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.
(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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