India maintains rate but says cut likely in early 2015
December 2, 2014
By CentralBankNews.info India’s central bank maintained its benchmark repurchase rate at 8.0 percent, but held out the promise of a rate cut early next year if the current trend of declining inflation continues. The Reserve Bank of India (RBI), which has been under pressure to unwind its 75 basis points rate rise from September 2013 to January 2014, said “a change in the monetary policy stance at the current juncture is premature,” in light of uncertainty of the base effects on inflation, the strength of disinflationary impulses, the change in inflation expectations and the government’s success in meeting its deficit targets. “However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle,” RBI Governor Raghuram Rajan said in a statement. India’s consumer price inflation rate eased to 5.52 percent in October from 6.46 percent, continuing the declining trend since November 2013 when it spiked at 11.16 percent. Inflation has now fallen below the RBI’s target of 8.0 percent by January 2015 as well as the 6.0 percent target for January 2016, and Rajan said November inflation is expected to fall further. However, Rajan underscored that the current favorable base effect that is driving down inflation will likely dissipate and December inflation could rise above the current level so the key uncertainty facing the RBI in setting its future policy is how long this expected rise in inflation persists. Over the next 12 months inflation is expected to hover around 6 percent, apart from seasonal movements, which means the RBI’s inflation target for January 2016 is evenly balanced. India’s economy slowed slightly in the second and third quarters, but Rajan said there were improving conditions – such as softer inflation, lower commodity prices, comfortable liquidity and rising business confidence – for a turnaround. The RBI’s central estimate for projected growth of 5.5 percent in financial year 2014/15, which began on April 1, was maintained, with a gradual pick-up in momentum through 2015-16. India’s Gross Domestic Product expanded by an annual rate of 5.3 percent in the third calendar quarter, down from 5.7 percent in the second quarter but up from 4.6 percent in the first quarter.
The Reserve Bank of India issued the following statement by its governor, Raghuram Rajan: (charts not included)
“Monetary and Liquidity Measures
On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:
keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent;
keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL);
continue to provide liquidity under overnight repos at 0.25 per cent of bank- wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and
continue with daily one-day term repos and reverse repos to smooth liquidity.
Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent. Assessment of the Global Economy 2. Since the fourth bi-monthly monetary policy statement of September 2014, the global economy has slowed, though the recent sharp fall in crude prices will have a net positive impact on global growth. The recovery in the United States is broadening on the back of stronger domestic consumption, rising investment and industrial activity. In the Euro area, headwinds from recessionary forces continue to weaken industrial production and investment sentiment. In Japan, growth may be picking up again on the back of stronger exports, helped in part by further quantitative and qualitative easing that has led to a depreciation of the yen. In China, disappointing activity and still-low inflation have prompted rate cuts by the People’s Bank of China. In other major emerging market economies (EMEs), downside risks to growth from elevated inflation, low commodity prices, deteriorating labour market conditions and stalling domestic demand have become accentuated.
3. Notwithstanding the cessation of asset purchases by the US Fed, financial markets have remained generally buoyant on abundant liquidity stemming from accommodative monetary policies in the advanced economies (AEs). The search for yield has driven global equity markets to new highs, with investors shunning gold and commodities. Capital flows to EMEs recovered from market turbulence in the first half of October, although some discrimination on the basis of fundamentals is becoming discernible. Assessment of the Indian Economy 4. Domestic activity weakened in Q2 of 2014-15, and activity is likely to be muted in Q3 also because of a moderate kharif harvest. The deficiency in the north- east monsoon rainfall has constrained the pace of rabi sowing, except in the southern States. Despite reasonable levels of water storage in major reservoirs, the rabi crop is unlikely to compensate for the decline in kharif production earlier in the year and consequently, agricultural growth in 2014-15 is likely to be muted. This, along with a slowdown in rural wage growth, is weighing on rural consumption demand. 5. Despite the uptick in September, the growth of industrial production slumped to 1.1 per cent in Q2 with negative momentum in September, unable to sustain the improvement recorded in the preceding quarter. The persisting contraction in the production of both capital goods and consumer goods in Q2 reflected weak aggregate domestic demand. However, more recent readings of core sector activity, automobile sales and purchasing managers’ indices suggest improvement in likely activity. Exports have buffered the slowdown in industrial activity in Q2 but, going forward, require support from partner country growth. 6. In the services sector, the October’s purchasing managers’ survey indicates deceleration in new business. In contrast, tourist arrivals and domestic and international cargo movements have shown improvement. Thus, various constituents of the services sector are emitting mixed signals. 7. A rise in investment is critical for a sustained pick-up in overall economic activity. While low capacity utilisation in some sectors is a dampener, the recent strong improvement in business confidence and in investment intentions should help. In this context, the still slow pace of reviving stalled projects, despite government efforts, warrants policy priority, even as ongoing efforts to ease stress in the financial system unlock resources for financing the envisaged investment push. 8. The fiscal outlook should brighten because of the fall in crude prices, but weak tax revenue growth and the slow pace of disinvestment suggest some uncertainty about the likely achievement of fiscal targets, and the quality of eventual fiscal adjustment. The government, however, appears determined to stay on course. 9. Retail inflation, as measured by the consumer price index (CPI), has decelerated sharply since the fourth bi-monthly statement of September. This reflects, to some extent, transitory factors such as favourable base effects and the usual softening of fruits and vegetable prices that occurs at this time of the year. On the other hand, protein-rich items such as milk and pulses continue to experience upside pressures, reflecting structural mismatches in supply and demand. The absence of adequate administered price revisions in inputs like electricity has contributed to the easing of inflation in the fuel group.
10. In the non-food non-fuel category, inflation eased broadly in September. Further softening of international crude prices in October eased price pressures in transport and communication. However, upside pressures persist in respect of prices of clothing and bedding, housing and other miscellaneous services, resulting in non-food non-fuel inflation for October remaining flat at its level in the previous month, and above headline inflation. Survey-based inflationary expectations have been coming down with the fall in prices of commonly-bought items such as vegetables, but are still in the low double digits. Administered price corrections, as and when they are effected, weaker-than-anticipated agricultural production, and a possible rise in energy prices on the back of geo-political risks could alter the currently benign inflation outlook significantly.
11. Liquidity conditions have eased considerably in Q3 of 2014-15 due to structural and frictional factors, as well as the fine tuning of the liquidity adjustment framework. With deposit mobilisation outpacing credit growth and currency demand remaining subdued in relation to past trends, banks are flush with funds, leading a number of banks to reduce deposit rates. The main frictional source of liquidity has been the large release of expenditure/transfers by the government. In view of abundant liquidity, banks’ recourse to the Reserve Bank for liquidity through net fixed and variable rate term and overnight repos and MSF declined from `803 billion, on average, in Q1 to `706 billion in Q2 and further to `476 billion in October- November. The use of export credit refinance also declined from 52.6 per cent of the limit in Q2 to 32.6 per cent in October-November. The revised liquidity management framework introduced in September, has helped the weighted average cut-off rates in the 14-day term repo auctions as well as in the overnight variable rate repo auctions to remain close to the repo rate, and the volatility of the weighted average call rate has fallen, apart from episodes of cash build-up ahead of Diwali holidays. 12. The Reserve Bank determines the need for open market operations (OMO) based on its assessment of monetary conditions rather than on a specific view on long term yields. On an assessment of the permanent liquidity conditions, the Reserve Bank conducted OMO sales worth `401 billion during October to December so far. 13. Merchandise exports declined in October, mainly reflecting sluggish external demand conditions, but also the softening of international prices resulting in lower realisations. For the period April-October as a whole, however, export growth remained positive although the deceleration since July requires vigilance. With import growth remaining modest on account of the decline in POL imports due to falling crude prices, the trade deficit narrowed from its level a year ago. Gold imports have surged since September in volume terms, largely reflecting seasonal demand. Barring month-to-month variations, non-oil non-gold import growth has remained moderate, with anecdotal evidence of imports substituting for shortfalls in domestic production. Even as external financing requirements stay moderate, all categories of capital flows, except non-resident deposits, have been buoyant. The consequent accretion to reserves denominated in US dollars has been moderated by valuation effects resulting from the strength of the US dollar. Policy Stance and Rationale
14. Consistent with the balance of risks set out in the fourth bi-monthly monetary policy statement of September, headline inflation has been receding steadily and current readings are below the January 2015 target of 8 per cent as well as the January 2016 target of 6 per cent. The inflation reading for November – which will become available by mid-December – is expected to show a further softening. Thereafter, however, the favourable base effect that is driving down headline inflation will likely dissipate and inflation for December (data release in mid- January) may well rise above current levels. 15. The key uncertainty is the durability of this upturn. The full outcome of the north-east monsoon will determine the intensity of price pressures relating to cereals, oilseeds and pulses, but it is reasonable to expect some firming up of these prices in view of the monsoon’s performance so far and the shortfall estimated for kharif production. Risks from imported inflation appear to be retreating, given the softening of international commodity prices, especially crude, and reasonable stability in the foreign exchange market. Accordingly, the central forecast for CPI inflation is revised down to 6 per cent for March 2015 (Chart 1).
16. Turning to the outlook for inflation in the medium-term, projections at this stage will be contingent upon expectations of a normal south-west monsoon in 2015, international crude prices broadly around current levels and no change in administered prices in the fuel group, barring electricity. Over the next 12-month period, inflation is expected to retain some momentum and hover around 6 per cent, except for seasonal movements, as the disinflation momentum works through. Accordingly, the risks to the January 2016 target of 6 per cent appear evenly balanced under the current policy stance. 17. Some easing of monetary conditions has already taken place. The weighted average call rates as well as long term yields for government and high-quality corporate issuances have moderated substantially since end-August. However, these interest rate impulses have yet to be transmitted by banks into lower lending rates. Indeed, slow bank credit growth is mirrored by increasing reliance of large corporations on commercial paper and domestic as well as external public issuances.
18. Still weak demand and the rapid pace of recent disinflation are factors supporting monetary accommodation. However, the weak transmission by banks of the recent fall in money market rates into lending rates suggests monetary policy shifts will primarily have signaling effects for a while. Nevertheless, these signaling effects are likely to be large because the Reserve Bank has repeatedly indicated that once the monetary policy stance shifts, subsequent policy actions will be consistent with the changed stance. There is still some uncertainty about the evolution of base effects in inflation, the strength of the on-going disinflationary impulses, the pace of change of the public’s inflationary expectations, as well as the success of the government’s efforts to hit deficit targets. A change in the monetary policy stance at the current juncture is premature. However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle. 19. While activity appears to have lost some momentum in Q2, probably extending into Q3, conditions congenial for a turnaround – the softening of inflation; easing of commodity prices and input costs; comfortable liquidity conditions; and rising business confidence as well as purchasing activity – are gathering. These conditions could enable a pick-up in Q4 if coordinated policy efforts fructify in dispelling the drag on the economy emanating from structural constraints. A durable revival of investment demand continues to be held back by infrastructural constraints and lack of assured supply of key inputs, in particular coal, power, land and minerals. The success of ongoing government actions in these areas will be key to reviving growth and offsetting downside risks emanating from agriculture – in view of weaker-than-expected rabi sowing – and exports – given the sluggishness in external demand. Anticipating such success, the central estimate of projected growth for 2014-15 has been retained at 5.5 per cent, with a gradual pick-up in momentum through 2015-16 on the assumption of a normal monsoon and no adverse supply/financial shocks (Chart 2). 20. The sixth bi-monthly monetary policy statement is scheduled on Tuesday, February 3, 2015. www.CentralBankNews.info
NEW DELHI: Reserve Bank may keep policy rate unchanged in its upcoming monetary policy review on Tuesday even as the Finance Minister and industry clamoured for the rate cut to prop the economy after GDP growth slipped to 5.3 per cent in the second quarter of current fiscal.
At the same time, inflation has hit multi-year low making a case for the rate cut.
“The fact of matter is that all the parameters are indicating that there will be further fall in inflation. Between November and January with the base effect it might go up a little bit. But by March it will be well below whatever the glide path that is indicated by the RBI,” SBI Chairperson Arundhati Bhattacharya said.
“RBI Governor has indicated that he will be data driven … may be by the end of the fiscal (cut in the interest rate by RBI),” she added.
Asked if she expected a rate cut in RBI’s bi-monthly policy on December 2, she said, “No”.
United Bank of India Executive Director Deepak Narang said that RBI would wait for some more time before effecting rate cut to prop up growth.
“Although parameters are conducive for the rate cut but there is hardly any appetite for loan in the market. Rate reduction by 0.25 per cent is not going to generate significant demand in the market,” he said.
“Therefore, I think the RBI Governor would maintain status on December 2,” he said.
The Reserve Bank, which has been keeping rates at an elevated level citing high inflation, wants the rate of price rise to come down to 6 per cent by January 2016.
Poor showing by agriculture and manufacturing sector pulled down the country’s economic growth rate to 5.3 per cent in the second quarter against 5.7 per cent in the April-June quarter of this year.
Inflation based on the Wholesale Price Index cooled to a 5-year low of 1.77 per cent in October driven by softening prices of fuel and food items. At the same time, retail inflation, based on Consumer Price Index, also eased to 5.52 per cent at end of October.
Finance Minister Arun Jaitley has also pitched for a cut in interest rate saying it will have positive impact on home and auto loans.
In in interview to PTI last week, Jaitley had expressed hope that RBI will move in the direction of making the cost of capital reasonable to help perk up economy.
On the other hand, Yes Bank CEO and Managing Director Rana Kapoor expects that the central bank may cut interest rate by 0.25 per cen
NEW DELHI—India’s economic growth decelerated in the third quarter, feeding doubts about how quickly the country’s new government can deliver on pledges to end a nearly three-year slump and transform the world’s second-most-populous nation into a manufacturing powerhouse.
Gross domestic product grew 5.3% from a year earlier for the three months that ended Sept. 30, according to government data released Friday. Manufacturing, which accounts for 15% of the economy, was stagnant, expanding just 0.1%. Financial and business services strengthened.
Shilan Shah, an economist at London-based Capital Economics, said growth for the quarter “is still very lackluster by past standards—and in terms of what India can achieve at the moment.”
The latest figures marked a retreat from the 5.7% year-over-year growth posted in the previous quarter. Growth was modestly above the median forecast of 5.1% in a poll of 16 economists by The Wall Street Journal. In each of the last two fiscal years, Indian growth has come in below 5%, the slowest such spell in decades.
“By and large, the trend is generally upwards,” said Siddhartha Sanyal, a Barclays Capital economist. “But within the quarterly numbers, there might be some ups and downs.”
Starting in 2003, India’s economy grew 8% a year on average for nearly a decade, lifting millions out of poverty and creating a generation of young people with middle-class aspirations. The abrupt end of those halcyon years stirred voters’ perceptions that India’s previous government was ineffectual and corrupt, helping to vault Prime Minister Narendra Modi into office this spring.
Half a year later, hopes for a turnaround in Asia’s third-largest economy are running high.
Amid torpid growth in other large developing countries—and in Europe and Japan—India’s promise has set it apart. Foreign investors are pouring money into Indian stocks and bonds. On Friday, the total market capitalization of companies listed on Mumbai’s BSE stock exchange passed 100 trillion rupees ($1.6 trillion) for the first time.
But a series of largely incremental steps by Mr. Modi has yet to cause the Indian economy to achieve liftoff.
The second quarter’s jump was “an aberration,” said Glenn Levine, senior economist at Moody’s Analytics. Exports and fixed investment, both growing from a low base a year earlier, had propelled the April-through-June uptick. “Neither of those looks sustainable,” Mr. Levine said.
One centerpiece of the prime minister’s economic program is a “Make in India” campaign, which aims to position the country as a new hub for labor-intensive manufacturing as wages in China rise and India’s workforce swells.
To that end, the Modi administration has raised ceilings on foreign investment in defense and railway construction. It has worked to approve stalled investment projects, reduce red tape for small firms and simplify bureaucratic procedures in other ways.
“These are minor changes with major impacts,” said Karan A. Chanana, chief executive of Amira Nature Foods Ltd. , a producer and exporter of specialty Indian rice. The new government has “provided all the cues for growth.”
But more-radical overhauls will take time to implement. A plan to streamline the sales-tax system, which the World Bank has called “the most crucial reform that could improve competitiveness of India’s manufacturing sector,” faces technological hurdles and resistance from state governments.
Labor unions and their political allies will fight any attempt to relinquish the government’s monopoly on commercial coal production, an operation at the heart of powering the economy.
In an interview with the Press Trust of India published this week, Finance Minister Arun Jaitley said the government will liberalize additional sectors of the economy next year. He said modernizing infrastructure will be a focus, as will increasing access to capital. Bank-credit growth hit a multiyear low in September.
But, Mr. Jaitley cautioned: “It will still take some time before results start surfacing. On the ground some green shoots are visible.”
India is on firmer footing than it was last year, when news of possible tightening in U.S. monetary policy roiled Indian markets and triggered massive capital flight.
Since then, inflation has halved, thanks largely to plummeting world oil prices. Restrictions on gold imports have cut India’s trade imbalance sharply, though late Friday, the Indian central bank withdrew its gold-import curbs. Net inflows of foreign direct investment between April and August were up a third from a year earlier.
sive – RBI under pressure to cut rates as growth slips
BY MANOJ KUMAR
NEW DELHITue Nov 25,(Reuters) – India’s economic growth probably slowed to around 5 percent in the three months to September, slipping from 5.7 percent in the previous quarter, two senior finance ministry sources said, putting pressure on the central bank to cut interest rates.
The sources said Finance Minister Arun Jaitley would press Reserve Bank of India (RBI) Governor Raghuram Rajan to lower borrowing costs when the two meet ahead of a decision on interest rates next Tuesday.
Six months after Prime Minister Narendra Modi swept to power with a promise that “better days are coming”, growth of 5 percent would mark a serious setback from the previous quarter and fall far short of the 8 percent that Asia’s third-largest economy needs to create enough jobs for its growing workforce.
Official GDP figures are due for release on Friday.
Indian finance ministers often “jawbone” the RBI on interest rates, but Jaitley’s calls have become unusually insistent of late. Aides say he will make the case for cuts forcefully.
“When Rajan meets the finance minister ahead of the policy review, he would be urged to cut the interest rates,” one senior finance ministry official with direct knowledge of the matter told Reuters. “A rate cut is the only hope for industry facing poor domestic and external demand.”
HISTORY OF INFLATION
Rajan, who made no reference to policy rates at a speaking engagement on Tuesday in Gujarat, has resisted calls to cut the RBI’s 8 percent repo rate, even though consumer inflation has dipped below the 6 percent target he wants to hit by January 2016.
The closest Rajan got to addressing the issue was in an answer to a question on the steep cost of borrowing to households, which he said was the result of India’s history of high inflation.
The hawkish former IMF chief economist has made it his mission to introduce inflation targeting to India, a country long plagued by double-digit price rises that hurt the more than 700 million people who live on $2 a day or less.
While factors such as weak international oil prices and flagging export demand have prompted Asia’s top two economies, China and Japan, to take aggressive action to ease monetary policy, Rajan has held out.
Bonds have rallied on hopes that falling inflation would lead the RBI to cut rates earlier than expected, but they took a breather on Tuesday. The benchmark 10-year Indian government bond closed flat to yield 8.16 percent, down 30 basis points since the RBI policy meeting in October.
“There is no doubt that we are on the threshold of a change in interest rates,” said Nirav Dalal, group president and senior managing director of financial markets at Yes Bank. “It is a matter of time now.”
INFLATION TARGET
Policy makers in New Delhi say the RBI should follow its Asian counterparts, ratcheting up the pressure on a central bank that enjoys policy autonomy but lacks the kind of independence enjoyed by central banks in the West.
“Rajan would have to really work hard to convince the Finance Minister why he will not cut interest rates this time,” said another finance ministry official who is responsible for tax policy.
After two years of sub-5 percent growth, India’s $2 trillion economy is struggling to break consistently above that level, which means the tax take for the year to end-March is now set to miss budget by as much as 900 billion rupees ($15 billion), the second official estimated.
Jaitley has so far vowed to uphold a fiscal deficit target of 4.1 percent of GDP, but his aides caution that any further cuts in spending that the government has to make to hit it could further sap growth.
“Expenditure cuts are certain, and that means a further slowdown in the economy,” the official said.
PUSHING ON STRING
Independent economists caution, however, that cuts in interest rates may not be the best medicine for India, which is in desperate need of structural reforms to make it easier to do business.
“Easing monetary policy without enacting far-reaching structural reforms that raise productivity would only risk re-igniting price pressures when things turn up, leaving everyone worse off,” Frederic Neumann at HSBC wrote in a commentary.
Red tape has strangled investment, and with it demand for credit. At the same time a state-dominated banking system riddled with bad loans may put an investment recovery at risk, the OECD said last week.
“A rate cut will have a sentiment boost impact for consumers but then that sentiment boost won’t last long as the supply side is constrained,” said Indranil Pan, chief economist at Kotak Mahindra Bank.
“The fall in inflation is not a structural correction but a cyclical correction because oil, commodity prices are not in our hands and they can turn anytime.”
head of the monetary policy review, SBI Chairperson Arundhati Bhattacharya on Thursday said RBI may leave interest rate unchanged in the next review but could soften its stance by end of the current fiscal.
“The fact of matter is that all the parameters are indicating that there will be further fall in inflation.
Between November and January with the base effect it might go up a little bit. But by March it will be well below whatever the glide path that is indicated by the RBI,” she said.
“RBI Governor has indicated that he will be data driven…may be by the end of the fiscal (cut in the interest rate by RBI),” she added.
Asked if she expected rate cut from RBI next month, she said “no”.
“Base effects will also temper inflation in the next few months only to reverse towards the end of the year. The Reserve Bank will look through base effects,” Governor Raghuram Rajan had said in his monetary policy announcement on September 30.
The RBI, which has been keeping rates at an elevated level citing high inflation, wants it to come down to 6 per cent by January 2016. It is scheduled to come out with its bi-monthly policy announcement on December 2.
Inflation based on the Wholesale Price Index cooled to a 5-year low of 1.77 per cent in October driven by softening prices of fuel and food items. At the same time, retail inflation, based on Consumer Price Index, also eased to 5.52 per cent at end of October.
With moderation in inflation, there is a widespread expectation that RBI will cut interest rate in its upcoming bi-monthly monetary policy.
Arvind Virmani, former executive director at the International Monetary Fund.
Reserve Bank of India Governor Raghuram Rajan should cut the benchmark interest rate as it will help growth recover without stoking inflation, a member of the central bank’s monetary policy advisory panel said.
“I have been arguing since September that CPI inflation is firmly on a downtrend,” Arvind Virmani, one of seven external members of the panel and also a former executive director at the International Monetary Fund, said in an e-mail interview yesterday. “The time for easing monetary policy has arrived.”
Retail inflation slowed to 5.52 percent in October, the slowest pace since the index was created in January 2012. Finance Minister Arun Jaitley said this week that growth would get a “great fillip” if the central bank lowered borrowing costs. The next policy review is scheduled for Dec. 2.
Rajan kept rates steady at 8 percent in September, citing risks from food price shocks and geopolitical developments. In doing so, he over-ruled the majority of external members of the central bank’s monetary policy committee who recommended a rate cut. The panel is advisory in nature and the final rate decision solely rests with the central bank chief.
“There is no inflation-growth trade off in Indian monetary policy at this point,” Virmani said. Easing monetary policy will facilitate a growth recovery by boosting consumer demand and investment, he said.
If the investment cycle resumes in India, then it is only a matter of time before Sensex scales 40,000, said Christopher Wood, managing director and equity strategist at CLSA. (Full interview with CLSA MD Christopher Wood)
Given the current scenario, however, that is a capital ‘IF’.
There are few signs of recovery in the economy. Manufacturing output grew at a dismal rate of 0.1% in the second quarter of the current fiscal as compared to the corresponding quarter last year. Analysts at Nirmal Bang expect the GDP growth in the second quarter will be tepid.
Industries and analysts alike blame high interest rate regime for the slow pickup in growth. Finance Minister Arun Jaitley, too, has joined the bandwagon to make a case for interest rate cuts. Broking firm DBS in its research note has said that “Pressure is mounting on the Reserve Bank to cut rates at its December meeting…. Jaitley’s recent call to lower rates to encourage construction activity has revived expectations.”
Economic data points have lined up to favour a cut in interest rates. October Wholesale Price Index (WPI) has fallen to a five-year low of 1.8%. According to Motilal Oswal, Whole Price Index inflation data reveals a prevalence of month-on-month (MoM) disinflationary trend for the last two months, while there is no sign of inflation at the retail level for the last two months.
Falling oil and food prices have resulted in near zero contribution from these two segments to inflation. Current inflation numbers were also helped by base effect as September/October 2013 saw peak levels of inflation. Motilal Oswal points out that the case for a rate cut is strengthened further with latest inflation figures being well within RBI’s guidance of 8% by January 2015.
RBI governor Raghuram Rajan is facing pressure not only from the government, industries and analysts but even from his colleagues at the central bank who feel it is time for a rate cut. Four of the seven external members of the RBI’s Technical Advisory Committee on Monetary Policy wanted a rate cut at the last policy meet itself, which Rajan overruled.
However, given Rajan’s track record, it is unlikely that he will buckle under pressure. He has data to support his stance. First, inflation numbers have fallen mainly on account of a high base effect and low fuel and food prices. Oil price are not in control of Indian government and could go up anytime. To some extent, food inflation is down on account of seasonal factors; the recent poor kharif crop output can push up food inflation again. The impact of the base effect would be reflected more accurately in the next quarter.
In its report on Inflation, Anand Rathi says that a global deflationary environment and subdued domestic demand should put further downward pressure on inflation, but as the economy turns around core inflation could harden.
Little would be achieved if the central bank reduces interest rates and inflation shoots up as demand picks up, forcing RBI to cut interest rate again. It would be prudent and beneficial for the economy in the long run to hold on to interest rate for another quarter till inflation numbers are well under control.
lowing inflation in India could build a case for RBI to cut interest rates
NEW DELHI: India’s inflation dropped to a new multi-year low in October, helped by slower annual rises in food and fuel prices, intensifying pressure on the central bank to cut interest rates to encourage spending and investment needed to boost growth.
The wholesale price index rose an annual 1.77 per cent last month, its slowest since September 2009, compared with the 2.20 per cent forecast by economists in a Reuters poll.
Friday’s data comes days after India reported consumer price inflation had dropped to 5.52 per cent in October, below the Reserve Bank of India’s (RBI) 6 per cent target for January 2016.
“With inflation at or under 6 per cent we think RBI is likely to face pressure to ease, not just from the government, but also from RBI’s own policy committee,” said Devika Mehndiratta, a senior economist at Australia and New Zealand Banking Group Ltd in Singapore.
She expects retail inflation to hit a low of close to 4 per cent in November, opening up an opportunity for a 25 basis points interest rate cut in the second quarter of 2015.
Indian businesses have been pleading for a cut in interest rates, which are among the highest in Asia, to stimulate consumption in a domestic demand-driven economy.
Consumer goods output – a proxy for consumer demand that drives 60 per cent of India’s economy – has grown in just two of the last 21 months. It fell an annual 4.0 per cent in September.
The RBI is meeting on Dec. 2 to review policy, having kept its key repo rate steady at 8.0 per cent since January.
A Reuters poll last month had shown that economists expected rates to be held unchanged until well into next year, due to worries that price pressures would revive once a favourable base effect fades out and food prices rise after a poor summer rains.
Bond traders are betting on one of the biggest interest rate reductions among major emerging markets once the rate cutting cycle begins.
The 10-year benchmark bond yield had dropped 36 basis points since Oct. 1 until the last session on hopes of a rate cut.
Bond market sees rate cuts even as RBI talks tough on inflation
BY SUVASHREE CHOUDHURY AND GAURAV PAI
MUMBAIMon Nov 10, 201
(Reuters) – The rally in Indian bonds is providing the Reserve Bank of India (RBI) governor Raghuram Rajan an unexpected gift: Falling borrowing costs are starting to provide the benefits of lower interest rates without him actually having to ease monetary policy.
The bond rally – and the lower yields that result – comes as the consumer price index eased to 6.46 percent in September.
That was the lowest since the series was introduced in January 2012 – a major morale boost for the fixed-income market and its legendary fear of inflation.
Investors are also more confident on the economy after a sharp turnaround in the rupee, the best Asian performer so far in 2014, gaining about 0.7 percent to 61.53 to the dollar, and bucking a falling trend among its peers.
Despite no change in interest rates, India’s largest lender, State Bank of India, last week became among the latest to lower deposit rates, often a precursor to lower lending rates, something some banks have already done for certain consumer loans.
Corporate bond yields have fallen sharply, making it 55 basis points (bps) cheaper for companies to issue bonds than a couple of months ago, bankers said. A 10-year AAA corporate bond is trading at around 8.75 percent compared with 9.30 percent just a few months ago.
That is working in Rajan’s favour, easing pressure on the RBI to immediately cut rates and allowing him to uphold his hawkish reputation on inflation.
“There is an anticipation of easing by RBI materialising earlier than later and that is triggering the rate cuts by banks and softening in market yields,” said Siddhartha Sanyal, India economist at Barclays in Mumbai.
Bond markets are now pricing in a cut in the key repo rate to 8 percent as early as the RBI’s next meeting on December 2 or in February – whereas previously expectations were for an easing in the second quarter of 2015.
As a result, the 10-year bond yield hit this week a 15-month low of 8.19 percent. The one-year interest rate swap – an indicator of policy rates – fell nearly 37 bps last month, the biggest monthly fall in a year and is now trading at 7.96 percent.
Meanwhile, cash conditions remain loose, allowing lenders to lower deposit and lending rates because they can access short-term funds more cheaply.
State Bank of India last week lowered some of its deposit rates by 100 bps, having already cut its home loan rates by about 15 bps in August.
CAUTION
For market borrowing costs to fall before a cut in official rates is a marked change in a country where banks often take months to react to changes in official rates.
This shift means any RBI rate cut would be passed through to the domestic economy much faster this time around.
That is critical, given that boosting credit growth, which touched a 13-year low in September, is a key plank in Prime Minister Narendra Modi’s plan to revive investment. Lower market borrowing costs also reduce pressure on the RBI to cut interest rates at a time when the economy has suffered from two consecutive years of below 5 percent growth, a relatively low pace for India.
Rajan has argued repeatedly that economic growth can only revive by defeating inflation. The former International Monetary Fund economist has tried to do that by raising interest rates three times since September.
“Lower interest rates are good for growth. If the reform process by the government, which has already started, continues and is accompanied by lower policy interest rates, then the combination will help growth pick up faster,” said Sanjay Mathur, head of economic research for non-Japan Asia at Royal Bank of Scotland in Singapore.
Union Bank of India Ltd, for example, said it was already prepared to lower lending rates after recently reducing deposit rates by 25-30 bps for some maturities to 8.75 percent.
“Once RBI cuts the repo rate, banks are likely to follow with base rate cuts to push credit,” said Arun Tiwari, chairman and managing director at Union Bank of India.
The worry for markets is an unexpected pick-up in inflation, such as via a sudden surge in crude oil prices, that would keep interest rates high for much longer than currently expected, given Rajan’s intent to get CPI to 6 percent by January 2016.
The RBI said after its Sept. 30 policy meeting that it expects inflation to pick up by year-end as the base effect wanes. Food prices also typically rise in the run-up to the monsoon months.
“In India we have seen this play out several times: policy tightens, inflation declines, policy is loosened in response which spikes inflation. I think RBI wants to avoid repeating this mistake,” said Jahangir Aziz, chief emerging-Asia economist at JP Morgan.
Reuters) – The rally in Indian bonds is providing central bank governor Raghuram Rajan an unexpected gift: Falling borrowing costs are starting to provide the benefits of lower interest rates without him actually having to ease monetary policy.
The bond rally – and the lower yields that result – comes as the consumer price index INCPIY=ECI eased to 6.46 percent in September.
That was the lowest since the series was introduced in January 2012 – a major morale boost for the fixed-income market and its legendary fear of inflation.
Investors are also more confident on the Indian economy after a sharp turnaround in the Indian rupee INR=D2, the best Asian performer so far in 2014, gaining about 0.7 percent to 61.53 to the dollar, and bucking a falling trend among its peers.
Despite no change in interest rates, India’s largest lender, State Bank of India (SBI.NS), last week became among the latest to lower deposit rates, often a precursor to lower lending rates, something some banks have already done for certain consumer loans.
Corporate bond yields have fallen sharply, making it 55 basis points (bps) cheaper for companies to issue bonds than a couple of months ago, bankers said. A 10-year AAA corporate bond is trading at around 8.75 percent compared with 9.30 percent just a few months ago.
That is working in Rajan’s favor, easing pressure on the Reserve Bank of India (RBI) to immediately cut rates and allowing him to uphold his hawkish reputation on inflation.
“There is an anticipation of easing by RBI materializing earlier than later and that is triggering the rate cuts by banks and softening in market yields,” said Siddhartha Sanyal, India economist at Barclays in Mumbai.
Bond markets are now pricing in a cut in the key repo rate INREPO=ECI to 8 percent as early as the RBI’s next meeting on December 2 or in February – whereas previously expectations were for an easing in the second quarter of 2015.
As a result, the 10-year bond yield IN10YT=RR hit this week a 15-month low of 8.19 percent. The one-year interest rate swap INRAMONMI1Y= – an indicator of policy rates – fell nearly 37 bps last month, the biggest monthly fall in a year and is now trading at 7.96 percent.
Meanwhile, cash conditions remain loose, allowing lenders to lower deposit and lending rates because they can access short-term funds more cheaply.
State Bank of India last week lowered some of its deposit rates by 100 bps, having already cut its home loan rates by about 15 bps in August.
CAUTION
For market borrowing costs to fall before a cut in official rates is a marked change in a country where banks often take months to react to changes in official rates.
This shift means any RBI rate cut would be passed through to the domestic economy much faster this time around.
That is critical, given that boosting credit growth, which touched a 13-year low in September, is a key plank in Prime Minister Narendra Modi’s plan to revive investment. Lower market borrowing costs also reduce pressure on the RBI to cut interest rates at a time when the economy has suffered from two consecutive years of below 5 percent growth, a relatively low pace for India.
Rajan has argued repeatedly that economic growth can only revive by defeating inflation. The former International Monetary Fund economist has tried to do that by raising interest rates three times since September.
“Lower interest rates are good for growth. If the reform process by the government, which has already started, continues and is accompanied by lower policy interest rates, then the combination will help growth pick up faster,” said Sanjay Mathur, head of economic research for non-Japan Asia at Royal Bank of Scotland in Singapore.
Union Bank of India Ltd (UNBK.NS), for example, said it was already prepared to lower lending rates after recently reducing deposit rates by 25-30 bps for some maturities to 8.75 percent.
“Once RBI cuts the repo rate, banks are likely to follow with base rate cuts to push credit,” said Arun Tiwari, chairman and managing director at Union Bank of India.
The worry for markets is an unexpected pick-up in inflation, such as via a sudden surge in crude oil prices, that would keep interest rates high for much longer than currently expected, given Rajan’s intent to get CPI to 6 percent by January 2016.
The RBI said after its Sept. 30 policy meeting that it expects inflation to pick up by year-end as the base effect wanes. Food prices also typically rise in the run-up to the monsoon months.
“In India we have seen this play out several times: policy tightens, inflation declines, policy is loosened in response which spikes inflation. I think RBI wants to avoid repeating this mistake,” said Jahangir Aziz, chief emerging-Asia economist at JP Morgan.
ECD wants RBI to continue with tight monetary policy
In its Economic Outlook report, OECD said inflationary expectations are still high
Cautioning the RBI against any rate cut, the Paris-based OECD has said that it should continue with the tight monetary policy as inflationary expectations are still high.
“In India, still-high inflation expectations call for a continuation of the tight monetary policy stance,” the Organisation for Economic Cooperation and Development (OECD) has said in its Economic Outlook report.
RBI Deputy Governor H R Khan too had expressed similar opinion and warned against “early celebrations” over recent fall in inflation.
“Inflation still has a long way to go,” Khan had said, elaborating “structural issues” like input costs, wage burden, food prices, protein-driven inflation and rural areas witnessing wider inflation pressures.
The Reserve Bank is scheduled to announce its monetary policy review on December 2. Industry has been demanding a rate cut in view of fall in inflation and the need to push growth.
While the WPI inflation in September dropped to a five year low of 2.38 per cent, the retail inflation too was at its lowest since January 2012 at 6.46 per cent during the period.
The OECD further said that India not only needs to continue with fiscal consolidation but should also improve its quality, rebalancing expenditures away from subsidies and towards public investment.
The Reserve Bank has been maintaining a tight monetary policy stance in order to tame inflationary expectations.
For the fourth time in a row, RBI kept key interest rates unchanged in its previous policy review on September 30 and said it will not cut them unless inflation moderates to anticipated levels.
The growth has slumped to sub-5 per cent for two consecutive fiscals. It fell to 4.7 per cent in 2013-14 and is estimated to be between 5.4-5.9 per cent in the current fiscal.
In April-June quarter economic growth accelerated to 5.7 per cent.
OECD is a grouping of 34 countries, mostly developed nations.
Recent fall in inflation does not mean decline is permanent: RBI Dy Governor HR Khan
MUMBAI: Reserve Bank of India Deputy Governor HR Khan poured cold water on corporate India’s hopes that a lower interest rates cycle could begin in December, saying the recent fall in inflation does not mean the decline is permanent.
The fall in price of crude oil and other commodities is beneficial to the Indian economy, but policy makers cannot jump to the conclusion that the trend was firmly established. “Inflation still has a long way to go,” the deputy governor told the audience at a chief financial officers’ summit organised by industry body CII.
“Structural issues like input costs, wage burden, food prices, protein-driven inflation, and rural areas are witnessing wider inflation pressures.” At the India Economic Summit in Delhi earlier this week, corporate leaders, including Anand Mahindra of the tractor-to-financial services conglomerate M&M, were vociferous in demanding that RBI lower interest rates since consumer prices are softening.
Central Bank Prefers Wait and Watch Policy
“It might be time for the RBI to think of a rate cut,” Mahindra said a few days ago. “The need of the hour has changed and it’s time to start to look to support growth.”
However, the central bank which is targeting 6% CPI by January 2016 is still hesitant saying that its model forecasts CPI at 7% by March 2016. Also, the base effect could peter out in the next few months, and CPI could begin its climb again. Crude oil has fallen more than a quarter in recent weeks, and coal and other commodity prices have halved from their peak levels. India imports two-third of its crude oil requirements.
With the slowdown in Chinese economy and the oil countries cartel — the Organization of Petroleum Exporting Countries — unlikely to resort to production cut to boost prices, the chances of rebound in prices is unlikely, many analysts believe. Consumer price inflation slowed down to 6.46% in September, on lower food and fuel inflation.
Governor Raghuram Rajan has kept the benchmarkrepo rate at 8% after three increases since taking over in September 2013. Finance Minister Arun Jaitley has also pitched for a rate cut on the back of stabilising inflation. Bond markets are already pricing in a rate cut with the benchmark 10-year yield dropping below 8.2% this week. But Khan made it clear that RBI would prefer to wait and watch commodity prices for a while.
“A fall in global crude oil prices is a boon for India,” said Khan. “When the global recovery is also tepid and there are many geopolitical issues, we need to be cautious when we celebrate early and we cannot be an outlier, particularly, in terms of inflation from among the BRIC countries.”
nov 7 (Reuters) – The rupee is unlikely to gain over the next year due to expectations that the Federal Reserve will raise interest rates by middle of next year, while the Chinese yuan will probably rise, a Reuters poll showed.
The rupee was trading around 61.50 a dollar on Friday. But in a month’s time the rupee is likely to stand at 61.46 per dollar, according to the poll of 26 currency strategists conducted this week.
The poll predicted the rupee at 61.70 per dollar in six months and 62.36 rupees in a year.
Those predictions are more bearish than forecasts in the October survey and come despite the stock market rallying 32 percent since the start of this year on robust capital inflows.
“It is the move in the dollar that will be the key driver of emerging currencies,” said Abhishek Upadhyay, economist at ICICI Securities PD at Mumbai.
“The rupee is better placed relative to its emerging market peers as inflationary pressures have eased even with a cyclical recovery underway.”
Indian consumer inflation eased to 6.46 percent in September, the lowest print since the measure was introduced in January 2012, while after a long slowdown growth picked up in the April-June quarter, accelerating to 5.7 percent – the fastest pace in two-and-a-half years.
A surge in the U.S. dollar could precipitate a slump in the currencies of Turkey, South Africa and Brazil similar to the rout seen between late 2013 and early this year when the Fed announced intentions to taper its stimulus.
Last week the Fed drew the curtains on its half-a-decade long multi-trillion dollar stimulus programme.
A Reuters poll on Wednesday showed that while some emerging market central banks may raise interest rates over the next year to protect their currencies, policy tightening will at best slow the rate of depreciation.
YUAN TO RISE
China’s yuan is expected to slowly strengthen over the next 12 months, according to the poll.
It predicted that the yuan would trade at 6.12 per dollar in one month, then 6.08 in six months and 6.04 in a year.
On Friday, the yuan opened at 6.1165 per dollar. It has gained 0.70 percent against the U.S. dollar over the past five weeks at a time when the greenback has booked broad gains against most currencies.
China’s central bank on Thursday pledged to maintain modest policy support to help the world’s second-largest economy weather the economic slowdown but stressed it will not flood markets with cash.
oct 9 he Reserve Bank of India has made progress bringing inflation under control and is “on course” to meet its goal of reducing annual consumer price increases to 6% by early 2016, Raghuram Rajan, the central bank’s governor, said in an interview with The Wall Street Journal.
“We’ve done a lot,” Mr. Rajan said Thursday in Washington, where he is participating in the semi-annual meetings of the International Monetary Fund. “We’ve been successful in getting public acceptance of the fact we need to bring down inflation.”
The central bank’s effort has been aided by falling oil and food prices. Mr. Rajan said domestic services prices are also slowing.
He described monetary policy as being in a neutral stance, with interest rate increases no more likely than interest rate cuts, as the central bank assesses a mixed economic landscape in which global economic growth is under pressure even as the domestic environment improves.
A better inflation backdrop is one of several factors that have made the Indian economy more resilient, Mr. Rajan said.
Its current account deficit is down below 2% of gross domestic product, its fiscal deficit is down, central bank reserves are up, and economic growth has picked up, he said. Moreover, India has required foreign investors in domestic government debt to hold securities with longer maturities, making it less exposed to sudden outflows of capital.
“We have focused on putting our house in order,” he said.
That, he added, put the country in a position to withstand market turbulence that could erupt when the U.S. Federal Reserve starts raising short-term interest rates next year. India’s markets have been rocked in the past by shifts in Fed policy, such as last year when Fed officials started discussing ending their bond buying programs.
During the milder episode of market turmoil in January and August, he noted, Indian markets were relatively unscathed.
ew Delhi: Indian Prime Minister Narendra Modi’s administration has proposed giving the central bank governor Raghuram Rajan veto power over a new monetary policy council that for the first time would focus on price stability as its main mission, people with knowledge of the matter said. The finance ministry proposal calls for the formation of an eight-member committee headed by the Reserve Bank of India (RBI) governor and a deputy that includes one government nominee with no voting rights, according to two people who asked not to be identified because the discussions are private. The RBI governor, a senior finance ministry bureaucrat and an outside expert will help pick the other five members, they said. The proposal differs from January recommendations from an RBI panel backed by Rajan to create a five-member committee in which the majority would determine the policy decisions, with the central bank chief breaking a tie if a member was absent. Under that proposal, members would include the governor, his deputy and two outside experts picked by them, along with an RBI official handling monetary policy. The changes are part of the most sweeping overhaul to monetary policy in the central bank’s 78-year-old history. Modi’s government backs the RBI’s proposal to make consumer price index (CPI)-based inflation the “predominant objective” of monetary policy for the first time, the people said, while also saying it should promote economic growth and employment. Talks continuing Discussions between the government and RBI are continuing, the people said. Both plan to sign a framework agreement in the next few months that takes effect in the next financial year beginning 1 April, they said. D.S. Malik, a finance ministry spokesman, declined to comment on discussions related to the monetary policy framework. Under current rules, the governor alone makes policy decisions with input from an advisory group and central bank officials. Rajan has held the repurchase rate at 8% for the past four meetings after adopting the RBI panel’s recommendation to bring down consumer-price inflation to 6% by January 2016. Rajan said last month the central bank was on pace to hit that target, discounting an RBI model that said 7% was likely. India’s retail inflation of 7.8% is the highest among 17 Asia-Pacific economies tracked by Bloomberg, and compares with 2% in China and 4.53% in Indonesia. The finance ministry proposal said the CPI target would be agreed to during consultations between the government and central bank, the people familiar said. The central bank had proposed a target of 4% with a plus-or-minus 2 percentage point band. Bloomberg
Reuters/Reuters – An employee counts rupee currency notes inside a private money exchange office in New Delhi July 5, 2013. REUTERS/Adnan Abidi/Files
By Manoj Kumar
NEW DELHI (Reuters) – India will unveil a new monetary policy framework by the end of January 2015, a finance ministry official said on Tuesday, making it easier for the Reserve Bank of India (RBI) to focus on tamping down persistently high inflation.
India has long struggled with prices rising at double digit levels annually, causing most distress for the poor.
Consumer price inflation slowed to 7.8 percent in August, making the central bank more confident that a near-term target of 8 percent inflation in January would be met.
An RBI panel this year proposed moving to a medium-term inflation target of 4 percent, with a band of 2 percent on either side, when setting monetary policy, sharply below current levels.
The recommendation had stirred concern about a potential clash with the traditionally more pro-growth government. Although the RBI is not statutorily independent from the government, it has long enjoyed wide latitude in policy-making.
The reforms foresee a panel-based approach that is standard international practice but, as in Britain, would require the RBI to adhere to an inflation target set by the government, known in the jargon as operational independence.
Finance Minister Arun Jaitley, in his maiden budget in July, promised to revamp the monetary policy framework to meet the challenge of an increasingly complex economy.
“It has to be put in place not later than December-January because it is a budget announcement,” the official, who asked not to be identified because of the sensitivity of the matter, told reporters.
“We have completed our internal work. And the (RBI) Governor and the finance secretary had some conversations.”
The finance ministry and the RBI are soon expected to sign a formal agreement on the issue, the official said.
RBI Governor Raghuram Rajan has already said he wanted to bring down consumer price inflation to 8 percent in January 2015 and a more difficult 6 percent the following year, in line with the “glide path” recommended by the central bank panel.
However, the official said it was up to the government to set the new inflation target.
“What is the appropriate inflation target for India, cannot be decided by the RBI. It has to be decided by the government,” he said, adding it could consult with parliament and the central bank before setting the target.
This effectively means the RBI would not enjoy the independence enjoyed by the U.S. Federal Reserve, which has latitude to set an inflation target as part of a broader legal mandate to achieve full employment and stable prices.
Rajan sent a strong signal last week that he would refrain from cutting interest rates until he was confident the inflation target for January 2016 could be met.
