India’s Annual Monetary Policy 2011 – Inflation Is Expected To Remain High Amid Robust Economic Growth.

The thirst of robust economic expansion and higher commodity prices will technically push inflation on the upside and interest rate in India is expected to remain high for the next couple of fiscal years as the RBI seeming to keep interest rates on the higher side to maintain the cost of credit exorbitant to lessen the demand.

 

Permalink: bit.ly/mSJbx9  – Text the permalink of this research to your Friends.

It was the confrontational step of the Reserve Bank of India by revising another 50 bps in its policy rates to address the wild price rise situation in order to eliminate the risk of higher inflation and to persuade the Indian economy to grow fast but sustainably. VMW has analyzed the inflation problem from the household’s kitchen to the corporate decision maker and found that the food prices are not rising as fast as the non-food articles do, due to increase in international commodity prices. Food prices in March rose by 9.47 per cent while the prices of non-food articles rose by 25.88 per cent largely inflated by expensive crude oil and other important imported commodity products. So far, the effect of RBI’s rate tightening and expensive commodity prices – rallied on the economic euphoria – can be seen on the Capital Goods sector of India. India’s IIP index has been fluctuating, and the capital goods, index in particular, has performed deplorably (see figure below) due to higher cost of credit, tolling in the company’s income statement in terms of higher interest payments. Construction, Energy, Real Estate, Diversified and Infrastructure companies have piled up billions of dollars in terms of debt to function their operations and to execute their awarded projects.

 

The important wings of the Indian government and the Reserve Bank of India are expecting the inflation around 6 per cent by the end of the fiscal year 2012. However, the VMW’s estimates are bucking the government and RBI’s estimates – expecting the inflation to remain above 6 percent and even in a double digit by the end of this year (up to 11 percent). The only fundamental cause is the India’s hunger of economic expansion at a faster pace, and the same would not pull down the inflation to lower levels, since it will dramatically push the demand in the economy for pricey imported commodity. Moreover, the US Federal Reserves’ monetary expansion program, known by Quantitative Easing or QE2 is scheduled to end by Jun, 2011 and, perhaps, it will not reduce the impact of higher inflation in the economy right away and high supply of a dollar could depreciate it against the other major currencies, which will push the international commodity prices. The expensive imports will prevail upon the higher current account deficit until the export figures too remain blunt. Henceforth, the Current Account Deficit remains a prime concern for the economy. Although, RBI is not considering it as a major threat but the VMW is deliberating the same, and the prime predicament could be the lower portfolio investments since Foreign Institutional Investors’ flows (FII) are the immediate source of financing the Current Account Deficit and Foreign Direct Investments are not as easy as the FII flows are due to scores of roadblocks to the investments and instability in national politics and India’s foreign policy.

 

Inflation always Remained High in India and Now Needs Government Intervention Plus Tighter Monetary Policy from RBI’s Side. 

Now, in our research lab, we have analyzed the inflation problem. Look at the GDP Deflator and the WPI Inflation rate – how these trend lines have emerged over the past six fiscal years. GDP deflator is one of the other important tools to measure inflation, and it show, the inflation problem was relentlessly haunting the Indian economy. The most significant discovery is, the RBI loosened the policy rates during FY08, when India faced the condition of deflation due to change in the base year and was not reflecting the correct picture. However, GDP deflator remained at the alarming levels. At the same time, in FY09, RBI has raised the interest rates to prevent India to be a victim of the global financial crisis.

 

Here, we are not suggesting the RBI to track the GDP deflator, but to align its monetary policy to fix the “structured inflation problem”, caused by huge government borrowings, and at the same time, to make the economic growth sustainable and to refrain from the economic overheating. Plus to this, there is an urgent need of government intervention in terms of policies to overhaul the distribution of agricultural produce, to check the government borrowings and bringing down the fiscal deficit, which is now estimated at 5.6 percent until Feb, 2011 and 5.8 percent for FY2011. This will also subdue the prices.

 

 

Future of the Interest Rates in India

Rise in crude oil prices and other imported commodity price holes the Indian Economy up. It is one of the biggest risks to India since the country is not completely reliant on its own energy output and imports more than 70 percent of crude oil from GCC countries and other OPEC members. It’s expected that the global economic recovery would not stall but the pace will come down most importantly when the United States has stepped up its efforts to bring down the fiscal deficit to 4.1 percent by 2014. Nevertheless, the real economic output could remain under pressure due to the effect of increasing government debt. Since, we have focused on the final output (GDP) and it shows the prices of final produce in a particular financial year are increasing by more than 7.0 percent, whereas the WPI inflation is fluctuating throughout the discussed fiscal years. Provided herein is India’s stock of money or M3 for the last three fiscal years, which reverberates above 20 per cent. However, it is now falling significantly back to 15 per cent, and it shows the RBI’s action in policy rate is working, which means the monetary policy has a certain effect on the core inflation problem and would make an impact on the demand side but it is not sustainable as the government’s borrowing plans are on track.

 

 

 

 

Lower money supply has side effects too as it will increase the cost of credit further, and it will reduce the access to credit. Moreover, the stock markets could not function properly in this environment since the economic activity declines, which will eventually reduce the value of people’s retirement savings. However, the RBI has only one choice – tight monetary policy to tame inflation by giving up the India’s ambitions of double digit economic growth.

 

This VMW Research is originally published at UNIDOW.com

Continue reading

Advertisements

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

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

 

Recovery in Economy.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 a short time. Since 2008 fallout, markets in India have been stabilized followed by the unprecedented 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.

India Economy Overview

In the above Chart, which is showing the India’s IIP, Inflation, Exports and Imports from Apr 2008 to Jun 2009. All trend lines 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 grown 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.

BSE Sensex

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 food grains, 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 depreciation.

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.

Important Notice: VMW Research Team has marked this research as “Superannuated” and the content of this research is no longer in use in today’s economic context. However, certain references and inferences in this research can be use.  Continue reading

VMW View on Politics: India Needs A Complete Overhaul of its State Level Administration System.

Recent Lok Sabha Polls may have mandated the Stable Government at the Center, however so far India fails to make a stable administration at the State level, which is as important as the stable central  government to the people of India. Govt changes every five years but the problem remains unsolved due to differences.

Inauguration of Memorial Park with the installation of statues in Lucknow, the capital of the Indian State of Uttar Pradesh (UP).The uncertainties and the war of words at the state level is the same kind of concern that people of India had faced the unstable government at the center in the mid of 1990s and even many times since the independence. The recent war between the Congress Party and the Bahujan Samaj Party (BSP) has sparked the war in politics just few months after the conclusion of recent elections, which mandated the stable government at the center stage. But does it able to make a stable administration at the state level?

Some of the most disturbed Indian states are Uttar Pradesh, Bihar, Orrisa, Jharkhand, Assam, Manipur, Nagaland and few other states are facing the uncertainties at the ground level with the rising risk of Terrorism, Diseases, Poverty, Starvation and many other state level issues that are still unresolved.

Central Government is incapable of implementing the targets of Five Year Plan or the sectoral reforms due to the clash between the state governments while the state governments are accusing the central government of incapable to fund in the growth of the state. There are lot major issues which cannot be resolved by the central government alone and the fighting between the both level of governments will hinder the growth of the nation. We have noted down some of the most prominent areas of the discussion which draws attention even after the successful election.

Key Challenges

On Agriculture

The weaker monsoon this year will add more pressure on the country’s farmers. The crop productivity this year is expected to fall and the country could face the deficit of the availability of  foodgrain in the coming months. Though the agriculture sector contributes 17% to the Indian GDP, however it employs millions of people to work on. According to the relevent data, more than 70% of the 1.1 billion people is in rural area, in which millions of people are below poverty line and the rest are engaged in the agriculture sector.

Whenever India receives the monsoon lower than the average, many farmers were forced to commit suicide due to financial stress. India has inadequate infrastructure, irrigation infrastructure and services in rural areas which actually makes the life of farmers a netherworld. Financial services are also a major setback for the rural parts of India. Even after the economic openness, farmers are still raising funds through Landlords (popularly known as Zamindar in India) and they forcibly acquire the land incase of non repayment. Severe land regulations such as banning or restrictions on renting land has made tough for the landless farmers to get access to land which actually discouraging the rural investments.

Availability of finances is the another major factor of concern for the farmers. Regional Rural banks – on an average are sitting in a huge loss with the mounting non performing assets (NPA) in their accounts, including no regulatory framework for these banks and high risk involved in transaction to the agriculture sector making them resistant to provide credit facility to the farmers. Even the govt has made an effort to support the rural development, however the inefficient use of public funds and lower accountability by the officials making these efforts dud. Last year, Government of India has waived off the debt availed by the farmers. However it doesn’t help at all as the farmers got the benefits only for a year despite this initiative to reduce the burden, they’re still facing tough situation after the scanty monsoon this year.

 

On Health & Security

Terrorism, hunger, widespread eradicable diseases are common in India which has a way to counter them, however the poor adminitration is making these things possible in the country. According to the International Food Policy Research Institute (IFPRI), India ranks 66 out of 88 countries in the world, in which Madhya Pradesh is the hardest hit state.

India State Hunger Index Map (By IFPRI)

India State Hunger Index Map (By IFPRI)

The severity of hunger situation in India is a serious problem and needs an immediate attention from the policymakers. Punjab, Andhra Pradesh, Kerala and Assam are at least in better position than the other states. The major health related issues like the child underweight is almost subsist in all states. This needs the health intervention to all women of reproductive age, pregnant and lactating women and children under the age of two. In many villages, the government controlled medical centers ( or Chikitshalya in Hindi) are running for this purpose, however the shortage of doctors and medical aid in the tribal areas and other remote places is making these medical centers trivial. There is a need for strict supervision of the local administrations in that type places so that the government initiatives will continue to work for them.

Terrorism is the prominent issues to be discussed nowadays. India putting pressure on Pakistan after terror attacks in Mumbai last Nov, to do justice for the victims of Mumbai Attacks and it is in under process and we know it will take number years to complete. Since we can understand, India is still unprepared for the possible terrorist attack (hope, not to happen such things) as the government has not done anything for the security yet. Eastern parts of India witnesses violence everyday by Maoist or Naxals. India should need to preclude these acts immediately.

India’s Agriculture sector has a potential to attract lot of investments however it need lot of measures too to improve that sector. Government of India has taken several initiatives including the recent project of setting up Agriculture Innovation Project in association with the World Bank. The major problems are discussed in brief:

  • Availability of Finance by restructuring the Regional Rural Banks (RRB). RRB’s major shareholders are State Bank of India, Punjab National Bank, Oriental Bank of Commerce and other major public sector banks.
  • Improving Irrigation infrastructure. India is the country which highly prone to the severe floods and witnesses it every year.
  • Needs immediate overhaul of land deal rules. Landless farmers do not have access to the lands due to strict rules on renting or using the farm land in India.  It’ll encourage both landless farmers and even the seasonal farmers.
  • Use of higher technology in agriculture sector. Many poor farmers are still using traditional tools for the irrigation purpose.
  • There is an urgent need for basic infrastructure in rural areas. This will enhance the
  • Access to Government Warehouses for storing the foodgrain. Central Warehouse Corporation is the major player in this. There is a problem of logistics to travel their crop to the warehouse to store them.
  • The lower margin in crop business to the farmers is discouraging the investment in India’s agriculture sector.
  • Transportation system is not very effective for the transition of crops to Warehouses.

Our intention is not to harm the image of any political party and we are never intended to publish any kind of information that will hurt the people’s sentiment. What we’ve delivered here is to get the attention of the Central Government and the State Government to justify their existence in the center and the administrative level so that they can put some concern into the issues which needs to resolve. The infirmity between the center and the state will hamper the growth of India and the stable central government will be considered as futile as there is no objective for the country and their inhabitants.

(SA) Recovery in Economy: How Indian Economy Would Fare With The Large Fiscal Deficit by the End of Year 2009?

Is the 35% to 70% rally in a global stock market showing the recovery in the global economy or it is just a bear market rally? But its clear, this rally cannot be justified why? Lets start read the whole review. Even before the World Bank prediction, VMW have already made a bleak outlook for the global economy.
 
Click here to get India's State-wise GDP Data.

Recovery in EconomySince Mar, 2009 – equity markets has rallied by more than 30% from their Mar ’09 lows. What we could expect from this? Is it showing the recovery in the global economy or it is just a bear market rally or it is just giving some hope of recovery in the global economy? Whatever the recent trends in the global financial markets are developing, but the situation is still unclear. Economies are still struggling, investors are still losing their wealth, banks and financial companies are still losing their profits, credit market are still nervy, people are still very anxious about their job prospect, consumers are still shunning from the spending, companies are still losing their markets, and there are lot of other problems, which are revolving around us. Everyone is questioning about the economic prospect. For how long, this recession will last? When we should see the time of better prospect which we had witnessed before this crisis? 

Do you believe, the economy is now going to settling down or at least set to recover from here? Hmm…Yes, but not at a full pace. Since the crisis has embarked, banks and financial institutions have lost more than $700 billion in total losses, and it is not very easy for them to recover from this huge massive trouble in a very short period of time. Banks and FIs are striving to sustain their business in these tough times. Financial condition of the banks however is still not in a good shape and their bad assets in a balance sheet are still a major setback for them to recuperate from this. However, the government authorities and central bank around the world are taking adequate measures to heal the bank’s pain to put these banks back on the growth track. 

What are the Problems/Challenges, Indian Economy is facing? 

  • Disparity between Wholesale Price Index (WPI) and Consumer Price Index (CPI)
  • Higher Fiscal Deficit
  • Balance of Payments
  • Falling Exports
  • Rising Government Borrowings
  • Global Economic Challenges
  • Economic Reforms
  • Final Budget

We’ll discuss these points in detail latter… 

Liquidity Situation: Then & Now 

Exhibit 1: India's Call Money Rate between Jun '08 and Mar '09

Exhibit 1: India's Call Money Rate between Jun '08 and Mar '09

 

Now, let’s talk about the Indian economy and its financial system. Indian Government is persistently putting pressure on the Indian Banks to reduce interest rates to the important sectors like Real Estate and Infrastructure. The liquidity situation in the country was very fickle and lot of apprehension in the call money market when the global recession was at a peak during Sep, 2008 followed by the collapse of Wall Street investment bank Lehman Brothers Holdings Incorporated.  At that time, banks even unable to lend to each other, resulted call rates jumped up to 20% (See Exhibit 1 for the reference). However, the liquidity is now at a comfortable levels and call rates lingering around 3% and 4% and even falls below 3% in May ’09. If the Indian economy has an adequate amount of liquidity in the system, so why banks and financial institutions are still dis-inclining to lend? 

Firstly, this crisis proved to be the disastrous one especially for the international banks. Indian banks are still far better than the foreign banks. In India, banks have only saw decline in their revenue growth and profits and in some cases mark to market losses (largely known by MTM losses), however the foreign banks have lost almost trillions of dollars in the last 6 quarters and still struggling to do their business as usual. So, here the reason could be the lack of confidence. Secondly, the higher cost of credit. In India, the banks are largely depend on the time deposits (also known as Fixed Deposits or Term Deposits) for the primary source of funds to lend in which they have to offer more than 7% interest rate to the depositors. The cheaper source of credit to the banks is Current Account and Savings Account deposits (also known as Checking Account). Generally banks offer 3.5% to 4% interest rates on Savings Account and nil on Current Account. That is the reason – banks are now focusing on to reduce the cost burden. 

Stimulus Package Announcement? To refuel the growth in the export oriented industries, newly elected government should consider announcing Stimulus Package for the export industry such as Textiles, Gems & Jewelers, Steel and other industries which are vastly depend on the exports and to focus on the lower cost of credit to revive the infrastructure, Real Estate sector and Auto Sector. 

Indian economy as a whole 

India's CPI and WPI Comparison for Year 2008.

India's CPI and WPI Comparison for Year 2008.

 

Earlier, we’ve mentioned some important points which are specifically have certain influence on the Indian Economy. Out of those, one the most prominent is the variance between the WPI and CPI which actually making difficult for the RBI to take stance. Since the change in base year in Wholesale Price Index (WPI), inflation has steeply fallen from over 10% to almost zero within 6 months and interestingly, CPI has not been affected that much and still at over 8%. This is going to be a troublesome for the Reserve Bank of India while considering any change in its monetary policy. RBI should consider CPI numbers while taking any appropriate decision on the interest rates. Overall the inflation rate has created confusion for the RBI, that is the reason, the Indian Ministry of Statistics and Planning Implementation (MosPI) is going to launch CPI next year. 

US Dollar Trivializing and Euro Gaining Fiat Currency Status? Now, the another important developments since last year is rising Fiscal Deficit. This is not a single problem in the Indian Economy alone, actually many economies around world are facing the same kind of threat. US and UK probably would face the de-rating of their Bond/debt from the credit rating organizations. What would probably going to happen? Of course US Dollar may witness significant reduction in its value against the major currencies as the biggest creditors – China, Japan will sell US Treasury en-masse. The world’s fastest developing nations like India, China, Russia, Brazil are the biggest holder of US Dollars and may consider to revise their dependence on the US Dollar and in that case, US Dollar would lost its status as a Fiat currency (or universal currency) and will see the huge depreciation. 

Countering Tax Evasion is the Solution to the Soaring Deficits? With the Governments facing rising budget deficits while combating the economic crisis, tax authorities around the world have agreed on a plan to encourage tax compliance and counter tax evasion specially focusing on the banks, financial institutions, wealthy individuals and offshore investments. US, which have announced trillions of dollars of bailout packages to protect its economy is going to face significant rise in Debt to GDP ratio, perhaps would excess the 100% mark. The bailout packages, which cost nearly $5 Trillion to the American Taxpayers, will have to endure this strain possibly for the next decade. But the Indian economy in particular, which largely depends on the foreign inflows (FDI or FII) should check the rising fiscal deficit in order to maintain its sovereign rating. 

Higher Inflation prospect? Lets check the Indian Government’s borrowing in the last four quarters of the financial year 2008-09.


The given below table shows the borrowings of the Indian Government in the last four quarters of FY2008-09. The amount shown is in Crores (Ten Million) of Indian Rupees.

 

Year 2008        
Public Debt Q4 Q3 Q2 Q1
         
Internal Debt        
Market Loans 1,200,576.00 1,170,756.00 1,137,203.00 1,104,553.00
91 Day Treasury Bills 69,892.00 51,501.00 52,250.00 30,371.00
14 Day Treasury Bills 56,043.00 41,080.00 48,770.00 68,630.00
Other Debts 569,211.00 598,777.00 603,577.00 576,946.00
         
  1,895,722 1,862,114 1,841,800 1,780,500
         
External Debt 258,194.00 237,352.00 220,902.00 210,083.00
Other Liabilities 520,148.00 471,147.00 479,719.00 483,490.00
         
Total Public Debt of India 2,674,064 2,570,613 2,542,421 2,474,073
% age of Annual GDP 53.75% 51.67% 51.11% 49.73%
         
 The above table may not be accessible clearly. Please follow the link to access the full length We really apologize for the inconvenience caused to you. 

As you can see from the above table which shows the Indian Government Debt, which is continuously rising. The upward trend in the Debt to GDP Ratio is actually showing the signs of concern. This would ruin the country’s credit rating and makes credit expensive to all of us. Moreover, the rise in issue of Bonds to the central bank would force them to print more money and infuse that money into the economy which could lead to rise in stock of money. Currently India’s stock of money (M1) stood at $261.49 Billion in compare to $253.06 Billion in Mar 2009. Rise in money supply means higher headline inflation. 

After the elections, there is a rise in optimism among the investors and businesses. There are lot of tasks which are pending to the new government. Prime Minister Manmohan Singh, which is also known as a Architect of the Indian Economy by opening up the Indian Economy since 1990s and the business leaders are expecting the same from the PM and his cabinet as they have a liberty to announce the favorable reforms for the Indian economy and to open up the Foreign Direct Investments (FDI) route in the sectors like Banks, Insurance, Retail, Infrastructure, Power and other sectors. After this, government should also need to focus on larger gap in Balance of Payment. Higher Current Account (CA) deficit is largely caused by the falling exports. As the Indian Economy is facing lot of challenges from the global economic downturn, so far the federal government had announced the two stimulus packages for the sector to enhance the potential of the export industry to survive in the challenging time and to boost the domestic demand and the industry is expecting the another stimulus package as the condition of the global economy is still looking uncertain. 

Economy in Rest of Year 2009 

Not easy to answer! When the year 2009 was approaching after bloody ending of 2008, economist around the world were expected that the economy should continue to contract and even sharper than expected. Central banks around the world have slashed their interest rates further in order to fuel the economic growth engine and even the crucial G-20 summit in London also proved as a sturdy solution for this global mess. Global equity markets have regained their strength and recovered by more than 30% from their Mar ’09 lows. That is the strong thumbs up from the investors in response to the global authority. But economies like US, UK, Germany, France, Japan and other developed economies are still contracting and seeing the worst economic data in more than a decade. US economy in particular, will take at least five years to recover from the massive amount of losses that has damaged the country’s financial system badly. Now the trillions of dollars of bailout package has been announced in response to this crisis and this will probably swell to multi trillion dollars in amount in the next few years and indeed will convert into a huge deficit for the country, which will be inherited to the newer generation of the country. Indian economy is also facing the same challenge, and this threat must be contain for a fresh start of the global economy by following the determination of the G-20 Summit which was held in London, UK. 

So overall, the situation is sill in a very bad shape and the recovery in the global market is not showing the real picture. The rise in consumer confidence, business sentiment, and the perception about the particular economy would take some time to revive. 

Continue reading

(SA) RBI Revised Its Monetary Policy; Reduces Repo Rate & Reverse Repo Rate.

Reserve Bank of India modifies its monetary policy. RBI Governor Duvvuri Subbarao has slashed CRR and policy rates several time since he took the charge.
 
Banks are under significant liquidity pressure and it is evident that the banks are now withdrawing money under the central bank’s Liquidity Adjustment Facility (LAF) or Repurchase Agreement (Repo). Is the RBI cogitating the another rate hike to contain inflation under the compressed liquidity situation? Find out more.
The Reserve Bank of India.

The Reserve Bank of India Headquarters in Mumbai.

On Tuesday Apr 21, 2009, India’s Central bank – Reserve Bank of India has announced its Annual Policy on Macroeconomic and Monetary Developments. RBI has slashed its policy rates by 25 bps. BPS is Basis Points which should be defined by One Hundredth of a one percentage point 1/100th of 1%.

After the reduction in policy rates, RBI’s Repo rate stands at 4.75% and Reverse Repo rate stands at 3.25%. Repo means repurchase agreement in which banks sell government securities to the RBI in exchange for cash and agrees to repurchase those securities from the RBI at a later date which is the Reverse Repo Rate. While addressing to media, RBI Governor stresses that the bank should pass-on the reduction benefits to the consumers. India has witnessed the steep fall in demand for a credit.

RBI Reference Rate As on Apr 2009

Bank Rate 6%
Repo Rate 4.75%
Reverse Repo Rate 3.25%
Cash Reserve Ratio (CRR) 5%
Statutory Liquidity Ratio (SLR) 24%
Prime Lending Rate (PLR) 13%

 

The Indian Economy has also got affected by the economic crisis in developed countries. Since mid of Sep 2008, when the major financial institutions were collapsed, the India’s central bank has reduced its policy rates and CRR by number of times and SLR by 100 bps since than to prop the Indian economy up. India’s money supply dropped to 18.4% in compare to 21.7% last year which signifies the deceleration in credit market and the capital inflows. In the last few months, Indian Rupee has depreciated by more than 18%  and likely to depreciate further due to higher risk aversion in Rupee denominated assets, acute deleveraging due to falling exports which resulted fall in corporate earnings and strong demand for US Dollar due to huge amount of selling in equity markets. However, since Mar 09, financial markets have performed better in compare to its peers and other developed markets due to attracting and cheap valuation of the India Incorporated. By taking these factors in mind, RBI is taking precise decision on a periodic basis to respond to the global financial crisis and to make a favorable economic environment. India’s external debt and national debt has reached the level of 49% to the annual gross domestic product, however the strong foreign reserves would ensure the external stability. 

This research has been Superannuated by the VMW Research Team. This research might not be applicable in today’s economic context.

Economy in Crisis: Global Markets Loses Extended to $50 Trillion, South Asia Can Weather Economic Crisis.

Asian Development Bank study says, there is further room for interest rate cut is available in India and need to diversify their economies to reduce the impact of global financial crisis and larger Gov’t deficits.

Asian Development Bank's Headquarters in Manila, the Phillippines.

Asian Development Bank's Headquarters in Manila, the Phillippines.

According to the new study by the ADB, the Global financial markets losses have reached $50 trillion (Rs.2.5 Quadrillion or Rs.2.5 followed by 14 zeroes) mark. Losses on financial assets in Developing Asia in 2008 totaled $9.8 trillion. The total measure of losses includes reduction in value in Equity and bond markets including those backed by mortgages  and other assets and depriciation of many currencies against the US Dollar, however it does not includes the derivative products like Credit Default Swaps (CDS). According to data available with the VMW, the total outstanding of principle amount of CDS equals to $50 trillion alone, and  it will further instensify the total losses. Study shows the recovery can only now be contemplate for the late 2009 or early 2010. Data provide close connection between the economy and markets, therefore, the emerging economies are in mid of the crisis and the next 12 to 18 months are very crucial.

The good news is that, the South Asia (including Indian Subcontinent – India, Sri Lanka, Afghanistan, Pakistan, Bangladesh, Nepal, Bhutan and Maldives) Economies can weather the current Economic downturn by taking both short term and long term measures to stimulate the domestic demand and their economies.

The number of short term measures have been taken to cushion the impact of this crisis. In India, the Government has already announced the three Economic Stimulus Packages to stimulate the economy. Particularly in India and Sri Lanka, there is enough room available for more rate cuts. It means, the expectations from the central bank to brace the economy is still alive. Government could also consider incentives to encourage overseas workers to remit money home, they should also discuss currency swap arrangements and other measures to keep their financial systems stable.

However, in the long term, South Asian nations need to reduce their fiscal deficits, diversify their economies, step up infrastructure investment and boost intra-regional trade to take up the slack of lower demand from G7 nations.

Source: Asian Development Bank and VMW.

RBI Responding To The Economic Downturn, Cut Repo Rate And Reverse Repo Rate.

Day after day, we are witnessing the bad news coming from across the world. In the Year 2009, day by day, the condition of the global economy is deteriorating as the financial crisis has spilled over from a single continent to the across the globe. The effect of the global downturn can be felt in India too to a certain extent, perhaps the Indian authorities are responding on a timely basis to weather this horrific economic catastrophe. In response to that, India’s central bank – Reserve Bank of India (RBI) has further eases the monetary policy on Wed, Mar 4, 2009 by slashing policy rates by 50 bps with immediate effect.

RBI has reduced the Repo rate by 50 bps to 5.0% from 5.5% while there is also a reduction of 50 bps on reverse repo front by 50 bps to 3.5% from 4.0%. However the CRR remained untouched. According to the RBI, there is no need to reduce the Cash Reserve ratio as of now, but will be considered if needed. Since the Oct, 2008 RBI has reduced the policy rates, CRR and SLR by number of times in order to maintain the flexibility in the banking system and the functioning of the Financial Markets in an orderly manner.

VMW Definitions:

  • Repo Rate: is a rate at which, RBI repurchases Govt Securities from the commercial banks to expand the money supply in exchange of cash.
  • Reverse Repo Rate: Vice versa of Repo rate means to sell Gov’t bonds in exchange of cash.
  • CRR: is a Cash Reserve Ratio. Banks kept some portion of their deposits with the RBI at a prescribed reserve rate.
  • SLR: is the Statutory Liquidity Ratio at which banks need to kept short term securities such as Cash, Gov’t Securities, Precious Metals like Gold and Silver and other short term securities.
  • BPS: is Basis Points which should be defined by One Hundredth of a one percentage point (1/100th of 1%). It is commonly used in expressing differences of interest rates.

If you need further clarification on these Finance terms, send an email at contact@vishalmishra.com