Trinity Trick

While Rajan’s monetary policy review did ensure to handle two of the trinity trilemma i.e. sinking rupee and rising inflation but the last one i.e. meek growth demands Government action.

With US Federal Bank postponing quantitative easing withdrawal and with debutant RBI-Chief Raguram Rajan coming up with pragmatic monetary policy, positivity seems to have enthused in Indian economy. On one hand the breather given by Fed-Chief Ben Bernanke has ensured that Foreign Institutional Investments (FIIs) will remain intact till December, on the other, RBI-Chief’s move to hike repurchase (repo) rate has signaled that notorious inflation will also be guarded. Consequently with external and internal stability, the rupee-volatility will soon be the thing of passé.

RBI has raised repo rate i.e. the rate at which banks borrow from RBI for short-term credit to 7.5% from 7.25%. Simultaneously, it has reduced Marginal Standing Facility rate, a special and expensive borrowing window for banks, to 9.5% from 10.25%. Usually hike in repo rate translates into increased borrowing cost for banks but considering that MSF is the effective policy rate since July which has been lowered, cost of borrowing for banks has actually come down. The idea behind this move is to provide fresh air to banks currently suffocated with cash dearth but at the same time prepare them for the ensuing normalcy when repo rate will regain its position as effective policy rate. In that case, during normal circumstances, even if repo rate is increased from current level of 7.25%, it will be less than the present rate of MSF, thus there will not be any dramatic impact on banks’ cost of borrowing.

Another positive implication of repo-rate hike is that the subsequent arbitrage advantage in interest rates will attract more foreign investors, something which is needed to shore up foreign reserves. Increase in repo-rate also suggests RBI’s hawkish stand on inflation front. Fighting inflation through increased rates is justified as it is undoubtedly notoriously high inflation which fuels the vicious cycle of economic slowdown. Though it will hurt the already languishing growth with expensive loans and all but lower inflationary pressure is required even if it comes at the cost of short-term growth.

The so called impossible trinity trilemma of sinking rupee, rising inflation and meek growth has to be dealt with now. While Rajan’s monetary policy review did ensure to arrest sinking rupee and control rising inflation but meek growth cannot be strengthened solely by RBI. It does need policy-push and legislative reforms something which demands Government action. Effective monetary policy will come to a copper as long as it is not backed by prudent fiscal and legislative policies and expecting fiscal and legislative prudence on the part of Government in an election year is like asking for moon. Therefore, thumbs up to Rajan, a question-mark on Government’s intent!

                          

Raghu Reform Rajan

 Mr. Rajan’s beginning is definitely commendable. He might have travelled across the half way too quickly but covering the other half would not be easier.

“If you can trust yourself when all men doubt you, But make allowance for their doubting too” following lines from the poem ‘If’ by Rudyard Kipling is probably the best message newly appointed RBI-Chief Raghuram Rajan could convey to everyone bewildered with current economic turmoil. Through his maverick maiden speech, he effectively addressed the hopes of each stakeholder but how much walk of his talk will take place is something yet to be seen.

Slew of measures, in order to provide fresh breather to banks, have been proposed by Rajan. For instance, well-run scheduled commercial banks do not have to acquire permission from RBI in order to set-up new branches. Also, no fees will be charged for this purpose. That underserved areas don’t remain neglected, RBI will make sure that banks open up branches in those areas in proportion to their expansion in urban areas. Apart from this, he also emphasized to expedite the process for issuance of new banking licenses. A committee chaired by former RBI-Chief Mr. Bimal Jalan will be looking into the applications after an initial review and compilation by RBI staff. The process is stipulated to be completed by Jan 2014 i.e. the new licenses should be issued by then, if the deadline is not extended any further. In a bid to set up robust banking structure in the country, differentiated licenses will also be issued to small banks and wholesale banks. Large urban cooperative banks will be converted into commercial banks.

Rajan also took into consideration the growing Non Performing Assets of the banks due to loan-defaults and subsequent Corporate Debt Restructuring. He took a hard line on owners of those companies and said they do not have the divine right to stay in charge unmindful of how badly they mismanaged their enterprises. Banks aren’t supposed to bear the brunt of their bleak business scenario. Thus CDR norms are certainly going to get tougher now. To the relief of cash-strapped banks, Rajan intends to reduce their requirement to invest 23% of their deposits in Government securities which is known as Statutory Liquidity Ratio. It reduces the amount of cash available with banks to make loans.

For the benefit of citizens, finally an RBI-Chief will be launching Inflation-indexed savings instruments pegged with Consumer Price Inflation (CPI), not WPI as it is former which reflects the actual inflation being borne by consumers. A national grid-based Indian bill payment system will also be launched, where households will be able to use bank accounts to pay school fees, utilities, medical bills etc. This will make payment anytime anywhere a reality. Also, a pilot will be conducted to enable cash payments using prepaid instruments issued by non-banking entities and Aadhar-based identification. An application for encrypted SMS-based funds transfer that can run on any type of handset will also be examined by a technical committee.

Acknowledging that access to finance for the poor and for rural small and medium industries is hard, Point of sales devices and mini-ATMs will be set up by even non banking entities so that financial inclusion leading to inclusive growth can be feasible.

As monetary policy is the first and foremost responsibility of RBI, a committee under the chairmanship of Urjit Patel, in three months, will be suggesting measures to strengthen the monetary policy framework. Measures such as liberalization in forward market and internationalization of rupee etc. have certainly spurred the confidence of investors that India is not afraid to take bold decisions concerning with financial markets.

They say that ‘well begun is half done’. Mr. Rajan’s beginning is definitely commendable. He might have travelled across the half way too quickly but covering the other half would not be easier. All eyes are now set on 20^th Sep i.e. the day when he will be coming up with his first monetary policy as RBI-Chief. All the best Mr. Raghuram Rajan!! Hope you setting-off to tread on the other half-way is a success. 

Seeing the Silver-linings

India’s export business is bleak and currency depreciation is a tried and tested formula to boost it, rupee’s fall CAN be translated into export-growth, CAN turn out to be a positive for Indian economy. 

And the rupee goes past 66 per dollar! An all-time low! Its swinging motion in the range of 61-66 per dollar has become a cause of concern for Finance Ministry and Reserve Bank of India. Though their panic-stricken remedies adopted to cure rupee’s free-fall do suggest that economy might go down into dumps if currency doesn’t stabilize but considering that India’s export business is bleak and currency depreciation is a tried and tested formula to boost it, rupee’s fall CAN be translated into export-growth, CAN turn out to be a positive for Indian economy.

Scrambling to tame burgeoning CAD and thus halt rupee’s slide, Chidambaram hiked import duty on gold, silver and platinum to 10% and also hinted to raise duties on non-essential luxury items such as air-conditioners, refrigerators and expensive watches. It has also asked state-run financial institutions to raise funds abroad through quasi-sovereign bonds, and liberalized rules on overseas commercial borrowing so that more dollars can be brought in India. Not only FM, but monetary policy supremo RBI is also up with its efforts through its liquidity tightening measures. It restricted banks’ easy access to money so that bank-financing for speculators who create pseudo dollar-demand in currency market, can be curbed. Apart from these, RBI also put drastic capital controls on Indian residents and companies to stem the dollar outflow. Now only $75000 can be remitted by resident-individuals which is a steep fall from earlier limit of $200,000. Also, no Indian company can invest more than 100% of its net worth in foreign countries which could earlier invest 400% of their net worth.

Unfortunately nothing translated into rupee’s stability and it went beyond 66 per dollar. What was supposed to work for rupee didn’t help it, rather backfired hitting the economy with collateral damage. On one hand increased lending rates due to liquidity tightening is eating on the already dilapidated growth, on the other recent capital and import controls have fuelled the panic arose out of rupee’s fall. Not only foreign but even Indian investors are now losing faith from Indian economy.

Now that much has been tried to stem rupee, it is time that it is left to take its own course. Rupee’s fall is just a phase of wheeling vicious cycle which by itself would come down to a stable level. Indian credit rating agency CRISIL has in fact predicted that rupee will stabilize at rs. 60/dollar by March 14.

It is time RBI and Govt. accept that they are short of arsenal to protect rupee. They must instead look for ways to make the best use of rupee depreciation. Japan and South Korea in sixties and China in nineties had deliberately weakened their currency in planned manner to boost export, which actually paid them well. In fact, rupee’s fall has begun making positive impact on India’s export-business.  Exports rose by 11.64% in July. Also, rupee’s value against dollar is at a level which gives it competitive advantage in exports as compared to currencies of other countries including China. The most important point to consider is that export-boom, if it at all it happens, can eventually ease pressure on rupee through an increased flow of dollars.

Hence it is time that cheaper rupee is converted into export-drive. It would not only perk up India’s internal sustenance but also help restore investor-confidence in Indian economy.

Oh Onion!!

All you need to know about onion-price-rise

If you can’t imagine your meals without onions, get ready to either loosen your pocket or learn to not loosen your tongue!! The spectre of rising onion-prices is back to haunt and will keep haunting for at least few more weeks to come. Here’s a look at what you need to know about your favorite kitchen-ingredient:

Why the price-escalation?

Last year, drought in Maharashtra, the biggest onion producer in the country, already led to production-shortage and this year due to untimely rain in the same state including Rajasthan, Andhra Pradesh and Karnataka destroyed the liliaceous plants whose edible bulbs i.e. onions are the major mainstay of Indian cuisine. However, an internal note prepared by the Ministry of Consumer Affairs says "It was observed that there was only 5 per cent lower production of onion during 2012-13 as compared to 2011-2012 and storage was less by only 2 lakh tonnes. But there was a sharp decline of market arrivals by around 20 to 40 per cent during June-July, 2013 as compared to 2012. It seems that the stored onion was not released to the market timely and either farmers or traders are making undue profit by creating artificial scarcity. Accordingly, prices increased almost double the level as compared to 2011-2012."

Thus hoarding by opportunist suppliers and farmers is another major reason behind prices going north apart from shortfall in production.

What is being done by Govt?

Government has imposed export restriction on regular variety of onions by setting Minimum Export Price at $650 a tonne. It has also eased quarantine norms, especially those of fumigation so that onion-imports from Pakistan, China and Egypt can be facilitated. Anti-hoarding drives are also on at wholesale markets, thanks to which supply in the last couple of days has improved. Apart from this onions are being sold at less than Rs 5-6 from retail prices in Government fair-shop outlets.

Will the prices go down any time soon?

Yes but marginally! As recent exponential price-rise has resulted in demand-slowdown and measures taken by Govt. have led to improved supplies, prices will surely stabilize but merely at measly lower peak than today. It will hover around between Rs 50-80. They will come back to normalcy only after new produce lands in market and which is likely to happen by October 2013.

Economic impact:

Consumer Price Inflation, the one being borne by us, has come down to 9.6% in Jul 13 from 9.9% of the previous month. But due to surge in onion price including other vegetables, CPI is likely to go beyond 10% in the months to come as food articles account for 50% weightage in CPI.

Political Impact:

Political cost of onion is too much to afford for Government. Given that Assembly elections in many states including Delhi are looming and Lok-Sabha election is also in the offing, onion price rise is likely to become a significant election issue. Government will try its best to not let people shed onion-tears but its efforts won’t pay out much given the agitation and furore created by opposition. For instance, major opposition party BJP is selling onions at Rs 10 per kg in Odhisa in order to raise protest against Government.

It is notable here that it was the failure of BJP to control spiralling onion prices in 1998 which led to the victory of Sheila Dixit, current Chief-Minister of national-capital, in Delhi assembly polls. One never knows how things will turn out after 15 years in November!! Victory-cause itself might prove to be the failure-cause for the Delhi Chief-Minister.

Thus, onion, historically being a politically sensitive commodity, will give a tough time to Congress in coming elections.

Collateral damage:

As onion is one of the two trend-setter vegetables in food basket, other being potato, onion price rise automatically leads to escalation in prices of other vegetables.

 Tidbits:

Ø  Lasalgaon at Nasik in Maharashtra is the largest wholesale onion market in Asia. Currently    onions here are trading at Rs. 42 per kg.

Ø  Delhi Govt. has facilitated onion-sale at Rs.50 per kg from 1000 points across the city.

Ø  Few restaurants in B’lore have taken onion-dosa off-the-sale for time being.

Ø  A tyre-seller in Jamshedpur is providing free onions on the purchase of a truck/car tyre.

Happy Inception Day, Thought Couture!!

I am highly thankful to everyone who followed, admired, guided, mentored and corrected my efforts with Thought Couture to improvise it further.

Today when whole nation celebrates our 67th Independence Day, I have an exclusive reason to feel elated. Today, my humble beginning with financial analysis on Thought Couture is celebrating its first anniversary. It is its inception day.

Consistently keeping up with writing on business issues on weekly basis was certainly not an easy task. By the grace of God and support of my parents, I could keep my commitment with Thought Couture intact. Writing on 48 issues, ranging from gold, growth, FDI to inflation and rupee, helped me understand economics in better and fruitful manner and also helped me to get into India’s premiere journalism college i.e. Indian Institute of Mass Communication.

I am highly thankful to everyone who followed, admired, guided, mentored and corrected my efforts with Thought Couture to improvise it further. I hope you all keep showering your blessings so that my journey on Thought Couture touches many more milestones.

Happy Inception Day, Thought Couture!!

Gear up Growth!!

 it is better to not let growth go off-track because if it cripples rest will fall apart. Exchange rate volatility is to some extent bearable not growth slowdown.

Finally it is worded by trusted sources like ratings agency Crisil, Morgan Stanley and Bank of America- Merrill Lynch that India is heading towards sub 5% growth i.e. the so called Hindu rate of growth. Their predictions are crucial as these are taken as yardstick by foreign and local investors to judge India as investment destination. Unfortunately RBI’s liquidity tightening measures meant for supporting rupee couldn’t do that but it surely worked to cripple growth prospects of the country. Now Govt. and RBI are in dock whether to focus on symptoms i.e. rupee fall, inflation or choose to operate cause i.e. low growth. Cure for one is pain for another. Indian economy has thus stepped onto a vicious cycle, getting off from which is a tough call!

Undoubtedly it is rupee’s weakness against dollar which is the major concern and that is what RBI did by making it tougher to reach out to cheap loans so that speculation in currency could be curbed. But increasing lending rates worked soar for consumers by reducing their purchasing power and for industrialists by reducing their investment power which could have otherwise translated into higher growth. It is worth to mention that India’s GDP is currently running at 5% which is already very low given its potential yet instead of boosting it; it is being made to suffer even more.

One of the important reasons for weaker rupee is falling external fund-flows i.e. FDI or FII but the tricky part is that it is GDP rate in itself which is widely considered to be an important parameter to look at before investing. Having said that, India can never attract foreign-inflows keeping growth at bay and thus can never get to a stabilized exchange rate. RBI’s outgoing governor Duruvvi Subbarao rightly said that India has become a victim of impossible trinity i.e. it cannot have stable exchange rate, free movement of capital and independent monetary policy at the same time.

India has been exuding unfavorable sentiment for many months in past. While demands to lower down interest rates were pervasive, RBI had to go for the opposite. Now Industrial production is surely going to go even down in the absence of weak domestic demand due to decreasing purchasing power. Not only demand, India also suffers from supply side bottlenecks. Thus there are sheer lack of positives which can stimulate growth.

While monetary policies by RBI do play an important role but govt. policies and the way govt. functionaries work also influence foreign investors to a great deal. Not only falling growth but issues like exorbitant land price, red-tape in environmental clearances, higher power and fuel tariff etc also dampens the hope of profit one can gain via investing in India. Thus fixing loopholes on the part of RBI and Govt. alike is must. RBI did fire its attempt but in vain. Now Govt. seems to be taking efforts by easing FDI norms and Special Economic Zones (SEZ) norms, but this will also do no good. Govt. must understand that FDI isn’t going to come in as long as profit prospects are not palpable by foreign investors which are not due to legislative deficit, infrastructure challenges and most annoying one i.e. the dereliction of duties. Being in an election year is an added suffering.

With the announcement that Raghuram Rajan is going to be the next governor, all hopes are rested on him that he will roll back monetary tightening measures in order to let banks breath so that growth can be rescued but at the same time he will have to check that rupee doesn’t lose much ground against dollar. A difficult task as short-term external debts are coming to maturity, funding of which will require dollar putting downward pressure on rupee.

To conclude, accepting that it is certainly a tough job to make a balance between ruining growth and weakening currency in current circumstances, it is better to not let growth go off-track because if it cripples rest will fall apart. Exchange rate volatility is to some extent bearable not growth slowdown. It is time that RBI and Govt. fix the nail at the right place instead of hammering around on wrong places.

Rupee's Fall and RBI's Tattered Safety Net

Rupee’s value is going down. Why? Let’s take classic demand and supply formula!

Rupee’s value is going down. Why? Because India’s Current Account Deficit is widening, it’s no more a prosperous investment-destination, Foreign Institutional Investors aren’t investing, whosoever have invested are moving out, speculative trading adds false pressure on rupee and the most  cited reason, Fed Chief Ben Bernanke intends to taper-off monetary-easing from US economy. Seems all Greek and Latin? Too much to dissuade you to understand rupee-economics? Be brave! Read on!

Let’s take classic demand and supply formula! At any given time if the demand of dollar is more than that of rupee, it creates dollar-scarcity and rupee-liquidity. Less is always expensive, plenty is cheap. That is why rupee depreciates i.e. you pay more in rupee against one dollar.

Now, who all are demanding dollar? Where do we need it?

1)    People like you and me have to pay in dollars for all our imported tech gadgets, luxury items, foreign education etc.

2)    India’s huge import business demands dollars. Importers have to be paid in dollars.

3)    Investors willing to invest abroad need dollars.

4)    To maintain country’s Foreign Exchange Reserves, dollar is needed

5)    To pay foreign debts incurred by corporate and Govt., dollar is needed

Who all are demanding rupee?

1)    Rupee is needed everywhere in domestic economy. In banks, households, companies etc.

2)    Foreign investors willing to invest in India

3)    Indian Exporters

4)    Opportunists ogle on rupee for speculative trading.

Why demand of dollars surpasses that of rupee?

Indian is an import-driven country. 80% of our oil demand and 100% of our gold demand is met through imports which are the largest two imports of India. For some reasons, indigenously produced materials and products like wheat, rice, coal etc. are also imported in the country. Given that India’s export business is bleak, dollar outflow is always more than its inflow. In the parlance of economics, this imbalance i.e. the difference between total imported and exported goods, services and transfers is known as Current Account Deficit (CAD). India’s CAD is currently 4.8% of GDP. So the logic is, as long as India’s import dependence doesn’t get controlled i.e. its CAD doesn’t go down, rupee’s value will remain volatile.

Now that you are aware with the sources of rupee and dollar demand and also know the most significant reason affecting rupee, let’s come to why sudden downfall in INR, why sudden fuss around it?

In the aftermath of global recession in 2009, in order to boost American Economy, American Federal Reserve Chief Ben Bernanke went for monetary-easing i.e. good chunk of dollars were minted and made available to Americans on zero or negligible interest rates. American investors invested their cheaply acquired funds in various countries and made profits thanks to higher interest rates in those countries. In India many foreign investors invested their money in Govt. securities and debt market and acquired gains through interest rates provided on securities and stocks. Investment by them is known as Foreign Institutional Investment. Recently Fed Chief announced that he will taper-off monetary easing i.e. no more cheap money will be available to American investors. Interest rates will rise. In that case they will have to pay interest in their own country. If gained interest in other countries is meager or less than the paid-interest in their own country, no point for them to invest abroad.  Differential between interest rates either leads to arbitrage advantage or arbitrage loss. FIIs are moving out of India after this announcement because they are wary of arbitrage loss. Foreign investors obviously moved out with funds in dollars, steep scarcity of dollar suddenly emerged and caused rupee to fall.

Now let’s understand what RBI is doing to perk up Rupee:

If rupee is to be strengthened, dollar-demand has to be reduced. Dollar-demand by foreign investors cannot be controlled by RBI, dollar-demand for import business cannot be reduced so easily, dollar-demand by consumers or corporate is also somewhat out of control of RBI and dollar needed for Forex can also be not compromised. That said, RBI can only control speculative trading creating false demand of dollar.

What is speculative trading in currency market and how does it affect rupee?

In currency market, predictions are made as to how much rupee will fall or gain against dollar. Sensing the market sentiment, investors rather speculators invest in the currency which wins them profit. Needless to say they sell rupee in order to buy dollars. As good number of these opportunist speculators seeks loans from banks to convert rupee in dollar, it unnecessarily boosts rupee liquidity and creates shadow dollar-demand.

Conclusion: Though RBI took few measures to suck this liquidity out of the banking system so that banks cannot easily lend but given that rupee is still hovering around above 60, RBI has to admit its measures have been failed in its core objective i.e. to strengthen rupee. On the other hand collateral damage of increasing lending rates is all set to dampen the growth prospect of the country which is already running slow.

INR 60-61 against dollar is perhaps the new normal which cannot be reduced as long as the major cause of its weakness i.e. import dependence isn’t reduced. To surmise, excessive dollar demand can only be curtailed through internal sustenance i.e. self-sustained economy at an optimum level can only protect currency.