Tagged #RBI

15/01/2015

Inflation Drop Leads to Unscheduled India Rate Cut

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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.

02/12/2014

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

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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.

05/08/2014

Reserve Bank of India Holds Interest Rates for Third Meeting in Inflation Fight

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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.”