"And, after all, what
is a lie? 'Tis but the truth in a masquerade."
— Alexander Pope
(English, 1688-1744)
Word
for the day
Knave (n)
An unprincipled, untrustworthy, or dishonest person.
Malice
towards none
Is our fight with Pakistan
or Pakistanis?
And have we already defined
who is a Pakistani?
First random thought this morning
I have not heard anyone who seriously believed that the latest
Indo-Pak standoff could actually escalate into a full-fledged war.
I am therefore totally unable to explain the losses in financial
markets on last Thursday.
I suspect it could either be a case of foul play or something
serious taking shape in the womb of time that will be revealed in due course.
Gather amunition before the war begins
As the date for RBI's periodic policy review date draws closer the
anticipation regarding the likely move on policy rate is rising. Like most
preceding policy reviews, the opinion is divided this time also.
The analysts and economists have been arguing against any decision
to cut repo rate in today's MPC meet. However, the bond traders and investors
appear convinced of a rate cut.
This dichotomy is not unprecedented. Rather it is very common
during periods when the monetary policy is expected to play an aggressive role
in the overall macroeconomic conditions. Usually it occurs closer to the peak
and troughs of the rate and economic cycles.
More often the traders get it right. However, whenever they are
wrong, the losses are huge. Whereas economists and analysts usually have not
much to lose, should their expectations not materialize.
Though as usual I would avoid speculating what MPC statement to be
released later in the day will read like; in the current instance, I would wish
that a 25bps cut in repo rate is done in each of next three MPC meetings,
beginning today.
This is nothing to do with the FM, industry or traders urging for
a rate cut. I intuitively believe that under the current circumstance it would
be the right thing to do. For example, consider the following:
(a) BoJ in its last policy
statement has indicated that the current monetary policy direction may have
lost its utility and a change would in the order. It is likely that US Fed may
hike the key policy rates in next 3-6months, reversing its stance taken since
December 2015. Some other key central banks may also be forced to change their
current policy stance in 2017.
The immediate impact
of such changes on global economy and market is unpredictable, thus higher
volatility is likely, especially in the currency market.
Under the
circumstances it might be desirable for RBI to create some policy cushion for
defending INR and attracting higher flows by raising rates. This cushion is
almost absent currently, in my view.
(b) The rate cut today will
come at almost no cost as inflation outlook has improved materially; with IDS,
disinvestment and spectrum sale the fiscal balance appears supportive of lower
rates; economy is far from heated and with real estate market is at bottom no
bubble is floating around. To the contrary, a rate cut today will help banks
repair their bleeding balance sheets and get prepared for the next credit cycle
as well as for any crisis like situation, should the global conditions
deteriorate rather precipitately.
(c) The external account
is in balance due to lagging exports. A weaker INR due to rate cut should help.
(d) The demand outlook is improving with government willing to spend more. Lower rates will have the desired multiplier impact
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