"I sometimes think that God in
creating man somewhat overestimated his ability."
-
Oscar Wilde (Irish, 1854-1900)
Word for the day
Jiggery-pokery (n)
Trickery, hocus-pocus;
fraud; humbug, manipulation.
(Source: Dictionary.com)
Malice towards
none
No European summer breaks for Congress leaders this
year.
What about a month of "introspection
hiatus"?
Stressed, uninspiring and apathetic
Governor Rajan obliged the government and markets by a rather reluctant
25bps repo rate cut. However, in doing so he might have caused some harm to the
market confidence rather than helping it out.
The latest RBI policy
statement and subsequent press briefing by the Governor Rajan had five
disturbing features.
(a) Recently on many
occasions, the RBI has admitted to the elevated and still rising level of
stress in the financial system. This stress has mostly prevented the banks from
transmitting past cuts to the business borrowers. There is little in the policy
statement to address this issue. The policy statement does speak of stress in
power discoms and need for funding of some bank balance sheet. But there is
nothing to suggest how RBI would like to manage the challenge of up-fronting of
rate cuts in still rising financial stress environment.
(b) RBI has raised
January 2016 inflation target to 6%, anticipating higher risk to price
stability from sub-par monsoon and external factors. Despite slow down in
headline numbers, RBI has admitted that the cost of living has been rising
unabated impacting the household consumption and savings. A rate cut at this
stage might weaken the RBI's battle against the inflation.
(c) In the latest policy
statement and subsequent press briefing the Governor rather curtly nudged
the banks to lower the lending rates. This may put the banks and the regulator
on a confrontational path, impacting the business of the lenders as well as the
confidence of the borrowers.
(d) The Governor has
highlighted the existence of material external and internal challenges to
growth. Under the circumstances a stronger INR could only negatively impact the
growth by adversely affecting the exports. Given the large output gap, lower
capacity utilization and benign demand growth conditions, the imports may not
likely to rise materially anyways.
Moreover, since
the governor has clearly belied his promise of making the policy objective and
data driven (see
here), this brings the element of unpredictability and surprise in the
policy making. This should keep the foreign investors guessing about the timing
of their investment in Indian assets and businesses. Thus adding to the
volatility in flows and therefore current account.
(e) The last and the
worst was the poor body language of the Governor. While announcing the policy
he was nowhere closer to his cheerful self, he is best known for. He appeared
stressed, uninspiring and apathetic. "If" it is indicative of a chasm
between the regulator and the government or regulator and the lenders, or all
three, this may not be good for anyone.
In my view, the rate cut announced by RBI might be redundant, and
prove to be counterproductive. The markets correctly reacted negatively to the
event.
(The third bi-monthly monetary policy statement will be announced
on August 4, 2015.)
Expert views on RBI policy
stance
"A repo rate cut of 25 bps was expected and already factored
in by most of the market participants. It's consistent with the RBI's cautious
stance, as it remains concerned about the monsoon outcome, geopolitical trends
& U.S. Fed action. RBI's future actions will be governed by not just the
above stated points but also the government's fiscal responses to adverse
monsoon outcome and its efforts to push infrastructure growth." (Rupa Rege
L&T Finance)
"Besides the as-expected 25 bp rate cut, the RBI's tone errs
on the side of caution on the price and growth outlook. Growth projections were
revised down a notch, reflecting the central bank's belief that the ongoing
recovery trend will be interpreted as modestly positive and not as strong as
new headline GDP seems to suggest.
RBI will also be wary of aggressively loosening policy reins given
the likelihood of higher public spending to kickstart the capex cycle and
fiscal support to compensate weak agricultural sector (if monsoon disappoint)
this year." (Radhika Rao, DBS)
"This is as per the market expectations: a rate cut followed
by indications of a long pause. You might get a knee-jerk rally in bonds on the
rate cut, but frankly I think markets will settle down to where they were and
maybe even weaken a little bit ... I don't really see yields, either in
government bonds or corporate bonds, going down significantly from where they
were before the policy (meeting): so it begs the question of how much of this
can be transmitted by banks, if there is no real change to interest rates
through the policy." (Ananth Narayan, Standard Chartered)
"Broadly in line with what we were expecting, which is RBI is
basically saying that this will be an extended cycle, and in the near term with
some of the risk they are seeing on inflation, they'd probably be on pause
after today's rate cut. We do believe that RBI is probably over-conservative in
its inflation forecast, and the 6 percent inflation they expect by the end of
the calendar year or early next year, is probably going to be undershot. Thus,
there is a possibility of a further rate cut. For that now we will need to see
data as it comes in." (R. Sivakumar, Axis Bank AMC)
"In line with anticipation, RBI has cut the repo rate by 25
bps. Further rate cuts definitely would be contingent on a lot of factors, in
terms of the impact of monsoons etc. (Shubhada Rao, Yes Bank)
"We'd like to see what happens in the market. You know we did
a base rate cut last month...We'd like to see in the next two or three weeks
what the action is in the market and accordingly we'll take action. I have to
say that demand for credit remains weak. So probably the passing on too will
also come in due course of time." (Ranjan Dhawan, BoB)
"I think the implication of the guidance is that the RBI is
going to wait for more inflation data and also for more clarity on risks to
inflation. We hold to our call that the RBI will be on pause for the rest of
the year until December.
"There is likely to be a partial pass-through from banks. If
government wants accelerated pass-through, whole public sector space, separate
the stronger from the weaker banks, but that's a policy call the government has
to take." (A. Prasanna, ICICI Securities Primary Dealership) (Reuters)
