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Monday, 11 December 2017


Mr Mark Carney, Governor, Bank Of England would definitely be envious of our RBI Chief. With slowest growth among G7 members, looming brexit divorce and 3% inflation, Bank Of England is in a delirious position. As a result, rates were raised 0.25 basis points by Bank Of England in its recent monetary policy. It’s former spouse, European Central Bank has reduced its monthly purchases to 30 billion euros and the US FED is expected to raise rates as a goodbye Christmas gift by Madame Yellen in her last December policy. Global economy is limping back to growth still backed by stimulus which is being withdrawn leisurely at the behest of central bank chiefs hoping to bring about some sensibility to the current volatile political & economic scenario.  Indian Central Bank on the other hand is in a relatively propitious situation with rising GDP & inflation still in control.


 It may sound extremely clich├ęd, but our monetary policy was on expected lines. Though there were no surprises with respect to policy rates, PSU banks dived even when everybody else had their protective gear on. They were definitely not expecting relative grading of their capitalization woes and hoped equal treatment irrespective of their fiscal temperament and indolent attitude towards asset quality mess. RBI gave a stern message underlining performance based recapitalization of PSU banks highlighting that the consecutive boom & bust syndrome through previous government bailouts was a thing of the past.  This dose of stick & carrot is definitely required for the Indian PSU Banks largely responsible for garnering the second highest Non Performing Assets in the world after Italy.


As our monetary policy was being elucidated by the Monetary Policy Committee (MPC), the rupee weakened 13 paise, stock markets dived 200 points and the bonds gave a measured reaction treating it as a non event. Repo rate at 6%, Reverse Repo rate at 5.75%, Marginal Standing Facility and Bank Rate at 6.25% with a neutral stance was decided by the MPC in the ratio of 5:1. Mr Dholakia was the lone member favoring a rate cut. Though RBI was largely expected to maintain its status quo with October inflation at 3.58%, GDP growth at 6.3% and credit growth up 8.6% v/s 7.5% YOY justified the stagnant policy rates. In addition to that, rising crude prices and fear of fiscal slippages through state farm loan waivers, rollback of excise duty & VAT of petroleum products and lesser government revenue due to lower GST rates made it mandatory for the central bank to remain frugal.

Boosting digitalization, RBI rationalized Merchant Discount Rates (MDR) on debit cards by categorizing merchants on the basis of turnover. Overseas branches and subsidiaries of Indian banks are now allowed by the RBI to refinance External Commercial Borrowings (ECBs) of AAA rated public sector and private sector companies reducing their borrowing costs and enhancing overseas credit market. Lastly, the Bank acknowledged government effort with respect to improvement in Ease of Doing Business and maintained growth forecast at 6.7% for 2017-18.


Analysts are expecting the Indian Central Bank to be on an extended pause the whole of 2018 as it expects inflation to follow an upward trajectory fuelled by oil prices and probable fiscal slippages. But, what if the GDP growth is maintained around 6% and inflation shoots up beyond 5% as expected in December. In such a scenario, a rate hike is not over-ruled and we might just end up in the elite club of FED & Bank Of England for valid reasons by February 2018. If that happens India may be in a ‘GOLDILOCKS’ situation with rising asset prices, lower inflation and rising GDP.  Really! Then what about the crude prices which have risen about 40% this year. Well, they are expected to remain within $62- $65 for 2018 as predicted by some optimistic financial pundits. That suits us fine, if GDP maintains its upward trajectory in the coming quarters, GOLDILOCKS might or might not be a certainty, but definitely an envious position to be in.

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