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RBI Says…Nothing.

We have a boring macroeconomic policy in which NOTHING happened.

This is horrible for media companies and TV companies who have lined up experts to speak simultaneously on this policy. There is hardly anything to talk about, though the weather is awesome in Bangalore.

But because Capital Mind is like this, we will highlight what little you might make something of. From the document:

Growth projections have been revised down from 5.7% to 5.5%. Not that they’ve been right that often.



Inflation target is now 5.0%. If you look at the chart closely, it doesn’t look that they believe in it either. Plus WPI is a hugely flawed figure, and even if it were marginally decent, the dollar rise and fuel price hikes will cause WPI to hurt.


Liquidity conditions will remain tight until things stabilize in the forex market, and recent measures to cut liquidity will be reversed in a calibrated manner. Meaning, no sudden removal of any move. The government is requested to please get their act together and set up policies that will increase exports and reduce imports.

A major risk is the QE taper by the US and/or Europe. That will cause funds to flow out and boom, the rupee collapses.

My view: They would like to ease, but they can’t because of the external deficit. This has been interpreted to mean something like we’d like to help you but our hands are tied. But that is the wrong interpretation. The natural tendency of the measures they would otherwise take – of easing rates or increasing liquidity – will result in an EVEN bigger current account deficit as it weakens the rupee. The “external” is a serious problem. It’s like saying I can’t help you because I’m having a heart attack – please, fix the heart attack first.

So basically they have to wait till conditions improve naturally. That will take a LONG time, or could happen tomorrow. The long time is about getting more exports going. The tomorrow is about having foreign flows return. The former will happen as the currency equation sets in. The latter is unlikely given our elections next year.

  • fubar says:

    So RBI has thrown the ball in government’s court again. You fix the rupee if you don’t want us to raise rates further.

  • Guruprasad V says:

    I believe RBI might increase the rates in near future only because of weakness in our currency. RBI unnecessarily intervened in Rupee by simply blocking the volumes of traders (other than banks) and took a pride in controlling the currency. Today honeymoon is over. I still believe that RBI tightening not just because of currency but due to various unknown factors and problems that could possibly create havoc in the system. Let’s wait and watch. Its a real fun watching so called pundits talk about bottom fishing in PSU banks.

  • Vidyanshu says:

    Latha Venkatesh keeps insisting that RBI was dovish today or well…would have been dovish if inflation had been down and rupee was back to 55…

  • mangoman2012 says:

    The screwing of Rupee is one of the highlights of today’s policy and accompanying comments. Can you throw more light on it?
    I think RBI is caught in their own web.
    Now any measures on going back on Repo control will be viewed as easing.
    I think it is wilful ploy by RBI to whip the Ass of government.

  • mangoman2012 says:

    Today a strange thing happened in Indian Financial Markets. After RBI’s monetary policy, along with equity markets Rupee also crashed. This is ironic and hope will be an eye opener for RBI and finance ministry which manipulates RBI from the background. It is sad that RBI becomes a puppet and now humiliated in front of the whole world.
    This unfortunately happened after RBI’s supposed monetary tightening in the form of Reduction in Repo limit last week. When RBI announced the measures the Rupee was trading at around 59.60. Now today it is decreased and at 60.41. From seemingly unlimited Repo limit to now 37000 Crores RBI has reduced the liquidity in 2 tranches. Even yesterday RBI MSF window saw huge drawing from Banks at 11% and odd. Even with all these, Rupee depreciated today which is very bad for the credibility of the RBI.
    RBI today made a mistake of talking in government’s voice. Mr. P. Chidambaram the minister for real estate and share market welfare who is also in-charge of finance ministry used to tell every week that the interest rate will be cut very soon and often tells that whatever RBI is doing to strengthen Rupee is temporary. That is for political reasons. He knew that Indian Economy is headed for collapse. RBI need not have spoken in that language. IT IS CREDIBILITY CRISIS AT RBI.
    Now if RBI went back on Repo limit measures it would be considered as easing and if that happens the market will punish Rupee. Otherwise also now the interest rate is clearly hardening. It is time for RBI to raise Repo rate and CRR to 1 percentage each. The failure of IIB ( inflation bonds) should be a eye opener for RBI.
    Now if government still wants to help and save brokers, then it is running the risk on huge economic collapse. Better late than never.

  • fubar says:

    In your assessment, what can be done to bring rupee back up to say 55 or so?
    Or 60s is the new normal for rupee?

  • Leo says:

    well not 60 70+ … coz RBI is not allowed to raise rates inflation adjusted rates are are down so .that will b e factored in soon.
    Rbi should not bend over to politics and just RAise rates .Govt has to cut imports of crude and start cutting this wild speculative consumption.

  • Jinesh says:

    Hey Deepak
    wonderful clear analysis. Fiscal policy is a non event and it will be till election next year. FII, FDI also seems a null event in near future or till US pressures subsides. Only monetary policy wont be effective for long time. It has to be supported by fiscal policy