Why RBI's decision is not an anti- depressant...

For some reason, the RBI's rate  cut (by 50 basis points)  triggers anxiety rather than reassurance. Japan's decades long experience proves that low interest rates do not drive investment; it is the confidence in an economy that pulls it through.

1. The rate cut is in an economy which has seen withdrawals by FIIs. Where there has been a flight to quality.
2. FIIs pulled out over Rs.  17,000 crore from Indian equities during August 2015. This was the highest in a month since 2008. 
3. One cannot by logic reduce interest rates when capital goes out.  Unless the Central bank believes that this Indian growth story is taking a severe knock.
4. Savings ratio has been falling to about 30 %. The incidence of the rate slash is on the saver. Savings are now at a discount.  That means that  the long term project funding is likely to take a drubbing.  The investments India  needs are gargantuan. 
5. Mammoth infrastructure building alone can create jobs through multiplier effects. Monetary policy will not create jobs directly. 
6. If you keep interest rates low, saving attrition rather than saving accretion takes place.
7. The immediate beneficiaries of a rate cut are likely to be consumer durable industry and the real estate industry. Consumer durables are expenditure items which do not lead to asset accumulation. To that extent, we see the liabilities of the household sector moving up to finance conspicuous consumption. Personal finances will see a hit in the medium term.
8. The real estate prices which by the Governor's prior statement, stand inflated might see a marginal fall.  On a prior occasion, the Governor had advised builders to first bring down prices and clear the stock ; cheaper home loans will now keep real estate rates high. The home builders have been reluctant to pass on lower costing benefits to prospective home owners. RBI has rewarded the same group through  cheap loans. This is indicative of a  mis-allocation between demand and supply in the housing sector. Where prices should have been lower, monetary policy has sweetened the borrower demand. 
9. The industry lobby which has been lobbying has gained at the expense of the savers who have no lobbies.  
10. Or is it that the RBI sees a severe economic winter coming and is preparing for it in advance?

The views expressed here are academic in nature and without any risk or responsibility. The blog recommends no investment. 

RBI's rate cut... a signal ?

To this blog, RBI's rate cut is a welcome opportunity in  an otherwise  selling market. As markets all over the world are selling, India cannot but converge. The RBI policy rate cut may thus be a good opportunity to sell and buy: Those who have bought on the rumour would sell and en-cash the rare opportunity. Tomorrow , may be another day. In trading , book profits and get out of positions.

Views expressed are without any risk r responsibility. This blog recommends no investment. 

RBI sees the world differently...Does it see an economic winter coming?

The decision to reduce the Policy Repo Rate by the RBI by 50 bps speaks volumes of the tremors of fear in the monetary policy makers' minds. Any elation has to be tempered with the fact that the RBI seems quite deeply concerned with global outlook.

The pessimism emanating out of China and the commodity markets is real time here. One needs to cogitate beyond market euphoria ofa rate cut. RBI met against the background of a $ 800 billion fall in international markets on Monday. The commodity prices keep on falling slackened by the lack of demand from China.

With the yen climbing, Japanese companies already reeling from lack of domestic demand will reel further. So after China, Japan too.

 If winter comes, can India be far behind...   
We definitely know that India is well behind the Government 's  target growth rate.



Views expressed are without any risk r responsibility. This blog recommends no investment. 

The Lessons from Volkswagen for banks...

• Deterioration in values and integrity has moved up to a corporate level.
• Managers, in their pursuit of profits, tend to take advantage of the lag in supervisory oversight. 
• Tricking the regulator becomes a  corporate  game.
• As margins become thinner and competition gets fiercer, banks give regulations a go by. This  was proved in the LIBOR fixing scandal as also in the money laundering charges against some international banks  like HSBC, 
• Changing CEOs do not  change work cultures - they are  profit seeking corporations looking for shareholder rather than stakeholder value additions. 
•  As supervisors are  obsessed with fine tuning their innumerable speeches, the corporations nicely cover up the tracks on  misdeeds.  
• Company values and ethics take a rear seat as market dynamics stall a company. 
• Over riding purpose veers around to  monetary results in line with the share holders expectations.

                  Views expressed are academic expressions. 

ADB revises forecasts for India

ADB

An economic slowdown in industrial countries,

a weak monsoon, 

stalled action on some key structural reforms 

All 3 will contribute to  India’s growth for the current fiscal year falling short of earlier estimates, but still remain robust, says a new Asian Development Bank (ADB) report.

Source: ADB 

China : The Siege Within

Reasons why China may take time to return to growth:

• China's factory sector seemed to decline in September, falling to its weakest level in 6-1/2 years as domestic and export demand continued to slump.
• Devaluing its currency to boost exports seems to be a quick fix aimed at seeking exports rather than a domestic market.
• Extent of systemic bad loans
• Not too transparent investments in the Chinese banking,
• A worrying "shadow banking" system.
• Inflation and re-inflation of  asset bubbles.  
• Firms engaged in illegal businesses,
• Identity fraud, a typical practice in grey-market margin financing.
• Leverage in equity.
• Real estate at inflated prices, and this asset used as collateral for buying stocks at inflated prices.
• People's Bank of China had cut liquidity ratios and interest rate and offered a credit line for equity investments.
• Routes for sellers on stock markets have since been blocked.  
•  As many as 1,500 listed companies have "voluntarily" withdrawn their shares from being traded. 
• Since 2000, China has had the world's largest outflow of high net worth individuals. Several thousand  wealthy Chinese have reportedly sought second citizenship fuelling demand to buy foreign property. These high net worth individuals, defined as those with net assets of $1 million or more excluding their primary residences, are moving to the U.S., Hong Kong, Singapore Britain, Australia and Canada . Australia's falling currency and proximity are attractions.

Note: This blog's views are an academic expression of views without any risk and responsibility.  The blog makes no recommendations for investment 

The Fed Reserve has to move rates up shortly...

The Fed has been kind to emerging markets and Europe in some measure,  It refrained from  adding to instability in the financial world when it restrained from any move up in the rate. First Greece (read Europe) and now China is  adding to the pressures on the Fed.

Te Fed,  unlike the IMF or the BIS is not a multinational institution. US economy remains and will remain at the heart of its concerns. The evidence that it is seeking to pick up on the pick up of the US economy is surely there- may be though in driblets. As the  data  of a resurgent US economy  is conclusive, the Fed has to but take note.   Therefore, it cannot but move up the rates.

Federal Reserve Bank of Dallas'  Globalization and Monetary Policy Institute, in its

Working Paper No. 34 (by William White) points out that 

'monetary policies designed solely to deal with short term problems of insufficient demand could make medium term problems worse by encouraging a build up of debt that cannot be sustained over time. The conclusion reached is that monetary policy should be more focused on “preemptive tightening” to moderate credit bubbles than on “preemptive easing” to deal with the after effects. There is a need for a new macrofinancial stability framework that would use both regulatory and monetary instruments to resist credit bubbles and thus promote sustainable economic growth over time." 

The Fed cannot ignore national interests. It will have to indulge in preemptive tightening. 

The views expressed are purely academic without any risk or responsibility. This blog recommends no investment. 

Lean versus Clean

Lean versus Clean:

Is the Governor of the RBI trying to temper the craze for a runaway growth ?

The Reserve Bank of India Governor has cautioned against the perils  of growing at a break- neck speed. In his subtle  resistance to calls for policy rate cuts, Rajan  seems to reflect  the current thinking that central banks should lean rather than clean.

There is a view  that monetary policy reacts to movements in asset prices and credit aggregates only to the extent that they affected inflation and output. This is because of a perception that it is too difficult for central banks  to distinguish fundamental-driven movements from speculative bubbles in real time. The  policy rate is not adequately refined  an instrument to address the financial risks. So monetary policy  is inclined to respond to the macroeconomic consequences of financial instability, if and when it materializes.  They clean up.

Governor Rajan seems to lean against credit bubbles by using tighter monetary policy. He is using the monetary policy to  lean against the expansion phase of credit upturns, so that the RBI subtly moderates boom conditions.  He appears to hold a view that central banks need to be proactive in order to mitigate crisis risk.    

Federal Reserve restrains itself from raising.

FRB Press Release

Release Date: September 17, 2015

 

Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.

2015 Monetary Policy Releases