Friday, January 16, 2015

Beyond the cut

Thought for the day
"The little reed, bending to the force of the wind, soon stood upright again when the storm had passed over."
-          Aesop (Greek, 620-560BC)
Word for the day
Quagmire (n)
A difficult or precarious position or situation; a predicament.
(Source: Dictionary.com)
Teaser for the day
Kiran (Crane) Bedi as Delhi CM!
Finally I can expect some pavements  to walk on!

Beyond the cut

The 'surprise' repo rate reduction by RBI is much more than a cut. In my view, to see it as purely a move in the inflation-growth matrix might be a mistake.
The 25bps rate cut may not have much impact on the cost of borrowing in the near term. For one, the effective rate in the money market are already much lower than the base lending rates of most banks. Secondly, the re-pricing of the existing corporate debt may take much longer than usual two quarters given the stress in collaterals. Nonetheless, another 25bps cut on 3rd February may trigger the necessary correction in debt profile of corporates who relying more on shorter term CPs even for their longer term requirements. The cost of raising debt may therefore also come down a bit.
The more significant signals that I get from the governor's statement are as follows:
(a)   The incumbent government is willing to allow institution the necessary independence in decision making. This shall certainly allow in future more scientific data driven action having long term sustainability.
       In most developed markets these data driven actions are seen to create the illusion of predictability and control amongst investors; adding to their confidence and risk appetite.
(b)   By not intervening aggressively in currency market, RBI has in recent past signaled that it is not averse to importing deflation from places like Europe, China, Japan, Australia, Korea and Latin America. Yesterday's out of turn rate cut may also signal reconsideration on this thought.
(c)   By not transmitting a material part of the benefits accruing from crude oil price to consumers, the government has shown resolve towards fiscal consolidation.
       RBI has sought to put an end to the debate "whether the government should use the current deflationary environment to boost public investment at the expense of fiscal consolidation".
       The governor has made it clear that long term quality fiscal consolidation is non-negotiable. At the same time he is willing to support the steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure through further easing.
       The effort to kick start the economy therefore would have to be financed through resources from asset sale, foreign capital and more conducive environment for domestic investment. A good omen for equity markets.
(d)   RBI has also exhorted the government to decide expeditiously whether (i) it want to take a confrontation path in the parliament to score political points or first fix the things that do not need legislative intervention; and (ii) it want to stay focused on Bihar (2015), West Bengal (2016) and UP (2017) and promote crony socialism or move forward with its inclusive and faster growth agenda and leave the rest to the voters.

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