Uncertain Markets And RBI Stand

On September 24, with the Supreme Court of India cancelling 214 of the 218 coal block allocations made by previous governments, the Indian stock markets plummeted into uncertainty. This week too, benchmark indices including the NIFTY and SENSEX broke their six-week rally – banks, metal, power, capital goods, and infrastructure took a beating while pharma, IT, and media were among the top gainers. On October 1, BSE Sensex closed at 26,567.9 and the Nifty ended at 7945.5, down 0.23 percent and 0.24 percent, respectively, over last Friday’s. The markets this week saw the large caps falter while investors favored the small and mid caps largely.

FPIs (Foreign Portfolio Investors) are reported to have bought shares worth INR 5102.5 crore as of September 29,  down from INR 5429.7 crore in August. Overall the FPIs are estimated to have bought shares worth INR 83437.7 crore between April and September. The choppy markets also seem to have taken cue from mixed responses at the other Asian markets (Nikkei 225 -0.03 percent, Hang Seng -0.79 percent, Strait Times +0.23 percent).

The forex, equity, money, and Indian commodity markets were closed for trading on Thursday (Oct 2 – Gandhi Jayanti) and Friday (Oct 3 – Dussehra). On Monday (Oct 6) again it will remain closed for Bakri-Id.

RBI’s credit policy

India’s Central bank, the Reserve Bank of India (RBI) announced its decision to keep the repo rate (rate at which the RBI lends short term loans to commercial banks), the reverse repo rate (rate at which the RBI borrows from commercial banks), the cash reserve ratio or CRR (ratio of deposits commercial banks need to maintain with RBI), the statutory liquidity ratio or SLR (ratio of investments mainly into government securities), and the bank rate unchanged.

Speaking at the RBI’s fourth bi-monthly credit policy review yesterday, the RBI governor, Dr. Raghuram Rajan also said that despite keeping the key rates unchanged, the Central bank would also scale down the liquidity provided under the export credit refinance (ECR) option. With effect from October 10, the ratio of eligible export credit outstanding shall be reduced from 32 percent to 15 percent.

Current RBI Rates

Bank Rate 9%
CRR 4%
Repo Rate 8%
Reverse Repo Rate 7%
SLR 22%

 

Growth vs inflation

The NDA Government’s spending cuts and check on the deficit has helped ease inflation. According to the RBI Governor, inflation can be effectively checked only if growth rate is controlled. This effectively presents a dilemma because one of the key promises of the NDA during its Lok Sabha elections is an unprecedented growth rate.

According to the RBI Governor, growth does not need to be sacrificed if investments come pouring in. A growth rate of 7.5 percent in the next 3 years seems optimum for checking inflation, says Dr. Rajan. His statement about inflation said, “inflation has ebbed to levels which are consistent with the desired near-term glide path of disinflation – 8 percent by January 2015. The most heartening feature has been the steady decline in inflation excluding food and fuel, by a cumulative 111 basis points since January 2014, to a new low.”

The RBI’s policies will require adaptation even as the full effects of the year’s monsoon come to light. The Indian Central bank has set its target firmly on curbing the consumer price index (CPI) inflation level at about 8 percent by January 2015. While this may look rather achievable in the current scenario, the next target of about 6 percent, however, may require concentrated efforts from the RBI, Finance Ministry, and the financial institutions of the country.

Crude prices fall

On October 2, the oil price benchmark of the world, Brent crude fell to the lowest levels in over two years and hovered over $92 a barrel. For the moment this could look like good news for the Indian Government in terms of easing the subsidy load and for the country’s oil firms in terms of reducing the losses on sale of petroleum products. The one question that has been resonant is ‘Are crude prices likely fall?’

The sharp fall in crude prices seems to be the direct result of price cuts initiated by Saudi Aramco, Saudi Arabia’s state oil firm. If the trend continues, India could certainly have reason to rejoice. Almost 75 percent of the nation’s crude oil requirements come from imports significantly impacting the current account deficit (CAD). India’s oil import bill for the financial year 2013-14 was pegged at USD 150 billion. Even a 10 percent fall in crude prices (from the USD 105-110 per barrel estimation of the Union Budget for this fiscal year) will lower the country’s CAD by 0.6 percent of the GDP. The geopolitical developments of the world, especially the ISIS crisis of the Gulf will play an important role in the sustenance of crude prices at current levels.

Chances of revival of economy

All the sectors of the Indian economy are yet to achieve stability. The initial spurt and optimism of having elected an NDA government at the Centre has started to wear away and the business world is now keen to find out if the Prime Minister, Narendra Modi can walk the talk and institute key reforms that boost various sectors. A revaluation and reassessment of labour laws is long overdue.

Agriculture is one sector that is likely to show some momentum in the last quarter of this fiscal year. Manufacturing should benefit from the added focus of the Government’s Make in India campaign. Infrastructure should see a major comeback post-monsoon with construction activities picking up. The revival of the Indian economy, however, willl largely depend on the interest generated in investors by the efforts of the Government. Fiscal consolidation and stronger focus in indigenous industries will be a game changer at this point.