RBI Monetary Policy Review: Policy Rates Unchanged, SLR Revised By 1%.

Reserve Bank of India’s latest monetary policy review has left the policy rates unchanged and the Statutory Liquidity Ratio has been revised by 1% to 25%.

Monetary Policy Action For A Sustainable Fragile Recovery

Over the past few months, the health of the global economies have been improved significantly however, the recent RBI’s monetary policy shows that the central bank is taking no chance for the sake of the economic growth as the RBI understands that the current economic recovery is fragile. Perhaps, the companies around the world are announcing better than expected quarterly results, but its not showing the real growth in revenue or on the bottom-line side, but actually it shows the positive response of cost cutting measures, which had been taken when the recession was at peak in Sep, 2008. Moreover, since the Indian economy decelerated in the last few quarters, Reserve Bank is taking permissive measures regardless the inflation problem which is persisting and would force the RBI in near future to take hawkish policy actions for a sustainable growth and to prevent the possible asset bubble, the same which was done by the former RBI Governor – Yaga Venugopal Reddy, who raised the interest rates even in difficult times to avert the Indian Banks from huge losses. To safeguard the economy from the rising public debt, the fiscal stimulus needs to be sustained until the recovery is on. Whether the economy is collapsing or recovering from the gorge, it is the crucial economic cycle and the sustainable recovery would be taken care of by way of stimulating the demand in a bleak times. In the recent economic research done by the VMW on the Indian Economy, in which we have mentioned about the disparity between the WPI and CPI inflation. The same is now concerning the central bank to decide over the interest rates which has been mentioned in the Minutes of Meeting (MoM) of the Board of Governors of RBI.

On Tue, 27th Oct 2009, RBI has left its key policy rates (Repo and Reverse Repo) unchanged for a while and hinted upon a high degree of probability of higher inflation in the near future which would be a turnaround for the interest rates. Moreover, the central bank emphasis on credit flows to the Agriculture and SME sector for a growth revival has disappointed the Real Estate industry. RBI has not even touched the Cash Reserve Ratio (CRR) as the liquidity in the market is still at a comfortable level. Upto first week of Oct 2009, M3 Money Supply was at 18.9 per cent above the RBI estimate as the large Government Borrowings reflecting the expansion of M3 Stock of Money.

Over the past few years, RBI’s monetary actions are always growth specific. India is a supply constrained economy as compare to developed economies which are lagging by lament demand. To supply the ample social infrastructure, RBI is now focussing on the Real Estate and Infrastructure sector. The stance of the Monetary Policy for the rest of the year 2009  under different monetary measures in which the Repo Rate and Reverse Repo rate has been leave unchange at 4.75%, and 3.25% respectively. CRR has also been retained unchanged at 5% while the SLR has been revised by 1 percentage point to 25%.

Developing Asia To Be Buoyant To The Global Downturn, Says Asian Development Bank.

Developing Economies in the Asian region would be more resilient to the global downturn than was initially thought, the major ADB report says.

Asian Development Bank on Tuesday has published its report on the Asian Region forecasting the economic growth for year 2009 and 2010 at 3.9% and 6.4% respectively. According to the ADB, despite the worsening economic situation, developing Asia is poised to lead the recovery from the worldwide slowdown. Active response from the government and healthy financial system in the region has fuelled the economic growth and insulated the region from the worst economic crisis to certain extent.

India Economy in particular, ADB has raised the growth forecast from 5 per cent to 6 per cent for the year 2009, and 7 per cent for the year 2010. The key drivers for Indian economy to survive is quicker than expected return on capital, huge capital inflows, increase public spending, Industrial production is improving, however the risk of downside in the economy due to weaker exports, weaker agriculture output expectations has been minimized by the way of announcing stimulus packages and monetary policies which has maintained the financial system in working condition, although the agriculture output is expected to revive by the last quarter. According to the ADB, 2010 would be better for the economy as the industrial economies is supposed to be out of recession, thus the exports will likely to turnaround and it will cut the overall trade deficit.

On the inflation side, as the food prices are soaring due to poor output of crops this year, the report suggest that the government will be able to contain the inflation by importing the appropriate amount of foodgrain, however it would create the chaotic situation for the central bank while coming on to the monetary policy review. Higher CPI would influence the RBI’s monetary decision and hence, the revision in interest rates is expected as the VMW had research earlier. Key valid points which has been outlined by the ADB to broader openness for the economic resilience:

1. Reinforce Intra-Regional Trade.
2. Effectively manage financial globalization.
3. Maximizing the benefits from labor mobilization.

 

 

This report is officially published by the ADB and the content used in this post has been taken from the report of Asian Development Bank. VMW is not intended to disseminate this report and has been published on VMW Blog for the information purpose only for the visitors.

Indian Economy 2009-10 Overview. Development in Economy Subsequent To The Recent Crisis.

High interest rates, inflation rate, trade deficit, fiscal deficit and depriciation of Rupee is expected in the next few months.

VMW have researched on the global economy with the projection of contraction in the economy is expected in the first half of the year and will likely to see expansion in some of the economies. Germany and France, the largest and second largest economies of the European Union respectively and Japan, the largest economy of Asia has emerged from the recession after 5 quarters, and the United States is somewhat shy to come out of the recession and is expected to expand by the end of this year. The main drivers which might helped the economy, is the active response by the Government Authorities, in a way of announcing trillions of dollars in stimulus packages. Central banks around the world have poured in billions of dollars into the system to make credit market works and slashed interest rates to almost nil to impede the economy to go into deeper recession. With most of the indicators are now offering the sign of strength, however the wobbling unemployment and unsustainable government support to the economy would hamper the growth process. Amid the bleak environment in the global economy, GDP growth in developing economies are shrugging the outlook of their economic growth. With most of the economies were in melancholy, economies like India and China registered a growth rate of 6.7% and 9% respectively.

The immediate effect of the rebound in the global economy could be seen in the financial markets which have posted the spectacular gains in short period of time. Since 2008 fallout, markets in India have been stabilized followed by the unprecendented victory in the recent elections, announcement of stimulus packages, and active response to the crisis by the central bank (RBI) which boosted market sentiment and anticipating greater reforms in the economy. In fact situation at the world level are also improving significantly. US economy in particular has offered strong signs of improvement in its economy and expunging the recession which begun in the last quarter of the year 2007.

In the above Chart, which is showing the India’s IIP, Inflation, Exports and Imports from Apr 2008 to Jun 2009. All trendlines are showing the sign of stability from falling which was started in 2008. Over the last six years, Indian Economy grew at an average rate of 8%, becomes one of the world’s largest economy. In 2007-08, Indian Economy posted a growth rate of 9%, though the economic growth has slumped due to recession in the west for the year 2008-09. Service sector will continue to outnumber the manufacturing sector and account for more than 53% of the total GDP, but still less than the advanced economies. According to the GDP data, IT export is on the rise and outpacing the overall growth of the sector.

Nasty Monsoon: This year’s deficient monsoon probably downgrade the overall economic growth as the Agriculture sector accounts for more than 18% of the total GDP. Uttar Pradesh, Andhra Pradesh, West Bengal, Punjab, and Haryana are the key farming locations of India. Almost scanty monsoon in Uttar Pradesh in particular will make a larger impact on India’s farm sector as the poor harvesting of Rice and Cane hit hard due to poor monsoon. Monsoon below average will make several kind of impact on India and other parts of the world. As India is the second largest producer of Rice and Sugarcane followed by the US and Brazil respectively, the commodity prices will go up, and according to the NYMEX data, the sugar prices soared by 62% since last year due to bad weather in India and the world had been affected by the food price crisis last year due to several reasons including poor harvesting due to drought situation and various other non-farm reasons.

Primarily, capital inflows into India has supported the sharp ”V” shape recovery in the BSE’s benchmark index, Sensex. Indian equity markets perked up by more than 90% from its March 2009 lows (See given below figure). Foreign investments, positive growth outlook, consumer confidence, good corporate earnings, better reforms prospect might be a specific reason of overall growth in the financial markets. But, will the rally be sustainable over the next few months as the economy would not be grow as fast as we had expected earlier?

The global financial markets are trading at a reasonable value after sharp fall from the 2007 highs. From the beginning of this year, lot of money has poured into the markets around the world as the investors are optimistic about the economy. Developed economies would take more than two years to recover however the Asian economies will lead the overall economic recovery. Companies around the world has posted better than expected earnings in the last couple of quarters and showing the signs of recovery in their operations, nevertheless the growth in their earnings was ushered by cost cutting measures such as layoff and restructuring of their businesses. In general, their growth would be sustainable once the consumer confidence revives in the developed economies.

Unruly Supply-Side: Over the next few months, we will see the higher inflation due to supply side exertion. Supply side concern may include shortage of foodgrains, higher stock of money in the system due to spiralling government borrowings will doubtlessly push inflation on the higher side. We will expect the monetary action from Reserve Bank of India (RBI) in response to the microeconomic developments. Over the next few months, perhaps the Interest rates would go up in response to inoculate the economy from the risk of higher inflation and currency depriciation.

Economy in 2009-10: It would be bewilder that when we should expect the veritable recovery in the Indian Economy? Of course the Indian economy is not an exception and will go inline with the global economies. It will take a lot of time to recover however the situation has improved significantly and so far we have seen an extremely rapid movement in the economy. Moreover, the G-20 Summit, Pittsburgh in Sep 2009 will play a crucial role in the overall economic recovery as the global leaders were committed to monitor the situation and decision which were taken in G-20 Summit, London. However, we cannot expect the fresh stimulus packages from the Government Authorities to revive the economy. Click here to get protraction of this research at VMW Website.

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RBI Monetary Policy Review: Policy Rates Unchanged, SLR Revised to 1%.

Reserve Bank of India Kept its Policy Rates And Discount Rate Unaltered in its First Quarter Review of Monetary Policy.

Reserve Bank of India (RBI) has upgraded the India’s economic outlook in its monetary policy however the inflation outlook has maintained at 5% to 6% in the next fiscal.

RBI’s Current Policy Rate and Discount Rate

 

Policy rates	Jul 2009	Oct 2008
Cash Reserve Ratio (CRR)	5%	9%
Repo Rate	4.75%	9%
Reverse Repo Rate	3.25%	6%
Statutory Liquidity Ratio (SLR)	24%	25%
Bank Rate (Discount Rate)	6%	6%

 

RBI in its recent meeting with the board of governors seems to be cautious with the large government borrowings. Reserve Bank of India has exhorted the government to cap the rising fiscal deficit. RBI has also raised its M3 money supply from previous 17% to 18% by taking larger borrowings into consideration which will make a certain impact on the supply side inflation. According to the RBI, Indian economy seeing the inflation rate between 5% and 6% going forward. The recent uptrend the global economy will augment the demand for the commodities. Since Jun 2009, India’s WPI inflation turned negative followed by the change in base effect and will not be elucidated as a contraction in demand in the Indian economy and hence the scanty monsoon this year and continuous rise in food prices will not let WPI inflation to persist in negative territory going forward. 

Money Supply (M3): India’s Money Supply (M3) is at Rs 4,938,278 Crores ($1.02 Trillion) while the M1 Money Supply is Rs 1,268,537 Crores ($262 billion) as of May 2009 growth of 20.57% from previous year.

RBI’s Policy Stance

 

RBI has opted to keep policy rate and bank rate unchanged. Central bank so far has reduced CRR by 400 bps, repo rate by 425 bps since early Oct, 2008. After taking office, the RBI Governor Dr Duvvuri Subbarao has slashed the interest rates in response to the economic downturn in mid of year 2008. Since the global economy is showing the signs of strength, RBI’s economic growth estimation placed at 6% with the upward bias followed by the improved domestic situation, decent corporate performance, and improving situation in the developed economies which will in turn favorable for the India’s export sector. Overall, its a revival of optimism in India, and the recent RBI’s monetary policy is now seen as a measure of performance and the future outlook of the macroeconomic part of the Indian economy.