Some food for thought
"Anyone who has ever looked into the glazed eyes of a
soldier dying on the battlefield will think hard before starting a war. "
—Otto Van Bismarck (German Leader, 1815-1898)
Word for the day
Fool (n)
A dish made of fruit, scalded or stewed, crushed and mixed with
cream or the like.
First thought this morning
Last week one of the most prominent private schools in Mumbai
asked its 10th class students to do a Civics project on Elections 2019. The
project requires students to analyse the current political situation in the
country, especially focusing on the following points:
"1. The four or five major national parties in the fray, their main
leaders and election strategies (including coalition with other parties for
election purpose).
2. The likely mandate of the people, indicating the number of seats
each party is likely to win in this election.
3. Will it be a Coalition Government or an Absolute Majority
Government.
- Predict the like - minded parties which could come together to form a coalition, in case no party wins absolute majority; prediction to be based on party ideology and party goals.
4. Predict the next Prime Minister of India and state your opinion
of him/her as a national leader."
When I first came to know about this exercise last weekend, I
was thrilled. I thought the education system of India is finally evolving to
make students think and bring them in synch with the national consciousness at
early stage. However, after pondering over it for 4 days, I find this exercise
deplorable, for two simple reasons:
(a) This exercise may
likely inspire impressionable students to accept the status quo regarding
degenerated political system and election practices as fait accompli.
(b) It seeks to make
"Prime Minister" a key outcome of elections, which is totally against
the spirit of the constitution. Our constitution provides that people will
elect their representatives and these representatives will in turn elect one
amongst themselves to be the leader of Lok Sabha. This leader, termed as Prime
Minister, is first among the equals and accountable to the entire Parliament
for governance and administration. Students need to understand that We the
People gave ourselves a strong democratic system; and we should not allow any
person or party or alliance to distort or circumvent this system.
Chart of the day
Rate cut: It's not monetary policy alone
Over years RBI had earned the respect of global bankers and
financial institutions as an autonomous and competent central banker. RBI is
credited with handling of monetary policy deftly during Asian crisis in late
1980s and as well global financial crisis 10yrs ago. Indian financial system
emerged unscathed from both major crises.
In pre MPC days, the judgment of RBI governor in relation to
monetary policy stance, especially policy rates, was questioned several times,
by ministers in office, market participants as well as economists &
analysts. However, no one questioned the integrity, competence and credibility
of the institution as such.
In past few years however, many fingers have been pointed on the
competence, integrity and credibility of RBI. Most of the noise, in my view, is
politically motivated, hence deserve to be ignored. However, when Hon'ble
Supreme Court castigates RBI for its arbitrary decision that could possibly
have far reaching repercussion, or a bank regulated by it drags it to court,
one cannot help taking note.
Tomorrow MPC of RBI shall brief us about its first bi-monthly
review of monetary policy for FY20. It shall announce its latest policy stance.
The consensus of market participants appears to be in favor of
further easing by a 25bps cut in policy rates. The primary argument is that
headline inflation continues to be much below RBI target; and the economy has
cooled significantly and need some stimulation to rev up.
In my view, this consensus is predicated on the premise that for
the time being MPC is ignoring its exclusive mandate to ensure price stability
and venturing into neighboring (not necessarily alien) territory of growth
stimulation.
There is no denying that the growth momentum has slowed down
considerably in past few quarters and needs some stimulus. However, this
stimulus should be more from fiscal side than the monetary side.
On its part RBI has eased the liquidity conditions materially
through OMO and currency swaps. It has stabilized INR and allayed concerns over
collapse in currency. It has however failed in ensuring transmission of policy
easing.
A rate cut at this juncture, without immediate transmission, may
be meaningless for growth stimulation, though it may help the government's
burgeoning borrowing program.
Insofar as inflation is concerned, indubitably the headline
prints in recent months have been much below the RBI target rate. However,
recent trend of pricing power shown by cement, steel, and some consumer
companies suggests that the inflation might have already bottomed. Concerns
over monsoon rains due to El Nino also need to be considered. The rise in
purchasing power due to PM-Kissan (or Nyay) and hike in MNREGA wages also
require close monitoring. The global crude prices are also not stable and not
looking to correct meaningfully from the current levels. INR weakness due to
rate cuts may result in higher fuel inflation too. Many power companies are
also indicating tariff hikes this summer. In any case the core inflation has
never fallen below the RBI target and continues to remain high.
Under these circumstances, I would feel that a rate cut is
totally avoidable if RBI cannot ensure its immediate transmission. Also, is it
would need to hold INR in 69-70 per USD range by persistent intervention.
Having said all this, I would like to go with the consensus and expect a rate
cut tomorrow, which in my view will not be entirely driven by monetary policy
considerations. I do not propose to make any change in my investment strategy.
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