Happy 68th Independence Day from IndusView!
Reserve Bank of India Holds Interest Rates for Third Meeting in Inflation Fight
IndusView, Tuesday 5 August 2013 (London): The Reserve Bank of India (RBI) today left its benchmark lending rate unchanged at 8%, resisting calls from the country's businessmen and policy makers to cut interest rates to help revive economic growth.
The Indian central bank kept its overnight lending rate steady at 8% for its third policy meeting in a row. The decision was in line with the expectations of most economists polled by The Wall Street Journal. Only one out of 15 analysts surveyed expected a quarter-percentage point cut to 7.75%, with the rest of them predicting no change.
"It is appropriate to continue maintaining a vigilant monetary policy stance as in June, while leaving the policy rate unchanged," said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “Getting inflation under control is the best way to encourage sustainable long-term growth.”
India's economy expanded 4.7% in the year ended March, the second consecutive year where the gross domestic product has risen less than 5%. India hasn't had two successive years of below-5% growth since the late 80s.
India's economy has been showing some encouraging signs recently. May industrial production picked up to 4.7% year-over-year, up from 3.4% the previous month. Business confidence increased in June, hitting a 17-month high.
The RBI has been focusing on the consumer-price inflation rate, which has fallen more than expected in recent months. The increase in consumer prices has cooled from an average of 10% in 2013 to 7.3% in June, the slowest rise since the central bank started measuring consumer price index (CPI) in January 2012.
High oil prices have a crippling effect as they push up the prices of food and other commodities because of the increased transportation costs. Vegetable prices rose 9% while fruit prices rose nearly 21% year on year in June, when monsoon was 48% below average, although rainfall improved in July, the second month of the monsoon season.
India's heavy reliance on imported oil—especially from Iraq, which accounts for about 13% of its imports — makes the country more vulnerable than most to conflicts in the Middle East.
The weather is another source of concern, with the lower-than-normal rains from the monsoon—which runs from June through September — likely to reduce the supply of grains and vegetables and push up prices. Most of the country's farmlands depend on rainwater for irrigation.
“Sentiment on domestic economic activity appears to be reviving, with data suggesting a firming up of industrial growth and exports,” said Rangar. “Economic reforms announced by the new government of Narendra Modi should create a congenial setting for a steady improvement in domestic demand and supply.”
RBI Governor Repo Rate Hike Disappoints India Inc
IndusView, Friday 20 September 2013 (London): India’s central bank Governor Raghuram Rajan today raised the benchmark interest rate by a quarter point to 7.5%, the first increase since 2011.
The move came as a surprise to most economists, who were widely expecting the Reserve Bank of India (RBI) to leave the rate unchanged. The cash reserve ratio was left unchanged.
Mr. Rajan, a 50-year-old former International Monetary Fund chief economist, is determined to build the bank’s inflation-fighting credentials, with the bump in borrowing costs coming amid the weakest economic growth since 2009. Rajan acted even after the Federal Reserve’s decision two days ago to maintain U.S. monetary stimulus eased pressure on the rupee, which has tumbled since May.
“ Given that growth in the economy is at a low point, business confidence is weak and the investment cycle has come to a grinding halt, I expected the new RBI governor to initiate measures that would enthuse the market participants, boost investor sentiment and bring confidence back in the economy” said Rangar. “A repo rate cut was needed to facilitate industrial production process and to gain in the international markets by enhancing exports scenario.”
To ease liquidity, the marginal standing facility rate, at which banks borrow from the RBI, was cut to 9.5% from 10.25% and the minimum daily maintenance of the cash reserve ratio was lowered to 95%.
The RBI's decision surprised the stock markets and the benchmark S&P BSE Sensex ended 383 points lower.
India Inc expressed its disappointment, as a rate cut by the bank would have helped ameliorate sentiments as businesses are struggling under a tight liquidity crunch due to high cost of capital.
“The government needed to be more proactive and just showed that fighting inflation is its core priority,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “So far, all the actions taken have been to contain a crisis and not to prevent it”.
International investors have withdrawn nearly $12 billion in shares and debt from India's markets since the beginning of June.
India's economic growth rate slipped to a decade low of 5% in 2012-2013 on account of poor performance of farm, manufacturing and mining sectors. It is projected to rise to 5.7% in the 2013 fiscal year and firm to 6.5% and 6.7% in 2014 and 2015, respectively.
Policymakers have consistently struggled to come up with steps that can convince markets they can stabilize the rupee and attract funds into the country despite extraordinary measures last month by the central bank to drain liquidity and action to curb gold imports and cut India's huge oil import bill.
The RBI Holds Key Interest Rate for Q1 2013-14 Review
IndusView, Tuesday 30 July 2013 (London): The Reserve Bank of India (RBI) has today kept its key interest rate steady at 7.25%, in line with expectations, due to continued concern with high current account deficit (CAD).
The wholesale price index, India's main inflation gauge, rose 4.86% in June, compared with 4.70% in May. Consumer inflation, which gives more weight to food prices than wholesale data, accelerated to 9.87% in June from 9.31% in the previous month.
The Indian rupee plunged to fresh record low of 61.21 earlier this month, against the US dollar, in trade on sustained dollar demand in the local market.
"A weak rupee exposes the country to external shocks, given the fact that India is largely dependent upon capital inflows to fund its important current account deficit, said Bundeep Singh Rangar, Chairman of London-based IndusView. "The rupee has fallen about 10% against the dollar since early May, which is pushing up import costs and could feed price pressures in the coming months.
Indias CAD hit a record $87.8 billion or 4.8% of the gross domestic product (GDP) last fiscal, up from $78.2 billion or 4.2% in the year before.
With crude oil price in the vicinity of $100 or more to a barrel, the government is hoping that a 10%-12% easing of crude oil prices will help the reducing the burden on the CAD. India imported crude oil worth $140 billion in 2011-12. India imports nearly 70% of its crude oil requirement, which has a direct impact on the rising CAD. The RBI has cut its main lending rate by three quarters of a percentage point in 2013. Industry lobby groups and the government want it to bring the rate further down to support economic growth that slowed to its weakest pace in a decade at 5% in the fiscal year ended on March 31.
"The priority for monetary policy now is to restore stability in the currency market so that macro-financial conditions remain supportive of growth, said Rangar. " This strategy can succeed only if reinforced by structural reforms to reduce the CAD and step up savings and investment.
Overseas investors have pulled out more than $754 million from the Indian debt market in the first week of this month amid concerns over depreciating rupee.
To check imports of non-essential goods that are adding to the already rising Current Account Deficit (CAD), the government has constituted a committee to be headed by Rajat Bhrargav, joint secretary (Budget) in the Ministry of Finance. The committee has been mandated to look into non-essential items in Indias import list so that these could be pruned to ease Indias CAD. Non-essential goods comprise luxury cars, cosmetics, certain exotic foods and beverages, gold, silver and foreign alcohol, among others.