014.

In the accompanying policy statement, the RBI mentioned that inflation momentum has significantly reduced and household inflation expectations have eased to single digit for the first time since September 2009. 

On the inflation outlook, the central bank said "on current policy settings, inflation is likely to be below 6% by January 2016". In the December policy statement the RBI had guided for a change in the monetary policy stance in early 2015, including outside the policy review cycle, if inflation data was supportive.

Making a decisive push towards generating investment to see the success of his 'Make in India' mantra, Prime Minister Narendra Modi said his government was trying to revive the economy, and told global investors that India today was a land of opportunities.

Mr Rangar recently attended The Vibrant Gujarat 2015, where Prime Minister Modi was addressing the seventh edition of the Summit. Modi laid down his government's plan and effort to create a policy environment that is predictable, transparent and fair.

By contrast with India, South Korea’s central bank chief today signaled he’s unwilling to reduce borrowing costs in response to an inflation rate pulled down in part by the slide in oil. Governor Lee Ju Yeol said the current interest rate of 2% is “not insufficient to support growth” and that the central bank will set future inflation targets soon.

The rate cut is a change in monetary policy stance and comes a few weeks earlier than expected due to the sharp fall in commodity prices and the better-than-expected December inflation print.  Bloomberg’s Commodity Index is down nearly 28% since its 2014 peak in May, and 43% since its 2011 peak.

Rajan’s move today will spur commercial banks to lower lending rates for borrowers, K. Subrahmanyam, executive director at state-run Union Bank of India in Mumbai, said in a phone interview. State Bank of India, the country’s largest bank by assets, has left its base rate at 10 percent since November 2013.


India 'Brightest Spot’ in Asia Pacific Economy


Ratings agency Standard & Poor’s (S&P) has called India the only bright spot in the Asia Pacific region in an otherwise shaky finish to year 2014 with all other economies losing momentum.

The Indian economy grew by 5.3% in the September quarter from a year earlier, and is expected to grow 5.5% in the current financial year that ends on March 31.

“Only India is bucking the trend,” said S&P in a report on Asia Pacific region’s credit outlook. “India has been the region’s brightest spot,” it added.

The reason for its sunny outlook for India was Prime Minister Narendra Modi’s government that, the agency said, has picked up the pace of reform after a “modest” start.

This marks a sharp turnaround about India’s image as an investment destination among overseas analysts who had been unsparing about their criticism of the previous United Progressive Alliance (UPA) government’s management of the Indian economy, hit by a policy standstill, corruption scandals and tax disputes.

The agency said that while China’s economy continues to slow, Japan is in “technical recession” and trade-dependent economies continue to suffer from lack of external demand.

Asia’s third-largest economy is showing signs of clawing out of its longest slump in a quarter century, and the raft of measures that Modi has announced has raised hopes that the government will be able to engineer a quick turnaround.

The government has vowed to remove red tape, ease rules, and pledged a non-adversarial governance regime to push companies to make India a manufacturing powerhouse through initiatives such as `Make in India’.

S&P upgraded India’s credit rating to “stable” from “negative” in September, by which time most of Modi’s announcements and measures were under way in various forms and stages.

The agency proceeded to list them: ending diesel subsidy, liberalizing foreign investment in insurance and controlling discretionary government spending.

The agency also noted some of the programs announced by Modi — financial inclusion by opening bank accounts for 100 million people who didn’t have one, streamlining government-transfer payment regimes, improving rural infrastructure, and cutting the number of government departments.

S&P welcomed the decision for “eliminating the planning ministry”. In August, Modi had announced the government’s intent to replace the Planning Commission with a new body, bringing the curtains down on the 64-year old institution founded on former Soviet Union’s command-style development model.

“Confidence has improved and growth momentum is now at around 7%,” said the agency, adding, however, a note of caution: “the build-up of corporate, and in some cases household, debt over the past five years remains a significant ‘tail’ risk,” S&P said.

The World Bank said in June that India is already “benefiting from this ‘Modi dividend’ … with economic activity buoyed by expectations from the newly elected government”.


Reserve Bank of India Ignores Oil Price Drop; Maintains Interest Rate


IndusView, Tuesday 2 December 2014 (London): The Reserve Bank of India (RBI) left its benchmark rate unchanged at 8.00% Tuesday, failing to take advantage of the drop in international crude oil prices and the resulting deflationary effect on India’s biggest import item.

The India crude basket, computed by the petroleum planning and analysis cell, was $72.51 per barrel on November 27 compared with $90.50 per barrel on October 9. The Indian basket of crude oil is based on the weighted average of Middle East sour grades (Dubai and Oman) and the North Sea Brent sweet grade of London.

Despite the lower oil price, RBI Governor Raghuram Rajan said he was still awaiting more proof that inflation was under control.

“Lower oil prices keeps inflation low and could have served as a cue for the RBI to reduce interest rates and foster GDP growth,” said Bundeep Singh Rangar, Chairman of London-based consulting firm IndusView. “It increases prospects of the Narendra Modi government meeting its fiscal deficit target for 2014-2015. A lower RBI rate would have helped ensure it also meets its GDP growth target.“

India imports more than two-thirds of its oil requirements, which constitutes 37% of total imports. A one-dollar fall in the price of oil saves the country about $648 million. Every $10 a barrel fall in prices lowers retail inflation by 0.2 of a percentage point and wholesale inflation by half a point, experts estimate. Lower oil prices, therefore, have a three-fold effect spread across the economy.

Cheaper energy moderates inflation, which has already fallen from over 10% in early 2013 to 6.5%, bringing it within the central bank’s informal target range. This should lead to lower interest rates, boosting investment.

Cheaper oil also cuts India’s budget deficit, now representing 4.5% of GDP, by reducing fuel and fertilizer subsidies: along with food subsidies, the total is $41 billion in the year ending March 2015—14% of public spending and 2.5% of GDP.

The government controls the price of diesel and compensates sellers for their losses. But, for the first time in years, sellers are making a profit. As in China, cheaper oil should reduce the pain of cutting subsidies. Since Oct. this year, India has ended diesel price subsides and raised the price of natural gas.

Gross domestic product expanded 5.3% in the July-September quarter from a year earlier, as a manufacturing slump took the bounce out of Asia’s third-largest economy. Growth in the previous quarter was at 5.7%. 
Thanks to growth in services and stronger-than-expected farming after a bad monsoon, the reading was higher than predicted by economists polled by Reuters, who on average forecast growth of 5.1%. On a year-on-year basis, trade deficit increased by 28.1 per cent during Q2 FY 15 (Jul-Sep) as compared with a decline of 24.1% in Q1 of 2014-2015.

Prime Minister Modi is keen to promote India as an investment destination. Moves are afoot to schedule Prime Minister Narendra Modi’s first bilateral visit to the United Kingdom for an event on January 30, the death anniversary of Mahatma Gandhi. The trip will be his first bilateral visit to Europe. U.S. President Obama is also due to visit to India as Chief Guest of its Republic Day parade on Jan. 26.