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Pre-RBI Action Notes: The Broad Picture


Before the RBI mid-quarter monetary policy review later today, let’s go through a few things.

Indian Situation

  • Growth has slowed. GDP is officially down to 5.3%, though I believe even that is overstated, and that we are growing negatively, net of inflation.
  • Inflation remains stubbornly high. At 7.55%, May 2012 inflation was a tad higher than April, but more worrying is that the inflation index (the WPI) is not showing a downward slope or even a flattening.
  • CPI was in double digits. The May data comes later today.
  • The Trade Balance is out of control. We simply import way more than we export. It’s not just about
  • Crude prices have fallen, to below $100. This is our biggest import. But the fall might just be a temporary move; crude is notoriously volatile and it’s not useful to make a long term policy decision on current prices.
  • Liquidity is under control. There used to be repo borrowings of over 100,000 cr. every day earlier, now it’s come down to 70,000 cr. a day. This is around the limit of 1% of bank deposits (approx) that the RBI looks at.
  • The dollar is 10% higher than the March levels. Inflation due to this – higher costs of imports – will come in with a lag.


  • Greece temporarily solved. The pro-bailout parties are in power, but this is very thin ice and things can fall through any time. The vote is clear – the anti-bailout parties have gotten a bigger vote than ever before. The mood is politically charged and even the winner will understand that they won purely because of the first-past-the-post system that Greece has. (Winner gets 50 extra seats) The pro-bailout parties had 85% of the last real election vote – in this one, they have managed just 40%+.
  • France just elected a socialist government with a huge majority. Significant, because politicians all over the world are thinking that if they try to balance budgets or use austerity measures, they’ll be voted out of power.

What Will RBI Do?

  • CRR may not be cut as there doesn’t seem to be a liquidity problem at all. The banks want it, as it gives them easy profits, and to offset the large provisions they’ll need to take as defaults attempt to cripple the system.
  • Repo: the consensus is for a 25 bps cut. (That’s 0.25%) Given that this is a mid-quarter review, and that RBI cut a whopping 50bps in April, and that inflation remains high, it looks like a bad case for a rate cut.
  • The RBI governor has said recently that you have to sacrifice some growth to bring down inflation. More famously, Mr. Volcker in the US did that by hitting a decade-long inflationary burst with interest rates so high they caused two recessions, and the US saw extraordinary growth after.
  • If they don’t cut rates, the government will blame high interest rates for the slowdown, when it really is the inability of the executive (govt) to govern. Will RBI fall for that play and drop rates to avoid blame?
  • They need to give out new banking licences. Immediately. Banks have started to behave like a cartel. It’s important to save the banking system, but not the existing set of banks.
  • My personal belief: They’ll either do no change or 50bps cut. CRR won’t be changed. But that’s just a guess; yours is as good as mine.

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