RBI’s Monetary Policy Review-September 2013

Raghuram Rajan, in his first policy review on 20^th Sept.’ 13, increased repo rate by 25 bps to 7.50 percent, defying most forecasts of holding the rate steady.

He has clarified that he is not going to give a free hand of RBI to govt. to revive growth at this stage. It is clear that he has beaten down the govt.’s expenditure plans fuelling inflation. To curb the inflationary expectations, he has increased the rate. He has also indicated targeting CPI, which remained stubbornly high near double digits for 3 continuous years.

Next mid quarterly policy review is due on 29^th Oct., as per his comments in the previous review, we may definitely expect him to raise the rate again by 25 bps. I expect a Repo rate of more than 8% to curb inflationary expectations and bring down the inflation to acceptable levels of 4-5%.

MARKET IS NOT A FOOL

Our finance minister P. Chidambaram(PC) has been the face of Govt. defending the economy and calming the nerves of market. Rupee depreciation, which began in late May this year, is in no mood of turning around, in spite of various steps taken by RBI & assurances by PC. He has been trying to calm the market nerves almost every day, he is ‘said more than done’, due to which Re has touched life time low of 68 on 28^th Aug.. Mr. PC be clear that ‘MARKET IS NOT A FOOL’, u work on the basics & market will respond accordingly, be sure that we cannot run export-import imbalance of 150-200 bil. $ year on year, when total exports is just 300 bil. $. Imbalance in the domestic production is not only affecting CAD, but also inflating prices, which is dragging the investment and economy.

Growth Slowdown

India’s GDP growth is on the doldrums for quite a long time now; in one of the previous blogs, I have elaborated various reasons for slowdown in GDP growth accusing primly UPA government. Q-o-Q GDP growth has been slowing with no recovery seen in the near future. Slow down in Manufacturing is bound to spill over to services sooner than later, with services accounting for almost 60% of GDP output, severe slowdown in services is going to be a huge setback for the sector. May be we are already witnessing severe slowdown in services too as per HSBC services PMI for July ’13(which has shown y-o-y contraction). Agriculture sector is expected to perform better this year, however we may not expect more than 4-5% growth for entire FY’13-14. Assuming Industrial growth at 1-2%, we have a serious issue at hand with overall growth slowing down further to 4% in the quarters ahead.

The Ideal Society

The Ideal human society towards which all have to work should have the following basics:

·          

      Availability of basics of life like food, water, shelter...

·         Security.

·         Basic health facilities at nil cost.

·         Freedom to express our views.

·         Equal opportunity to all to become what they want in life empowered through right to education at nil cost.

·         To overcome the human characteristic of self extinction. 

Even though humanity has evolved over centuries, our modern day society is still plagued with humans killing humans in the name of religion, land and other resources. The obvious question is how many more centuries will our humanity take at least to stop killing each other and provide the above few basic necessities of life to all …???

The Missing Link

Missing Link between what science has proved and what religion says is still to be found. Religion provided us the supreme truth of life, however science is yet to prove the birth/death conundrum. How many more years will it take for science to unravel this mystery-200/ 300/500 years or more ???...

Reasons for fall in India’s GDP growth to 4.5% in Q4-2012-A Decade’s Low growth

      1)    Government inaction on reforms and creation of impediments for investment/investor sentiments since the UPA-II came into power is the main reason for drastic slowdown in economic activity:

• Insurance sector reform viz., raising of FDI from 26% to 49/74%.
• Pension sector reform including creation of pension regulator.
• Lack of incentives for investment.
• No measures being taken in spite of persistently high inflation due to supply side constraints.
• Continued expansion of government expenditure by ever increasing market borrowings leading to unmatched demand surplus in turn causing high inflation.
• Long pending Land acquisition reforms.
• Infrastructure reforms – like coal linkages for power plants, long delay in administrative clearances for various infra projects, gas price issue for natural gas from KGD-blocks to name a few.
• Judiciary reforms – long pending justice from the judiciary is acting as impediment to country’s image.
• Introduction of GAAR beating down the sentiment of investors which was already low.
• Applicability of MAT to SEZs which were engines of growth for exports.  Exports were already hugely lagging imports and introduction of MAT to SEZs has considerably affected the growth of SEZs.
• Inefficient public distribution system and loss of huge amounts of grains at the govt. storage houses.

2)   High inflation leading to high interest rates- Continued expansion of government expenditure by ever increasing market borrowings led to unmatched demand surplus in turn causing high inflation. High inflation has bound the hands of RBI to cut policy rates leading to high interest rates. High interest rates have badly affected the much needed turn around in investment cycle.

    3) Government inaction leading to unprecedented fall of rupee worsening BOP position of the country dragging GDP growth.