Bank Policy Tuesday: RBI Governor completes policy action

inflation
inflation (Photo credit: SalFalko)

With the forced liquidity constraints as the currency devolved on the nation in June ( after May 21 announcement) RBI was stuck in the middle of a rate cut leg of its policy to encourage growth. Already hampered by banks using Central Bank liquidity to the extent of INR 2 Tln instead of market, the Central bank’s rate hike onsequently in September even as the MSF hikes were redacted and brought back to the normal line may finally break the back of the markets on the verge of a bullish move from 6200.

The only inflation out of control however is the Food inflation which may not respond to any rate hikes and this rate hike may just be a mechanistic response continuing since Duvvoori Rao demitted office to stabilise the higher rate environment, in which case India may old these levels for a good six months, and in developed markets this new intermediate leg could have lasted years, till the rate cuts can begin again.

Meanwhile consumer staples will continue to see large double digit price increases to correct 2-3 years of suppressed marketing budgets and pricin pressures unrequited to keep basic sales growth alive in consumer markets

The announced policy steps however will increase bank rates and as retail lending has reounded such increases are largely going to be absorbed by consumers and however will have had debatable impacts on fueling furthr inflation now controlled by bank rates. NBFC business is already looking better in consumer durables with a clampdown on 0 interest loans and while that may not segment the market in favor of first time durable buyers that have been an absent quantity fooling marketers and policymakers, it will continue to better control the negative output gap with more advantages for NBFC lending even for banks that have already relied a fair portion of their portfolio on the sector at the expense of obviating the real winning consumer sectors or industry sectors winning n the changed scenario

RBI hiked rates 25 bp and MSF channel has returned to 100 bp over the repo rate clearing the path for a return to the Repo rate as the Bank rate.. WPI forecast has been banded to the central bank’s comfort zone as 6-7%. GDP growth is updatd to 5% for FY 2014

The banks lead the Nifty comeback post policy action as they assume the deed is done and currency will consolidate around 61-62 levels before going back to the trade deficit control led highs nearer 60-61 levels The sponsored rally ost policy is however blushingly even across non actors and non performers in the banks bunched with YES Bank, ICICI Bank and even HDFC Bank and Axis Bank. IDFC has recovered its morning deficit too. BOB is up 15 pointsand BOI is in the positive with Pharma/result candidate DRL also staging a mini rally. The short on LIC Housing ahead of results has also disappeared and tomorrow’s results are likely to see fat positives as sentiment needs a good build up and inflows ontinue to allow market makers to perform as such and the Financials are likely to reward investors who stuck through the unreasonable 2 months pre the last MSF related policy action. Further policy action unless embargoed by inflation is likely to stay with seeing the bank rate climb down from the current MSF 8.75% to the Repo rate of 7.75% ( The Revese Repo is 6.75% where  RBI issues new collateral securities)

 

Cut in MSF, RBI to monitor CAD and Inflation(WPI)- Bank Policy and Mid Quarter Review (September 2013)

RBI followed Fed into the ever present snare of having lost the confidence of the markets when it decided to recalibrate repo rates while decreasing MSF rates to 9.5%. The Repo rate at 7.5% in fact allows the 200bp cover on the normal MSF as it now stands exactly at 9.5% but the markets were spooked by an anti inflationary stance from the Central Bank blocking out possiblities  of growth returning in the immediate future.

RBI has in the meantime further eased intra day trading on FX limited for banks along with the extraordinary increase in MSF and Bank rate last month. The Reverse Repo rate is also notified to 6.50% and though the bank rate has not been updated, it has been notified to 9.5%. Unfortunately with yields pulling away sharply to 8.3% levels despite their being room to move to 8% levels after the policy announcement, it means markets and inflows are now gong to try and make economic judgments all over again and with no other policy action forthcoming that could fiscally pressure India all over again ahead of the tightening in December

Daily CRR has been reduced to 95% from 99% allowing banks a little more flexibility but CRR and SLR together still account for more than 23% of the Banking deposits

Changes to liquidity rates can be effected further at any time before or after he next policy review. The Mid quarter review sees to balance the good monsoon’s impact as he negative outut gap now expected with the increase in risks on CAD and inflation

RBI’s stress on WPI seems unwarranted at ur end esp wit Crude levels coming back to manageable levels even as they go down further.

RBI Mid Quarter Review 11 am  

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Bank Policy Tuesday: 90% expect a rate cut. Sorry, says RBI Governor. India wins.

Despite the political improbability of this being counted as a standoff by the understanding P Chidambaram, this will be the most advocated course by us as Indian Food inflation starts into gear and despite non Food inflation now being below 4% the banks’ predisposition to trust their models earning a good profit in such rate cut cycles and the lack of transmission of last rate cut to bank rates across the board means the RBI governor will have more wiggle room later if he leaves rates untouched.

That is some simple policy math weighed in by a outside in look at the markets busy in the ranged groove. Market economists are hemmed in by the lack of bullish global prospects despite a healthy prognosis for 2013 just two months ago. CAD remains dangerously teetering on the brink and can easily be held hostage by Oil and other imports. Gold imports  have not been capped off. Fisc parameters have not been resolved.

Indian markets have showed the same audacity for a bullish candle if only they  were allowed to bully the experts and the pragmatic Duvvoori Subbarao. Most experts thus have agreed to a rate cut tomorrow as more likely but have correspondingly cut down on the wiggle room for growth in even 2014 and definitely the rest of 2013. While Bank Policy could traditionally go for a rate cut now, the only room it will have in the future is to nod sagely and say ‘we told you so’. The 6.8% WPI is no measure of the 11% CPI and never the twain shall meet.

This is not the last stand for central bank led monetary policy however and if rates are indeed not cut now and market forces continue to engender the positive turnaround in IIP , the Q3 policy in December 2013 could look much more positive and we could be near a good take off point where consecutive cuts could then support growth. A 10 Y yield at 7.75% therefore is no bad news and the guv has all my good faith support if he lets the rate cut go unannounced tomorrow. 

Happy Thursdays! The India Inflation reports (October 2011)

India reported its October figures for inflation still near the September’s 9.72%. The 9.73% figure was stuck

Fort Area, Mumbaiwith a high food and fuel component of 11 and 14.5% The core inflation figure remains equally tense at 7.7% India has lived with historically higher rates than most economies, its nominal growth always outpacing inflation by 7-8% since the 90s and even before at higher inflation figures and short term borrowing rates of even 21% .

India’s shadow banking system has also been in a perpetual declines unlike its counterparts in China or elsewhere  is Asia and Europe. However, bank rates are currently capped at 8.5% and borrowers do not have to fork out more than 10-14% across the 5 different credit worthy rating baskets. Credit growth is however slower at less than 20 %with RBI targeting 18% and consumption sectors have again slowed down after 11 straight months of 9+ inflation

Also linked to the monetary and fiscal systems is the fact that less than 5% of Indians fall under the tax code and/or file returns and GST has not been implemented across the Federal structure and /of fiscal measures monitored along with welfare scheme as systemized data is usually at variance within and not connected across different silos

RBI-Tower
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Food and Vegetables have not dropped below 10% in the year most times, a category of vegetables or pulses landing an annual rate as high as 25% and never lower than 15% for 6-8 months on the trot as supply measures and inadequate remuneration of farmers disturb the welfare mechanism. Almost 2 in 3 of farm advances are classified as bad loans but remain recoverable for most bankers by experience

Tighter liquidity has taken domestic yields in the 2-5 yr range to 9.1 – 9.2% recently and banks have stopped subscribing to new Govt auctions , small amounts of $220 mln devolving last week on the new 2023 security as banks are already loaded up on SLR securities as well as the 6% CRR

Rupee has also broken on the downside decisively across 50 this month after the 15% down move last month

September Bank Policy review : Rate hike again!

Gold Key, weighing one kilogram is used to acc...
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Update: CRR has been cut 25 bps and there may be more CRR cuts. The channel being fixed the repo rate of 8.25% means a MSF rate of 9.25% and a Reverse Repo rate of 7.25% still be paid out by RBI . A SLR cut of some kind and a SLR deposit rate increase may also be happening while CRR is 6%

RBI says:

– Global Eco environment has worsened

– Pace of Exports unlikely to be supported as weak demand

– Inflation much above comfort zone

– Policy transmission is still weak but inflation is being transmitted to retail POP

yields are now trading higher at 8.37%, hawkish stance takes markets down on news. More details after rBI conference is held

Here’s the case for a rate hike in a nutshell:

a. Rates up 475 bp since march 2010. this means the Governor has to start SLR cuts now, which RBI has indicated as possible this time. It does not mean rate cuts or that thee rate hike cycle has topped off because

b. non food inflation at 13% is not in control and the new inflation target of 7% may already be too old as rindia’s crude basket for one remains one of the most expensive in the world at $110 and even in September $106( indiainfoline.com, UBS for the crude basket data)

c. food inflation control has meant plateauing and not fall in inflation

We are here and would be posting the bank rate update

Happy Thursdays! What else to expect..(Early Report)

HSBC in Kolkata
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Inflation WoW came out as expected at 11.7% for food inflation, 12.86% for Primary Articles and the consolidated number at 9.02% ahead of the unscheduled eGOM meeting for Diesel and Kerosene price corrections that will keep inflation up. Expectations are normalising to a higher level and in an hour or so the bank policy for the rest of the year may become clearer with the Bank rate 100bips above the Repo rate and currently at 8.25% (Repo 7.25%) likely heading to a above 10% figure andd more as imported inflation and the one carried into input prices squeezes profitability factors in yet bereft India forver waiting for new investors..This article will be updated later throughout the day

HSBC and Stanchart have come out as the only ones carrying forward from here being used to a Rupee Trillion of business assets each in the country. MoM inflation WPI figures had earlier come to 9.06% on Monday night and markets have started correcting from 5500, results a few weeks later probably accelerating the down move this time and the yield curve moving after the announcement further higher from 8.3 to even 9 – 9.5 % in the next quarter or so. Banks’ pricing will move as also for deposits after a couple of months if and when inflation stays at 9-9.5% and RBI makes a new set of more quicker baby steps just to stay on top till the rates start moving southward in 2012

The monthly inflation figure saw non Food core inflation move from 6.5% to 7% Month on month and base transmission is on to manufactured articles as car prices were hiked this week while FMCG / durables keep playing with their own retailer economy.

Happy Thursdays! The bank rate catastrophe | Advantage Research

The North Block, in New Delhi, houses key gove...
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While the “bank rate” has been already used into Indian policy as the commercial benchmark for banks to lend and thus borrow, the policy rates set by the RBI in the ordinarily and now by policy fixed channel of 100 bp has definitely made Fixed Income more interesting with yields touching 9% soon whenever a rate hike of more than 25 bp or a WPI inflation move to double digits is confirmed even as a blip. Luckily, the ECB rate hike would already be done tonight and we have a week before talks on QE3 are more than an idle opinion at PIMCO.

As mentioned in the networks ( by Commodities experts, I suspect) the end of QE2 would soften the inflation blow for us and if it had come six months earlier, India may not have been tackling hot inflation either, which unlike in the case of China is not from overusing existing domestic production capacities and is more from supply inefficiencies and the skewed pricing vis a vis dollar we sustain for our exports. Also, before we forget challenges continue for our forex earners in other punitive action vis a vis knowledge workers and the expiry of the Doha round, even as a great performance on the fiscal deficit at 4.7% outruns our dismay in FY2012 for a likely 5.5% deficit an almost 20% jump without Telco licence revenues and lack of availability of cost cutting measures as we continue to under invest in Infrastructure as also Education Welfare and Healthcare.

My analysis however begs again that we find the space from the globally inspired inflation that has been unwillingly thrust on us and soon because we really never could afford a tight monetary policy for the Private sector or stop printing money for Welfare schemes. The catastrophe being in the RBI having to hike rates ( and they will raise it again) to bring inflation under control and keep growth moving forward when a drop to 7% growth does almost become standing still for us because of our size and diversity

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