The financial markets are definitely elated by the new RBI
governor; and not completely without reasons. He has promised more certainty in
policy and therefore less volatility in markets.
Insofar as the measure announced by him immediately after
assuming the office is concerned in our view these were focused primarily on
two issues:
(a) Building defense against potential outflow
of money due to reversal of Fed policy stance, expected sooner than later.
Providing incentive to banks for mobilizing FCNR deposits and
issuing foreign currency bonds to boost USD reserve is a good idea. However, it
would be prudent to see how the Indian Diaspora and global investors respond.
In our view, people would want to see some macro improvement
before they commit any significant amount of money to India.
The downside risk is that with more money in the system and
better currency outlook, the resolve to contain fiscal and current account
deficits below 5% may weaken, given the political commitments in an election
year. In recent times, we have seen similar straying from targets in 2010-12, when
large inflows due to QE in US and EU provided unwarranted comfort. In such an
eventuality the measures proposed by the new governor may in fact prove to be
counterproductive in the medium term.
(b) Strengthening and stabilizing the financial
system through some structural changes in the banking system.
In our view, the proposal certainly does not mean CRR and SLR
reduction on 20th September. It also does not mean rate cuts or
status quo on rates.
In our view, this means continued tight money policy; stringent
prudential lending norms; higher provisioning, frequent stress tests for banks
and onerous liabilities for those corporates seeking debt restructuring
including change in management. Emphasis on inclusive growth may actually imply
more political influence in terms of priority sector lending.
Anyone expecting dramatic shift in RBI policy stance may be
disappointed. The disappointment may be exacerbated by the fact that the
governor has actually raised expectations sky high. The promise of better
communication does not seem to be coming through at least in the opening
speech.
It is pertinent to note that the measures announced immediately
after assuming the office were obviously not conceived between 4:00PM when
Rajan took charge and 5:00PM when he addressed media. RBI obviously was working
on these for some time. So believing that these mark any paradigm shift due to
change in leadership is premature.
It’s the same as government waiting for the Parliament session
to end to raise diesel prices, no matter how much damage will be caused in the
interim.
For now, we do not see
any reason to change our underweight equity stance.
Thought for the day
“The poison of skepticism becomes, like alcoholism, tuberculosis, and some other diseases, much more virulent in a hitherto virgin soil.”
- Simone Weil (1909-1943)
- Simone Weil (1909-1943)
Word of the day
Vicissitude (n)
Regular change or succession from one thing to another; alternation; mutual succession; interchange.
(Source: Dictionary.com)
Shri Nārada Uvāca
c2009
QE: A recipe for hyper inflation; threat to fiscal stability, a disaster in making, etc. etc.
c2013
QE withdrawal: A threat to global economy; a potential disaster.
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