Thought for the day
"It is with our passions as it is with fire and water, they are good
servants, but bad masters. "
-
Aesop (Greek, 620-560BC)
Word for the day
Caustic (adj)
Severely critical or
sarcastic.
(Source: Dictionary.com)
Malice towards none
Maharashtra and Haryana CMs have apparently joined Deepika
Padukone in "My Choice" campaign.
Will someone please bother about My Choice too?
Significant slack and structural rigidities hold back revival
The April 2015 RBI Monetary Policy
Report further strengthens the trend seen in presentation of rail budget and
general budget for FY16, viz., globalization of the "policy
presentation". Like the two budgets, the jargon and techniques distinctly
have imprint of global practices.
It would make an interesting study to evaluate whether the
process of policy formulation has also become global!
The policy making at RBI appears to have moved to global
standards inasmuch as it is now more data driven, It perhaps no longer rely on
the subjective assessment of RBI and political expediency.
In fact the recent monetary policy report prominently mentions
that "the Government of India and the Reserve Bank have committed to an
institutional architecture that accords primacy to price stability as an
objective of monetary policy. The Monetary Policy Framework Agreement envisages
the conduct of monetary policy around a nominal anchor numerically defined as
below 6 per cent CPI inflation for 2015-16 (to be achieved by January 2016) and
4 +/- 2 per cent for all subsequent years, with the mid-point of this band,
i.e., 4 per cent to be achieved by the end of 2017-18.
Failure to achieve these targets for three consecutive quarters
will trigger accountability mechanisms, including public statements by the
Governor on reasons for deviation of inflation from its target, remedial
actions and the time that will be taken to return inflation to the mid-point of
the inflation target band.
This flexible inflation targeting (FIT) framework greatly
enhances the credibility and effectiveness of monetary policy, and
particularly, the pursuit of the inflation targets that have been set. The
commitment of the Government to this framework enhances credibility
significantly since it indicates that the Government will do its part on the
fiscal side and on supply constraints to reduce the burden on monetary policy
in achieving price stability."
It is perhaps for the first time that RBI policy report has
presented professional forecasters 5qtr, 5yr and 10yr inflation expectations,
the trends that will be primarily driving the monetary policy stance.
Going by this there is little probability that RBI will cut policy repo rate
materially in next three quarters. The governor has adequately hinted this in
his media interactions.
Any relief on lending rate will therefore have to come from
lower cost of funds driven by excess liquidity in the financial system.
The five major sources of incremental liquidity as I see at this
point in time could be:
(i) Buying of USD by
RBI to prevent INR from appreciating and augment fx reserves for a likely
exodus post US Fed rate hike ("the Lift").
(ii) Rise in
government spending.
(iii) Release of
stalled payments by the central government (expected to be Rs1500bn).
(iv) Rise in financial
savings of household due to gold monetization, various tax incentives, lower
inflation and PM Jan Dhan Yojna (PMJDY).
(v) Cut in statutory
reserve ratios (SLR and CRR).
I find none of these sources to be reliable/sustainable.
Moreover, there are serious headwinds for the liquidity which could neutralize
the incremental flows from these sources. For example:
(a) Outflows of
foreign investments especially due to (i) unwinding of dollar carry trade,
(ii)erosion in confidence of foreign investors due to political failure of the
government.
(b) Poor farm income.
(c) Rise in physical
savings of households due to disinflationary conditions and lower rates.
(d) Shrinkage in
informal (cash) lending markets due to tighter compliance and surveillance.
(e) Lower government
spending due to lack of clarity in administrative procedures.
(f) Large
disinvestment program (Rs600bn)
I personally would like to see the liquidity augmentation coming
from:
(a) Regularization of
restructured assets.
(b) Release of huge
tax money stuck in litigations.
(c) Active retail
debt market.
(d) FDI in
infrastructure and realty sector.
(e) Improvement in
working capital cycle.
Another noteworthy highlight of the policy report is the concern
over "Significant slack and structural rigidities continue to hold back a
sharp revival in investment demand".
The report reads:
"The latest round of the Order Books, Inventory and
Capacity Utilisation Survey (OBICUS) of the Reserve Bank reveals that capacity
utilisation (CU) remained range-bound in Q3 of 2014-15 as compared to the
previous quarter and declined over its level a year ago.
An overall assessment of the state of the real economy points
to recovery gaining ground slowly. Signifi cant slack and structural rigidities
continue to hold back a sharp revival in investment demand. Lack of certainty
about cash fl ows from new investment projects is contributing to the
lacklustre investment cycle.
Unless structural reforms unleash productivity gains going
forward, lower saving and investment rates could become a risk to stronger
recovery. Recent reform measures in the infrastructure sector, including
target-based progress on national highways, encouraging FDI in railways and
defence, plans to start power plants in the private sector with all approvals
in place, bringing in the requisite amendments in the Land Acquisition Act to
expedite project clearances and coal block auctions are expected to address
infrastructure bottlenecks and boost medium term growth prospects."
Many readers have appreciated the new format of this morning
letter, where we have done away with reproducing select news briefs. However,
some readers feel that news briefs were useful as a quick morning catch up.
We would request some more feed back to decide whether to go
back to the earlier format. Kindly mail your feedback at investrekk@gmail.com.
Trivia
The Finance Minister has rightly pinpointed that foreign
investors should not assume India to be a tax heaven or banana republic.
It would be completely naive on investors' part to expect their
all gains to be tax free.
The point to ponder however is
- what led these investors to believe that in India they can get away
with anything?
Whether the miscommunication started with the road shows done in
2012 by P. Chidambaram to alleviate concerns over GAAR?
Has the miscommunication continued with "Red Carpet in lieu
of Red Tape" call of PM Narendra Modi?
Or it is legacy issue from 1990's, which no politician has tried
to address directly?, Instead IT department is being used to convey the message
in a rather impolite way.
Interesting reads:
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