Do it yourself

It’s almost a year since the Reserve Bank of India shifted the course of its monetary policy stance and embarked on the path of monetary tightening and withdrawal of accommodation to reign in runaway inflation. In the course of its journey in the past one year, RBI reversed the entire 250bps of rate cuts made during 2019-2020.  Besides hiking the policy repo rate, RBI also enforced correction in banking system liquidity to check the demand side pressures on inflation. The banking system liquidity that was running in excess of rupees eight trillion a year ago, has been completely neutralized. Impact of monetary tightening It is very difficult to assess the direct impact of the RBI’s monetary policy action and its consequences. Nonetheless, it is pertinent to note how various sub segments of the economy have moved in the past one year. This movement could have been caused by a variety of factors, RBI tightening being one of them. Inflation The Consumer Price Index Inflation (CPI...

In an unscheduled press conference yesterday, the RBI governor admitted that the Covid19 pandemic has recently intensified in India. This intensification could derail the still fragile economic recovery. He implied that the impact on livelihoods due to restrictive access to workplace, education and income mediums could be significant and needs immediate attention. The governor also highlighted that “The global economy is exhibiting incipient signs of recovery as countries renew their tryst with growth, supported by monetary and fiscal stimulus. Still, activity remains uneven across countries and sectors. The outlook is highly uncertain and clouded with downside risks.” He underscored that “Consumer price index (CPI) inflation remains benign for major AEs; in a few EMEs, however, it persists above targets on account of firming global food and commodity prices.” The governor also highlighted the emerging inflationary pressures and softening bias in bond yields as follows: ·  ...

  The recent data on sectoral credit distribution and growth released by RBI discloses some noteworthy trends. These trends are interesting and worrisome at the same time. In particular, the investors may take cognizance of the following trends. 1.     Overall bank credit growth for the month of August 2020 was 6% (yoy). This is the slowest growth in bank credit recorded since October 2017. It is pertinent to note because this slowest rate of growth has happened despite a slew of special credit schemes, lending concessions, and rate cuts announced by the government and RBI since May 2020. 2.     In past 10 years, the services sector has been the top performer for the Indian economy. The share of service sector in GDP is over 55%. Unfortunately, this sector has been hit the hardest by the COVID-19 induced lockdown. The credit growth to this sector has seen the sharpest drop in August. The credit growth to the sector slowed to 8.6% (yoy). NBFCs and c...

In past couple of years, there has been a strong demand for cut in the interest rates. The cacophony rises multifold closer to the scheduled meeting of the monetary policy committee (MPC) of RBI. Many experts have been persistently citing lower rates as panacea for accelerated economic growth. In past five years, since July 2015, RBI has halved its benchmark repo rate 8% to 4%. Despite this we have not seen any signs of acceleration in economic growth. The credit growth has remained low and is expected to plunge to zero by end of this year; as the supply of money (deposits) continue to outpace the demand (credit) A couple of months ago I had shared some random thoughts on the utility of lower interest rates in the current economic environment. I mentioned that "Interest rates are usually function of demand and supply of the money in the monetary system. Demand for money is again impacted by the level of economic activity and outlook in foreseeable future; whereas supply...

The Monetary Policy Report released by the Reserve Bank of India last week, highlights some interesting trends in credit market. Though the sharp deceleration in the credit to the commercial sector has been adequately underlined, I find the following trends also noteworthy from the investment strategy viewpoint: (a)    Despite conspicuous rise in the stress in NBFC sector and spate of downgrades, "Interest rates on CPs moderated noticeably during H1. Though, CP issuances moderated from July reflecting heightened risk aversion in view of downgrading of a few CP issuers in June and July 2019, the interest rates in the primary CP market – as reflected in the weighted average discount rate (WADR) – moderated sharply by 130 bps during H1:2019-20, facilitated by the easing of liquidity conditions.   (b)    The risk premium declined sharply to an average of 64 bps in August-September on account of (i) the liquidity effect emanating from t...