Bank Policy Tuesday: DMK steals policy limelight, Rate cut hopes of India Inc

Though we did not suspect the political mulligatawny soup that will lead to a face off in the Parliament on the Lankan Tamils issue and should in fact be used by Indian polity to align to US on this issue and come down on belligerent China friendly Lanka, the very least done today in the political arena with the Nifty barely holding 5750 and yields hardening closer to 8%  has been the virtual throwing away of the monetarists wheel in what can be educative to all large economies hoping for moneteraistic target based Economics to bring home the citizens out of the global crisis of growth overtaken by stagflation.

RBI allowed another 25 bp cut in Repo rates to 7.5% and though it seems pat following fixed yields early 2013 move below 8%, it removes any further room for easing for the Central Bank. Cheap RBI lending thru the LAF should have already impacted yields to move down as inflation remained in control. LAF rates are now 6.5%. RBI has also posited the MSF as bank rate at the upper end of the channel in the mid term review. India’s GDP growth was the lowest in the last 15 quarters at 4.5% in Q3 of FY13

The Governor meets the press at 2:30 pm.

SEMI Breakfast - Fixed Income/Credit Analysis
SEMI Breakfast – Fixed Income/Credit Analysis (Photo credit: ceonyc)

Rate Cut Economics

The bank rate cut to 7.75% was already an avoidance response to the  Type II error of over tightening the monetary turf by the RBI which is already conducting large OMOs to provide continuing liquidity. The last one was just this week , the 3 day repo accounting for INR 1350 bln. In real terms rates have only risen after the last rate cut announcement in Indian Fixed Income markets despite the appreciation in the Rupee and counting today’s rate cut of 25 bps thats 50 bp of rate cuts shouted out by India bears waiting for the debt trap that India Inc could never be. Indian credit stock instead still remains the lowest in Developing and Advanced Economies globally at 75% of GDP ( both data points in this argument have come from this week’s RBI data releases)r

The Challenge ahead

Despite the 30% growth in NBFC credit this January (based on RBI data released for segmental review of bank credit) credit growth will likely challeng e the 16% non food credit target. In market terms(equities) , though 5750 levels are holding on the Nifty, expectations have definitely been turned down three notches after the violent 100 point mid day reaction and as profit growth eludes and food inflation rules the rest of 2013, real income growth may finally turn out to be a mirage and bring down curtains on future consumption growth for the nation as it dives into political uncertainty. RBI rate cuts could have been avoided to keep the market discipline better in later months when the fixed income markets would have been in situ better able to target a downward slide in yields and keep ahead with higher growth enumeration as non food inflation instead of staying low now tries to bite back with global demand improved by China’s lot However all that still means India grows by 5% in FY13. The lower data of worse cases for FY 14 enumerated above are still low probability events and can be easily avoided though these downside risks should also blanket any other global downside risks.

Foreign investment flows

India remains a global island of relative comfort for investors engendering continuing foreign investor interests that should as posited turn positive as the global downside risks emerge stronger esp for Europe and competitors like Korea and Singapore (affected by the China story) get bit while others like Thailand may still not provide the required depth to global investors. BRICs and N11 stories have at one time or other shown how executive decision can help them pull past the Indian jugger naut and India needs to be better positioned to respond in global markets thru joint policy and private sector action.

 

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