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.

 

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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

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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.

A man talks on his cell phone past the electronic stock board of a securities firm in Tokyo, Japan, Friday, Aug. 14, 2009. Japan's Nikkei 225 stock average rose 80.14 points, or 0.8 percent, at 10,597.33, the highest close since Oct. 3. (AP Photo/Itsuo Inouye)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.

India Budget 2009 Review. Market Expectations Despaired.

 

 

GDP Growth

IIP Data

Budget for an Inclusive Growth

Much awaited Budget mainly for reforms, hike in FDI limit financial industry, deliverance of an inclusive growth in the ecocomy were finally delivered by the Finance Minister of India, Pranab Mukherjee. Some of us were very happy with the proposals made in the House while other got disappointment on various front. For sure, India’s economic growth has been impacted by the global economic problems and the recovery in the western economy specially in the US would play a critical role in a growth of the Indian economy. The rising fiscal deficit, expenditures are not only a single major concern for the economy but the significant rise in government borrowings also does matter for the future growth, which would affect the borrowing cost (refer to the given below figure).

India's Fiscal Deficit for FY 2008-09 of Annual GDP at Current Market Price.

India's Fiscal Deficit for FY 2008-09 of Annual GDP at Current Market Price.

 

There is no doubt that the debt level of the Indian Government likely to puff up due to higher spending. First look at the brief synopsis of Budget 2009.

  • Mr Finance Minister has agreed upon the real challenges to get back to sustainable 9% GDP growth.
  • Finance Minister stressed upon infrastructure development by providing long term financial assitance to infrastruture projects via India Infrastruture Finance Company Ltd (IIFCL).
  • Increases allocations for National Highway and Railways projects.
  • Extension of repayment period from Jun 2009 to Dec 2009 under the Debt relief Program 2008 to the farmers having acquired land more than two hectares.
  • Gov’t of India commitment on restoring growth in export sector.
  • To Initiate Institutional Reform measures from this year to fix the rising Fiscal Deficit.
  • To allocate Rs 39,400 crores ($8.16 Billion) to National Rural Employment Guarantee Scheme (NREGS).
  • Total expenditure of Rs. 1,020,838 Crores ($209.62 Billion) according to the Budget Estimates 2009-10.
  • Abolishment of Fringe Benefit Tax (FBT) and removal of Surcharge on Income Tax.
  • Changes in Direct Tax Code.
  • Implementation of Goods and Service Tax (GST) from 1st Apr 2010.
  • Revision in Minimum Alternate Tax (MAT) from 10% to 15%.

Since the inflation is no longer a concern for the economic growth, India needs to opt for a better policies and reforms to achieve the macroeconomic stability. Interest rates become more stable backed by the comfortable liquidity situation in the system which would be prudent for the constant growth of the economy and to be self reliant driven by the domestic demand. Forasmuch, India seeing the higher non plan spendings due to Subsidy burden, Sixth Central Pay Commission, and food subsidy which would be a troublesome for the government to restructure its finances. Savings rate at 59% of the anual GDP and massive foreign reserves assets will put the Indian ecconomy on reposeful position in the global arena (helps the Indian economy to abstain from the risk of revision in credit rating).

Finance Minister Mukherjee has commended the budget without giving further stress on the spending and even didn’t touch the revenue side largely in the wake of the macroeconomic health. Foreign Inflows will continue to drive the Indian economy higher in future but the lower exports will make the Balance of Payments (BOP) uneasy for the economy. The vast current account deficit will make the Indian currency more vulnerable in the near term against the US Dollar however it would be a short term pain and not a major concern to think upon. We’re expecting some bit of reduction in fiscal deficit in FY2009-10 due to diminution in subsidy burden including Oil bonds, food subsidy and we could see the beginning of economic reforms in the fiscal year 2009-10 Budget.

We would discuss more in our next report “Indian Economy in 2009-10 Overview”

(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. 

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(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