Easing interest rates may not be an easy task for RBI
News item collected from Economic Times 28.05.2012
MUMBAI: Voices forecasting interest rate cuts by the Reserve Bank of India is getting feebler by the day. Indeed, there are odd ones calling for even a rate rise.
Slowing economic growth, rising prices, sliding currency and deteriorating government finances may possibly throw up a deadly cocktail - stagflation - a state of low growth and rising prices.
If the government takes a leaf out of oil companies' decision last week to raise petrol prices, and follows up with increasing diesel, cooking gas and kerosene prices, inflation rate may jump to double digits making talk of interest rate cut meaningless.
Even if economic growth rate falls to multi-year lows the Reserve Bank of India could not ease rates aggressively for fear of fueling inflation, one of the factors that has halted investments. The government does not have the fire power either to provide fiscal stimulus.
Complicating decision making is the growing imbalance in the financial system where deposits growth is at a 7-year low. RBI's sale of US dollars to arrest the Rupee slide is sucking out rupees from the system and inflation is eroding savings. Of course, a financial catastrophe if Greece exits the Euro zone could turn the argument in favour of series of rate cuts.
"Given the forex volatility and RBI interventions, liquidity has remained tight and government induced inflation pressure still remains high, so the RBI will have little room to cut rates immediately,'' says Madan Sabnavis, chief economist at Care Ratings.
Economists from Bank of America Merrill Lynch to Barclays have cut their expectations of interest rate cuts to about 75-100 basis points for the calendar from about 150 basis points. A basis point is 0.01 percentage point. Few are forecasting a repo rate cut when Governor Duvvuri Subbarao announces mid-quarter review of monetary policy on June 18, a day after Greece elections.
"I think the RBI will need to at least reverse the April rate cut in Q4 or even earlier in the July meeting because of inflationary pressures," says Jahangir Aziz, economist at JPMorgan Chase. "However, it is possible that the RBI is forced to raise rates earlier to defend the relentlessly depreciating currency." Subbarao in April surprised with a 50 basis points cut in repo rate, the rate at which RBI lends to banks, to 8%.
India has to go through a phase of painful adjustment after enjoying record growth due to market distorting policies that kept prices suppressed. The government has to curtail its expenditure to limit market borrowing that is crowding out private investment. People should cut consumption which they indulged in due to petroleum and power subsidies. Adjustments could happen with higher prices for both products, as well as money, i.e., interest rates.
"To the extent that these measures are towards correcting the fiscal deficit, RBI may not be greatly perturbed about their inflationary impact, since they would do the function of pruning demand,'' says Shubhada Rao, chief economist at Yes Bank. "Food inflation in April has also disappointed. It's not going to be easy for RBI to take their eyes off inflation.''
Poor management of the economy pushed current account deficit, the excess of imports over exports and fiscal deficit to record highs. Easy money for long and government splurge stoked demand in the past while policy paralysis stymied investments. Global investors are turning wary of India. The Indian Rupee has fallen nearly 25% since last July hurting importers and forcing the RBI to throw an estimated $25 billion since September to cushion the volatility.
Diesel, cooking gas cylinder and kerosene prices have to be raised by around 38%, 120% and 220% respectively to erase losses of oil marketing companies, says Nomura Securities. Banks reluctantly cut lending rates after the RBI cut repo rate last month since they face slow deposit growth and mounting bad loans. They are still borrowing an average of more than Rs 1 lakh crores from the RBI due to liquidity shortage. Even if the RBI cuts rates, banks wont be able to follow.
"Unless deposit growth revives to say, 16% by June from the current 13% levels, banks will not be able to cut lending rates to stem the slide in loan demand even if the RBI cuts,'' says Indranil Sen Gupta at Bank of America Merrill Lynch.
Deposits growth remains sluggish after more than two years of negative real interest rates.
Rising prices of goods and services could further reduce deposit growth rate since higher portion of income would be spent than saved.
Anand Rathi, a brokerage, expects the Wholesale Price Index to go past 10% by August from 7.23% in April. Although manufacturing, or the core price levels, are below the RBI's comfort level of 5%, there may be little scope for rate cuts since a diesel price increase will set off another round of manufacturing products price rise.
Apart from prices and currency, government's ability to stick to its borrowing target of 5.7 lakh crores and keeping the fiscal deficit target at 5.1% of the Gross Domestic Product is necessary.
India's macro-economic situation has suddenly worsened: Assocham
NEW DELHI: India may not be heading towards a balance of payment crisis, but its macro-economic situation is worsening by the day calling for urgent steps to ensure no further damage is done to the economy, a survey of leading economists and select industry leaders has pointed out.
Out of the 58 economists and CEOs covered under the Assocham poll in the last one week, as many as 53 said India's macro economic situation has suddenly worsened.
"India may not yet be heading towards a balance of payment crisis, but the macro-economic situation of the country is worsening by the day calling for almost emergent steps to ensure that no further damage is done to the economy," Assocham said.
It was a combination of flip-flop on domestic policies and the global uncertainties arising mainly from the troubled euro-zone which played a spoilsport for the Indian economy, it said.
"Breaking out of scams, one after the other, resorting to taxation policies which are perceived to be unfriendly to the global investors, political compulsions of the government in not pursuing the economic reforms are the major factors which have led to a worrying state of economy, which was booming till two years ago," it said.
Majority of the respondents said India's macro economic situation has suddenly worsened.
"The worst disaster is coming from a huge uncertainty on the rupee value and its free fall. Everybody out there in the business world is feeling shaky," the survey said.
Rupee has depreciated by over 13 per cent since early March and has even touched the low of Rs 56.38 last week.
It said that a whole lot of sectors like automobile, tourism, steel, oil, gems and jewellery, real estate are feeling the heat of rising dollar and weakening rupee.
"While cost of raw material imports has gone up significantly with rupee weakening, inflation is raising its ugly head and is adding to the nervousness among the industry, bankers and policy makers," it added.
This would be catastrophic and depress the demand in the manufacturing sector, the largest employment source after agriculture and services, it said.
However, the chamber hoped that RBI will take a balanced view when it reviews the credit policy next month.
Out of the 58 economists and CEOs covered under the Assocham poll in the last one week, as many as 53 said India's macro economic situation has suddenly worsened.
"India may not yet be heading towards a balance of payment crisis, but the macro-economic situation of the country is worsening by the day calling for almost emergent steps to ensure that no further damage is done to the economy," Assocham said.
It was a combination of flip-flop on domestic policies and the global uncertainties arising mainly from the troubled euro-zone which played a spoilsport for the Indian economy, it said.
"Breaking out of scams, one after the other, resorting to taxation policies which are perceived to be unfriendly to the global investors, political compulsions of the government in not pursuing the economic reforms are the major factors which have led to a worrying state of economy, which was booming till two years ago," it said.
Majority of the respondents said India's macro economic situation has suddenly worsened.
"The worst disaster is coming from a huge uncertainty on the rupee value and its free fall. Everybody out there in the business world is feeling shaky," the survey said.
Rupee has depreciated by over 13 per cent since early March and has even touched the low of Rs 56.38 last week.
It said that a whole lot of sectors like automobile, tourism, steel, oil, gems and jewellery, real estate are feeling the heat of rising dollar and weakening rupee.
"While cost of raw material imports has gone up significantly with rupee weakening, inflation is raising its ugly head and is adding to the nervousness among the industry, bankers and policy makers," it added.
This would be catastrophic and depress the demand in the manufacturing sector, the largest employment source after agriculture and services, it said.
However, the chamber hoped that RBI will take a balanced view when it reviews the credit policy next month.
No comments:
Post a Comment