Some food for thought
"The first qualification for a historian is to have no
ability to invent."
—Stendhal (French Writer, 1783-1842)
Word for the day
Adrenalize (v)
To stir to action; excite
Chart of Day
To cut or not to cut
Persistently lower than RBI target headline consumer inflation
numbers and recent prints of poor IIP/PMI data have prompted a few economists
and analysts to seek rate cuts in next MPC meet on 07 February 2019.
In my view, these are unreasonable wishes and MPC may in its
collective wisdom not oblige those seeking easing of monetary policy at this
juncture.
Firstly, I believe that irrespective of the government's
optimism and maneuvering, the fiscal gap for FY19 and FY20 may stay above the
expected level of 3.3%. In the event of political uncertainty post elections in
May 2019, it may actually end up even higher than 3.5% as decision making would
suffer and GDP (the denominator) may log lower growth.
Secondly, the contribution of exports in the GDP growth has
declined materially in recent quarters. Given that the energy prices have
started to rise and current account concerns are emerging again, it may not be
advisable for INR to let appreciate disproportionately, which might be the case
if rates are cut at this juncture.
Thirdly, the credit growth has been quite robust in past one
year, whereas the deposits have been declining. More significantly, credit in
the riskier segments like personal loans, MSME etc. is rising even faster.
Primary principle of economics suggests that price of anything is function of
demand and supply for that thing. Since, at present the demand for money is
much higher than the supply, the price of money (interest rates) should
logically stay higher.
Fourthly, the rising rates in US have already led to some
unwinding of USD carry trade, leading to outflow of portfolio funds. A further
rise in rate differential could accelerate the outflows even further, creating
panic in financial markets, at a time when liquidity is already tight.
Lastly, the whole perception about the lower inflation may be
misplaced. The core inflation on both WPI and CPI measures has been running much
higher than the headline numbers.
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