Tuesday, December 5, 2017

"To cut" or "To raise"

"It takes a great deal of bravery to stand up to our enemies, but just as much to stand up to our friends."
—J. K. Rowling (English, 1965-)
Word for the day
Gerontocracy
A state or government in which old people rule.
Malice towards none
Ravan was son of a Brahmin and devotee of Shiva!
So what's the point?
First random thought this morning
While Baba Ramdev was kept busy fighting war on MNC tooth paste, confectionary and cosmetic brands, the global mobile phone makers (mostly Chinese), automobile makers, and readymade garment sellers have "plundered" billions from "gullible" Indian consumers.
Moreover, even on cosmetics, hair oil, ayurvedic products like Chyvanprash etc., confectionary and grocery etc. also, Baba may be competing more with pure domestic players like Dabur, Emami, Parle, LT Foods, DFM, Baidyanath, Marico, etc., rather than P&G, Colgate and HUL.
Should someone call his bluff and restrain him for carrying out a mostly misleading campaign?

"To cut" or "To raise"

When the members of Monetary Policy Committee (MPC) of RBI meets today for the Fifth Bi-Monthly review of monetary policy for FY18, the question before it might be "to raise or not to raise" rather than "to cut or not to cut".
An overwhelming majority of experts is forecasting a status quo on rates.
A near unanimity amongst forecasters over the likely decision of MPC 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.
In my view, MPC is presently faced with unprecedented complexities in policy making. Though the stated objective is to manage inflationary expectations, MPC must deal with prospects of worsening twin deficit, slowing growth and likely global liquidity and rate events.
As the recent GDP data (2QFY18) showed that Private consumption growth (6.5% in Q2) was weakest after Sep 2015 despite festive season and some pick-up in rural demand. The consumer confidence pointed that the urban consumer sentiment has stayed weak over this period, which suggests that the impact of 7th Pay Commission has mostly been digested, and a decent stimulus may be needed to encourage private consumption.
Government consumption growth dropped sharply to 4.1% in Q2 (17.2% in Q1) as fiscal deficit concerns prompt some belt-tightening. The rate hike by some banks on bulk deposits amply highlight the tight liquidity conditions. This tightness in my view is mostly due to the government's fiscal management jugglery (delay or deny tax refunds, delay contractor payments, delay subsidy payments and defer consumption and investment). This will reflect badly on FY19 fiscal, which may face political pressures also as general elections draw near.
The 4.7% growth in investment demand (GFCF) was the best in 5qtrs but as a proportion of GDP it remains ominously low. Given the still very low capacity utilization level and fiscal constraints, the visibility of investment demand recovering in FY19, without a significant stimulus, appears low.
The stimulus in turn will depend on improvement in revenue collections, which may largely be a function of consumption growth and revival in export demand. Exchange rate may play a critical role here. Many experts believe that a more than 10% correction in INR value would be needed to improve the competitiveness of our exports.
While the need for a monetary stimulus (rate cut) may appear overwhelming, as the finance ministry officials have also been insisting, the specter of inflation is rising (may rise aggressively if INR depreciates 10%) and trajectory of rates in global markets is no longer heading south.
 
So, my sympathies with MPC, especially the market economists sitting on the committee, who would obviously want an aggressive easing.

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