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Commentary

RBI Policy: Rates Unchanged, But Opening of Government Bond Markets Looks Good!

The RBI didn’t move rates an inch in its monetary policy statement. Repo stays at 7.5%, and CRR at 4%.

To explain: Repo is the rate at which banks borrow from the RBI overnight. CRR is the percentage of deposits that banks must keep interest free with the RBI.

On The Strange Data in Services

Mixed signals are coming from the service sector. While the national accounts statistics seem to suggest that consumption demand for services is robust relative to the demand for goods, and purchasing managers perceive activity expanding on new orders, various coincident indicators of services sector activity including railway and port traffic, domestic and international passenger traffic, international freight traffic, tourist arrivals, motorcycle and tractor sales as well as bank credit and deposit growth remain subdued.

Buying Up Reserves Helps Protect Against US Interest Rates

Exports of services, particularly, software and travel have provided a silver lining and have helped to hold down the current account deficit (CAD) which has narrowed in Q3. This improvement has likely extended into Q4. As a result, capital inflows – mainly portfolio flows into domestic debt and equity markets and foreign direct investment – have exceeded the external financing requirement and enabled accretion to the foreign exchange reserves which reached an all-time peak of US$ 343 billion as on April 3, 2015. These reserves, including forward purchases that will be delivered over the next few months, provide some buffer against potential capital outflows when monetary policy normalisation in AEs commences.

On Inflation Projections

They’ve got a graph, and we’ve put in our comments:

image

On Why They Didn’t Cut Rates

Going forward, the accommodative stance of monetary policy will be maintained, but monetary policy actions will be conditioned by incoming data. First, the Reserve Bank will await the transmission by banks of its front-loaded rate reductions in January and February into their lending rates. Second, developments in sectoral prices, especially those of food, will be monitored, as will the effects of recent weather disturbances and the likely strength of the monsoon, as the Reserve Bank stays vigilant to any threats to the disinflation that is underway. The Reserve Bank will look through both seasonal as well as base effects. Third, the Reserve Bank will look to a continuation and even acceleration of policy efforts to unclog the supply response so as to make available key inputs such as power and land. Further progress on repurposing of public spending from poorly targeted subsidies towards public investment and on reducing the pipeline of stalled investment will also be helpful in containing supply constraints and creating room for monetary accommodation. Finally, the Reserve Bank will watch for signs of normalisation of the US monetary policy, though it anticipates India is better buffered against likely volatility than in the past.

Basically, give us more data and more action.

This is also a way to tell banks that look, you aren’t reducing your rates, so the RBI won’t reduce theirs until you act. RBI has cut rates by 0.5% since Jan.

The monsoon and the recent unseasonal rains could hurt prices of foodgrains, which supposedly are heavily impacted. This can derail the entire rate-cut process.

Our view: another 1% cut by March 2016 is standard course of action. Only risk is higher inflation, nothing else.

Exporters/Importers can Write Options

Currency options cannot be written by “end users” (i.e. non-banks or non financial institutions). The RBI is changing that.

Now exporters and importers will be allowed to write “covered” options, that is, if they have underlying exposure. So an IT exporter will be able to write call options on the USDINR, say at Rs. 63, for an amount that the exporter is going to receive in dollars anyhow. This allows him to hedge partially against any receivable currency.

(If the USDINR is at 62.2, and the 6 month 63 call option is at Rs. 1, then writing this call option gives the exporter Rs. 1 “cushion” if the rupee appreciates, upto Rs. 61.2. If the Rupee falls to 65, the exporter only benefits upto Rs. 64.)

This is good news; but the presence of such micro-regulation is incredible.

G-Secs to be Open for All: Very Interesting!

Soon, you and I will be able to buy Government Securities online, through the RBI, without having to chop your head off. They will soon make it easier to buy G-Secs and T-Bills, the safest rupee investment. We don’t know how big this market is, but it has serious potential.

We have a small survey for you – just a few questions. We’ve love it if you could answer.

Our View

Interesting policy, but banks have taken it on the chin in the stock market. This policy doesn’t address their desperate need to shove bad assets under the carpet, or to have RBI increase their margins by reducing interest rates while they continue to charge high lending rates to the rest of us.

RBI will however take action if inflation falls further, as we will get data next week. Another 0.25% cut if inflation is below 6%.

But the policy has, as usual for the last year, been totally predictable. This is good for the country; a predictable central banker is an asset that most western countries don’t seem to have nowadays.

We’d love your inputs on directly buying G-Secs. There’s a huge market waiting and we’d like to help you invest.

  • rkg says:

    very interesting to note there is a typo in the policy document
    it says the rate cuts were front loaded in Jan and Feb
    the second cut actually happened on Mar 4
    considering the pedigree Dr RR is, even such simple errors become unacceptable 🙂

  • DJ says:

    One of the interesting parts of today’s release is that they expect inflation to go down to 4% by August (and then go back up). It is encouraging that they did not cut rates or signal a more dovish tone despite that. And, that they took a longer term view and indicated that they will look beyond base effects and seasonal effects.
    Also, the inflation expectations chart does not seem to be in the comfortable zone yet since it shows 50% confidence that inflation will be outside the target range.
    I think RBI is finally doing a good job in engendering inflation expectations of 4%, which is what we have been hoping and waiting for, for over 5 years now. It was also pleasantly surprising that consensus did not expect a rate cut today. I don’t think anyone could have imagined a year or two back that CPI would be 5% and RBI would not cut rates from 7.5%!!
    Lastly, it looks like RBI does not think that the NPAs are a huge problem, or else it might have cut rates or signaled as much. That should be encouraging too, as long as it is correct in its evaluation.

  • Gold Bug says:

    For retail G Sec market opening is a welcome news. For example G sec maturing in Aug. 2016 is yielding 7.8%. If I buy directly and hold it till maturity I get TDS free interest and long term capital gains/loss. If the same money is invested in Bank FD I will have to pay TDS. If I invest in Growth option of G Sec Mutual Fund I will have to pay short term capital gains and if I opt for dividend option I lose on DDT.