Thought for the day
”There are good and bad times, but our mood changes more often
than our fortune.”
-
Thomas Carlyle (Scottish, 1795-1881)
Word for the day
Rimple (v)
To wrinkle; crumple; crease.
(Source:
Dictionary.com)
Teaser for the day
President's daughter tells the world that she possesses the
personal diary of her father, containing his account of political events in
past four decades.
Why does she say this? Is she "assuring", or
"threatening", or "warning" someone?
To cut or not to cut is not the only question!
The complete unanimity amongst forecasters over the likely
decision of RBI on policy rates is rather unusual. Overwhelming consensus on
any issue involving human intervention always bewilders my strategist mind.
Consensus on economic issues is even more perturbing as it is against the basic
concept of market. Imagine a market place where only buyers or only sellers are
present.
To me this consensus could be outcome of any one or more of the
following factors:
(a) The economic
situation in India is too volatile. All forecasters are therefore equally
confused about the likely direction in near term.
(b) RBI is presently
faced with unprecedented complexities in policy making.
In a decoupling world, the largest economy USA is doing
relatively better and Federal Reserve is moving steadily on the path of
tightening the monetary policy and debating the timing of reversing the
declining trend in policy rate; whereas other big economies like Japan, China
and EU are struggling with growth and are more likely to ease the policy. The
currency movements are accordingly also volatile and divergent.
RBI therefore has the unenviable task of maintaining the
competitiveness of INR to protect exports; to augment USD reserves to protect
the economy against a possible BoP crisis, protecting the interests of
importers and borrowers in foreign currency, and at the same time keeping real
rates positive to encourage domestic savings which have been on the decline
since past few years.
(c) RBI has mostly
failed in ensuring adequate transmission of policy easing in past few years.
During past four rate cuts private banks have not transmitted any concession to
borrowers, while PSU banks did full transmission only once.
Under these circumstances, from industry stand point policy rate
cut becomes more of political decision rather than a monetary one.
Moreover, rate cuts are not necessarily positive for the economy
and markets. In a recent report
India rating (Ind-Ra), highlighted "...policy-driven change in interest
rates has in the past impacted the domestic currency rate. In certain
instances, an interest rate cut by the Reserve Bank of India (RBI) was followed
by a 1.1%-5.8% depreciation in the Indian rupee one month post the effective
date of cut. Around 53% of BSE500 corporates, which account for 70% of the
balance sheet debt, have historically suffered a 1.3% EBITDA (by value) erosion
for a 1% rupee depreciation, according to Ind-Ra‟s estimates. The benefit
of a lower interest rate is thus often muted, and in some cases the impact on
credit metrics such as coverage ratio is actually negative.
Under the scenario of a 25bp interest rate cut followed by a 2%
depreciation in the currency, the amount of stressed debt within BSE 500
corporates is estimated to increase to 14% from the current amount of 10%.
While a 50bp rate cut followed by a 5% rupee depreciation could cause the
stressed debt to increase to 21%."
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