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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:


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.


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