Saturday, June 16, 2012
Slower growth and high volatility, Reserve bank is expected to cut Repo and Reverse Repo rates by 25 basis points in its policy review on Monday, 18th June, 2012.
What are current rates?
Repo Rate - 8%
Reverse Repo Rate - 7%
RBI has room to support economic activity as industrial production growth remains weak and inflation is under sub 10% level.
The industrial production grew at just 0.1 per cent from a year ago in
April. Meanwhile, the wholesale price index based inflation rose to 7.55
per cent in May from a year ago because of higher food and fuel prices.
Bloomberg survey on Reserve Bank of India policy suggests all major economists predicting 25 basis points rate cut. Only Religare and Bank of Baroda economists are predicting 50 basis points, rest all either suggesting 25 basis points or no change.
It seems rate cut has become a necessity and Reserve Bank has no option but to adhere to above estimates. I hope some good days coming for consumer and corporate segments. However, RBI can surprise market with 50 basis points bold move or even make it remain as it is. All eyes on policy review on 18th June at 11 a.m.
Saturday, June 16, 2012 0
Earlier this week, ratings agency Standard and Poor's raised concerns over India's investment grade ratings and said India could be first BRIC nation to lose this grade status. This event was rather predicted as India factory output data came flat in April. I am not a big fan of S&P or Moody ratings, this reminds me how they failed during 2008 crisis to correctly rate derivatives instruments. If they can't rate few instruments, how can they rate giant economies. Having said this, I would concentrate not on rating agencies but mainly on Indian economy.
Recently, I heard one of friend said "India is destined to grow but China is determined to grow". I thought a lot about this statement, checking the growth of other BRICs. China and Brazil both have slowed but India's GDP figures are the worst in last 9 years. It gives me a feel that "All is not well". I analyzed the situation mainly from three points:
1. Government failure since 1991 Liberalization: India was thought to grow due to its large customer base, high savings and foreign investment that would come up. A deeper look suggest that India was growing at 6% till mid 1980s and situation today is not different. With quarter ending March, growth was 5.3% as opposed to expected 6%. People who were involved in liberalization are considered to be GOD and VISIONARIES but rather than this, India grew on human optimism.
2. Finances: Rupee depreciation to 55-56 level, depressed government bond yield and high gross bad debts with restructured loans in Banks. RBI firepower is limited to push up rupee, but we still feel decent as oil prices went down luckily. Brent is trading in range of 81-83 dollars a barrel. Banks are forced to buy government bonds, more borrowing means corporates can not raise much.
3. Politics and corruption: Baba Ramdev estimates 10 lakh crores of Indian black money sitting abroad. This much money can not be made by fair practices and made to sit idle in a foreign land. Policy is at complete standstill, coalition government is unable to pass key reforms of FDI. Over 10 lakh crores of government revenue was sacrificed by ManMohan Singh for coal blocks. Reason given by his government was we want poor to benefit, I believe if this was the intention then government should have taken this money and distributed to poor by creating more true jobs. All knows how much money in getting looted by UPA flagship money making scheme of NREGA (National Rural Employment Guarantee Act).
Perhaps India will bounce back. And if that doesn't happen, there could be a miracle where public rise to the occassion and excercise right to vote and throw out this corrupt government. I am still bullish about India, remember "India is destined to grow" and would bet my money on it. Hopefully the small pieces of growth & economy will start coming togther sooner than later.
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