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  The Reserve Bank of India adopted its current monetary policy framework in August 2016, under the governorship of Dr. Raghuram Rajan. This marked a major shift in the monetary policy formulation process in India. In the pre-independence era, the function of monetary policy was mainly to maintain the sterling parity, with the exchange rate being the nominal anchor of monetary policy. Liquidity was regulated through open market operations (OMOs), bank rate and cash reserve ratio (CRR). After independence, India adopted the planning model of development, loosely based on the USSR model. The role of RBI monetary policy in this model was mostly to regulate credit availability, employing OMOs, set bank rate and reserve requirement in congruence with the planning objectives and development needs of the country. The monetary policy framework witnessed a major shift between from mid 1980s to late 1990s. In 1985, on the recommendation of the (Dr. Sukhamoy) Chakravarty Committee, a new mone...

The Reserve Bank of India’s (RBI) monetary policy statement on June 6, 2025 marked a significant shift in India’s monetary policy framework, reflecting a bold approach to stimulate economic growth while navigating global uncertainties and domestic inflation dynamics. Policy rates cut by 50bps to support growth The Monetary Policy Committee (MPC) reduced the policy repo rate by 50 bps to 5.50%, a larger-than-expected cut compared to market expectations of a 25bps reduction. This was the third consecutive rate cut in 2025, following reductions in February (6.5% to 6.25%) and April (6.25% to 6.00%). Consequently, the Standing Deposit Facility (SDF) rate was adjusted to 5.25%, and the Marginal Standing Facility (MSF) rate and Bank Rate to 5.75%. This sharp cut in rates is aimed at accelerating the growth. Pertinent to note that FY25 real GDP grew by 6.5% yoy, and is expected to grow at a similar or lower rate in FY26. Considering the fragile global conditions, it is imperative to sup...

Wishing all the readers, family, and friends a very Happy Diwali. May the Lord enlighten all of us and relieve everyone from pain and misery.   ========================================================================== The growth is slowing across the world. The engines of global growth - India and China – are also expected to slow down in 2024. Most European countries are flirting with recession. Canada is technically in recession. The US growth is stronger than estimates but not enough to support the Growth decelerating As per the latest  World Economic Outlook  report released by the World Bank, global growth has slowed down to 3% in 2023 from 3.5% recorded in the year 2022. The global economic growth is expected to further decelerate to 2.9% in 2024. The advanced economies have grown by 1.5% in 2023 against 2.6% in 2022. Their growth is likely to further decelerate to 1.4% in 2024. Economic growth in Emerging economies is also not accelerating. These economies are exp...

 The latest episode of global inflation is impacting peoples’ lives in multiple ways, especially in developed countries where the present generation of citizens has not experienced this kind of rise in the cost of living; borrowing cost and challenges in accessing consumer credit. It is of course a significant challenge for the young investors and professional money managers who have been raised in an environment of profligate fiscal policies; abundance of liquidity; near zero cost of borrowing; persistent struggle to mitigate the deflationary pressures and unchallenged US supremacy over global markets and geopolitics. For them all the assumptions that underlined their investment strategies might be falling apart; just like the Dreamliner Titanic. This episode of inflation and consequent monetary tightening would indubitably prove to be an important life lesson for the young investors and money managers; and go a long way in defining the future investment strategies and market di...

Just when everything appeared to be settling nicely, the volatility in Indian equity markets has increased materially. The sharp corrections at any hint of adverse event highlights the jitteriness (and to some extent lack of conviction) of market participants. Considering that household investors (and traders) have increased their participation in the market significantly in past 6-8 weeks, the pain quotient of any sharp correction from here could be significantly higher. Evidently, while the benchmark indices are now mostly flat for past 8-9 weeks, the sectoral shifts have been meaningful. Investors have adopted inflation (commodities) and cyclical recovery (mid and small cap) as a primary investment theme. Financials, discretionary consumption and realty sectors have witnessed a major “move out”. The investors positioning seems to be, inter alia, based upon the following premise: (a)        The earnings recovery witnessed in 4QFY21 shall contin...

Unlike the previous occassions, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided to honor the market consensus and held the policy rates unchanged. However, honoring the consensus was limited to not changing the policy repo rates; otherwise it announced a number of policy measures that were not expected by the market and hence could be counted as positive surprise. The MPC kept the Repo Rate (5.15%), Reverse Repo Rate (4.9%) and Marginal Standing facility Rate (5.4%) unchanged. GDP growth for FY21 is projected at 6%, howver the recovery is expected to be back ended. Accordingly, the growth is expected to remain in the range of 5.5-6.0% in H1FY21, before recovering to 6.2% in Q3FY21. The target consumer price index (CPI) is maintained at 4% +/- 2% band. However, the CPI inflation projection has been revised upwards to 6.5% for Q4FY20; 5.0 to 5.4% for 1HFY21 and 3.2% for 3QFY21 with risks broadly balanced. The policy statement makes many ...

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...