RBI MONETARY POLICY: MAKES SENSE AND MANIFESTS SENSIBILITY

Shedding 500 points is big enough to be noticed by every Tom, Dick and Harry of India Inc. Uninformed investors, herd mentality and FIIs ready to make a quick buck were the major factors for the 2% fall in our domestic indices. The usual talk was, ‘Arre market gir gayi suna, kya kare monetary policy mein,”. And the blame goes to the central bank and the bankers. As per the market analysis, FII traders and speculators were taken aback with just a 25 basis cut, but who asked them to take positions on the basis of the budget speech. The market has been going up since 29^th February by some 10% with an expectation of 50 basis points cut in repo rate. I think by this time, they should have some idea about Mr. Rajan, his usual style is to do the unexpected. Till now 150 basis points have been cut and only half of it has been transmitted and thus the need arose for liquidity measures which have been announced and consequently both our indices tumbled like Jack and Jill, of course supported by weak crude and poor show by European markets.

Now let’s go to the cherry on the cake, I mean liquidity measures. Everybody wants a lower lending rate on every possible kind of loan, but when the central bank actually tries to transmit it in reality, we have a free fall. The crux of the matter is that the FIIs don’t care a fig about our lending or borrowing rates or for that matter about the financial health of our banks. What they want is a higher interest rate cut driving financial sector stocks higher to amplify their portfolios. So measures like reducing the minimum daily maintenance of the CRR from 95 per cent to 90 per cent does not matter to them. RBI initiated other path breaking measures such as narrowing policy rate corridor from +/-100 basis points (bps) to +/- 50 bps by reducing the MSF rate by 75 basis points and increasing the reverse repo rate by 25 basis points now at 6%, which will remove distortions and bring about better alignment between the weighted average call rate (WACR) and the policy repo rate. Last but not the least, the central bank will progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality which is one of the most crucial decisions taken by the governor resolving the long tussle for liquidity between the RBI and banks.
  

All these measures will be extremely fruitful in the long run, as impediments for rate cut transmission and liquidity needs of the banking sector have been addressed. So instead of sulking, let’s get back to work. What ever is done by the central bank was due for a long time and made eminent sense in the present uncertain global scenario. Our foremost concern should be to strengthen our financial sector and this is what is being done in the recent monetary policy. For rational informed investors, the RBI monetary policy has made both sense and sensibility, for the rest only luck can help them.

FOR U, ME & CRICKET, LET’S SKEW THE LAW OF AVERAGES

The sentiment remains low with India crashing out of the World Cup and Sensex starting on a negative note on the very first day of the financial year. For a change, apart from the usual rationalization, profit booking was cited as the valid reason for BSE Sensex declining by almost 0.3%. Sensex has been up by some 15% since January and our cricket team has also been on the winning spree since defeating Australia in T20 series in February.  I think the best rationalization in both the cases is the ‘Law of Averages’, which has come into play. Everything balances out in the long run or in more complicated terms, the relative frequency with which an event occurs in repeated trials will converge to a stable value over time as the sample increases. Some pessimists have even predicted Apple’s downfall in the coming future based on this law. Whatever may be the case, the question remains, do you believe in this law or can it be defied.

I don’t know whether we can defy it or not, but one can definitely work around it. As for our benchmark indices we need not worry, that is what core sector growth is telling at 5.7% for February and with the expected repo rate cut in the first bi-monthly policy on 5^th April, growth engine will refuel it-self for future growth. Lower deposit rates and lending rates on the basis of marginal cost formula augur well both for the borrowers and banking sector especially PSU. On the macro front, high forex reserves, low external government debt and stable exchange rate will help us to fight any number of no balls against cheap Chinese imports, Europe and Japan’s ongoing stimulus or the impending rate hike by US FED.  As for cricket which is our national religion, hope of 1 billion people will skew even the law of averages.    

MADAM YELLEN HAS DONE IT AGAIN.......

Madam Yellen has defied the age old male adage that women are not mentally transparent. She made things pretty translucent on Tuesday for global investors and the whole central banking community. Last December, she had raised hopes of US becoming again the only ray of hope for the depressed world economy. Though the hopes are still not dashed, they are dampened for a few quarters at least. The best thing was that she did her best to explain the systematic risks faced by the US economy and why they existed? It’s quantum of a jump from an era of hard nosed, obscure, insensitive to a more transparent and pragmatic monetary policy.

Her forceful speech made stock markets skip and prance justifying USA’s dependence on developed, developing and the sacred Emerging Markets. What one couldn’t miss was the cautious undertone of the whole discourse exhibiting underlying risk parameters faced by the largest economy of the world.

Though Yellen seemed optimistic about various scenarios which may lead to favorable inflation, manufacturing and job data for the US, uncertain global factors such as declining crude prices, slowing China, precarious Europe and Japan is forcing her to be more data dependent for future course of action. As a result, FED has indicated gradual progression for hiking interest rates in the coming quarters which is best for everyone. A responsible and sensitive FED will have spill over effects spreading calmness so badly needed by global trade and investment community.