Do it yourself

In a rare instance of exuberance, the RBI governor termed the present moment as “rare Goldilocks period” of the Indian company, after cutting the policy rates by 25bps and quietly opening the liquidity taps. This should have enthused the financial markets but to the contrary, markets have turned even more cautious; especially, the foreign investors. This market behavior phenomenon might raise several questions in the minds of small investors. For example, - ·           Whether the rate cut decision is driven by conventional macroeconomic and monetary policy conditions, i.e., to support growth, considering that growth rate is already high and above the RBI estimates or the decision is driven by non-monetary policy considerations, e.g., driving bond yields down in anticipation of larger borrowing targets in FY27, or to drive INR further lower to help exporters manage tariff situation well, etc.? ·        ...

  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...

In July 2025, India’s consumer price inflation (CPI) hit an eight year low of 1.55% (yoy). Several factors contributed to the fall in inflation, including, a favorable base effect, lower fuel inflation, and decline in beverages and food prices. Since the inflation is much below the RBI tolerance range of 4% to 6%, it has excited the market participants about another rate cut at the RBI’s October 2025 Monetary Policy Committee (MPC) meeting. The prospect of lower Goods and Services Tax (GST) rates from November 2025, which could keep inflation subdued further, has added fuel to the speculations. However, notwithstanding what RBI does at its next meeting, we need to answer a fundamental question - Is this low inflation—or even disinflation—a desirable thing for a growing economy like India? Positive side of low inflation Boost to Consumer Spending:  Lower prices for essentials like vegetables and pulses mean more disposable income, which could spur consumption in a country where priv...

The Monetary Policy Committee (MPC) of the Reserve Bank of India concluded its three-day meeting on Wednesday. The committee voted unanimously to keep the policy repo rate unchanged at 5.50 per cent. The MPC also decided to continue with the neutral monetary policy stance. The MPC noted the favorable domestic conditions like (i) inflation lower than estimates and closer to the lower bound of the policy tolerance limits; (ii) Robust growth, though below aspiration; (iii) transmission of the 100bps policy rate cuts continuing and its impact on the economy unfolding. Urban consumer demand tepid, investment demand remains supported by govt capex The MPC also noted that on the demand side: “Rural consumption remains resilient, while urban consumption revival, especially discretionary spending, is tepid.” However, “Fixed investment supported by buoyant government capex continues to support economic activity”. Farm sector buoyant, services steady, industrial growth subdued On the su...

Continuing from yesterday… Mr. Bond no longer a superstar Given my view that the yield curve is no longer a strong leading indicator, I prefer to use a mix of indicators to assess the likely direction of the markets. Mortgage rates, credit growth, credit terms, repo outstandings and the size of the central bank’s balance sheet are the most prominent ingredients in the mix I like to use. For example, in the context of the US, Mortgage rates are a close pulse on borrowing costs, consumer behavior, and economic health, less abstracted than the yield curve. In the U.S., the 30-year fixed mortgage rate tracks loosely with the 10-year Treasury yield—historically about 1.5 to 2 percentage points higher—but it’s more than just a derivative. It folds in lender risk appetite, housing market dynamics, and Fed policy fallout in a way that hits Main Street directly. Presently, mortgage rates are climbing—30-year fixed is around 6.8%, up from 6.4% in late March, shadowing that recent 10-year ...

In my view, the stock market outlook in India, in the short term of one year, is a function of the following seven factors: (1)   Macroeconomic environment (2)   Global markets and flows (3)   Technical positioning (4)   Corporate earnings and valuations (5)   Return profile and prospects for alternative assets like gold, real estate, fixed income, and cryptocurrencies, etc. (6)   Greed and fear equilibrium (7)   Perception of the political establishment The outlook for these seven factors for the next twelve months is as follows, in my view— Macroeconomic environment – Neutral My outlook for the likely macroeconomic environment in FY25 is as follows: (a)   Inflation: Consumer inflation may average well within the RBI tolerance band of 4% to 6%. However, food inflation may continue to be erratic and cause occasional violations of the upper range. (b)   Fiscal Deficit: The fi...

In the past few days, three noteworthy events took place in the global financial markets. These events highlight the policymakers’ dilemma and the uncertainty faced by the financial markets. First, the Bank of Japan changed its policy stance of “negative interest rates” ending its massive decade-long monetary stimulus exercise to a virtual close. Addressing the press after the policy decision, Governor Kazua Ueda emphasized that BoJ has “reverted to a normal monetary policy targeting short-term interest rates as with other central banks” He also added that “if trend inflation heightens a bit more, that may lead to an increase in short-term rates”. An overwhelming market consensus now believes that BoJ will hike the policy rates from the present 0-0.1% to 1% in the next year. However, given the massive debt accumulated over the past two decades, Japan may not afford any rate hike beyond 1%. USDJPY (151.38) is now at its lowest level since 1990. Second, the Swiss National Bank (SNB) cut ...

I had an opportunity to meet with a group of investors last week. The discussion revolved around the present market conditions and the likely direction of equity and bond markets over the next few months. The views about the equity markets were divergent. However, the views about the bond markets were surprisingly similar. A substantial number of people believed that the interest rates have peaked and may move lower in the next 6 months. Long bonds thus appeared as a consensus trade. Almost all of them have been advised by their respective advisors (or friends) to increase the “duration” of their debt portfolio to avail maximum benefit of the declining interest rates. A deeper inquisition highlighted several interesting issues related to the “long duration” positioning of the investors. I want to share some of these issues with the readers to seek their views in this regard. ·          Most of the investors were not fully conversant with the...