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What Will Rajan Do Today?


Short Answer: Only Rajan Knows.

Long Answer: Only Rajan Knows, and it’s useless to predict it.

The pieces of data that Rajan will use are what we’ve seen recently, and I’ll post some charts to help.

GDP Growth Is Slowing

From: Jun 2013 GDP at 4.4%, Might Actually Show Recession

India Low GDP Growth

And even that is skewed:

GDP Components

Inflation is very very high

From: WPI Inflation at 6.1%, and CPI Inflation at 9.5% for Aug 2013.

WPI Inflation

IIP Surprises at +2.63% But Please, It’s Just +2.63%

From: My IIP Post

IIP Data

The Rupee has reversed about 10% after falling over 20%

USDINR chart

MSF Borrowing is Still at 80,000 cr. + (1% of NDTL)

MSF Borrowing

CRR Balances Remain Way Above Requirement

Banks have to now maintain a minimum of 99% of CRR needs with the RBI (up from average of 100% but minimum of 70%). Since banks don’t have very good real time information systems (and can’t really organize cash in the same time that cash can be taken away from them through RTGS or NEFT) banks put in a lot more cash than required.

CRR And Actual Cash Balances

CRR Maintained as %

My View

I believe that:

  • Rajan should raise rates to control inflation. (But I doubt he will)
  • The liquidity tightening must continue to support the anti inflationary cause. But since they pitched it as a dollar-rupee control measure, it is unlikely to. So CRR might be eased (in terms of % maintained).
  • The MSF window might come down – Again, my view is to keep those rates high no matter what. From 10.25% we might see a 10% rate though.
  • I believe he must act on some of the other things he mentioned, like a freer rupee.
  • Also, on the “default” front, I hope Rajan introduces strict measures for banks to recognize and not evergreen defaulting loans. Very tough restructuring norms and penalties will help.


What would I do?

Banks are in dangerous territory. Very volatile, and they’ve moved up a lot recently. So there are some positive expectations. At best, they might go up another 1-2%, because the GDP growth slowdown will still impact them. If rates are hiked or there is status quo on the other fronts, banks will be negatively hit.

Overall, my money has been in ultra short term funds, investing in the short end of the curve. That might have to change if there is a move to make the yield curve normal again, but even then I see ultra-short terms as the way ahead for at least three months more.

Let’s see what surprises the RBI governor has in store. The biggest surprise might just be that he says nothing since this is a mid-quarter review (the real policy will be out only in October).


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