It’s Raghuram Raj !

ImageThis Wednesday at RBI’s mid-quarter review of monetary policy an interest rate hike looks inevitable. One should blame the retail inflation (CPI) which burgeoned to 11.24% in November from 10.17 percent the previous month and not to forget Mr. Raghuram Rajan; an inflation hawk doesn’t believe in ‘Facebook  likes’. In its previous two meeting the RBI Governor has made it very clear – he won’t tolerate inflationary pressure on the economy.

Coincidentally, many socio-political analysts suggest unlike previous occasions there won’t be any pressure seen from the central government to cut the interest rate this time since Congress has blamed rise in price as one of the main reason for its poor performance in recently held four state assembly election, especially in Delhi.

To make the job little tricky for the RBI governor the factory output (IIP) contracted by 1.8% in October , down from 2% in September. But almost all polls and surveys had predicted hike in interest rate; possibly one last time in the current cycle. On the global front, the Federal Open Market Committee’s (FOMC) two day meeting will possibly paint new picture on the most expected-predicted-anticipated ‘tapering’ move. Many economists believe March 2014 would be that decisive month for the U.S. Fed to dial back its quantitative easing (QE) policy backed by good economic data. The U.S. Senate is expected to vote for new budget deal which will run till 2016 giving more room for the Fed to dial back its QE.

From RBI’s point of view a possible tapering will impact Indian currency. So far, to check the currency depreciation RBI has curbed speculation on dollar (by hiking interest rate). This month at New York, Raghuram Rajan apprised inflation as a key concern.  Market pundits are assured of WPI increase as well which is due to release Today. A higher WPI will concrete interest rate hike decision. Although, ever since Rajan became RBI’s governor, the Central Bank of India has shifted from WPI to CPI as its main guide for monetary policy. So, many market analysts expect hike in interest rate this time.
Its Raghuram Raj for sure!


Cut in MSF, FCNR swap: A win-win situation

Yesterday, RBI cuts MSF rate by 50 basis points (0.50%) which was inevitable indeed. It tightened the short term rates couple of months back and tried hard to curb the liquidity in the market so that the banks should not speculate against the US Dollar. Now the MSF rate stands at 9 percent.

One of the major factor which helped RBI to cut down the MSF rate is the “no tapering” decision by US Fed which in turn helped not only Indian Rupee but other EM currencies as well. “No tapering” or continuing in QE policy is bad for dollar as it will weaken dollar against other currencies.

Cut in MSF rate is most welcomed part but the most exciting part is the new FCNR swap offered by RBI to the Indian Banks.

The FCNR account (abbreviated as Foreign Currency Non-Repatribale accounts are offered by Indian banks to the NRIs) is a term deposit account meant only for NRIs. The Indian banks accepts only those currency deposits which are freely convertible i.e.US Dollar, British Pound (Sterling), Japanese Yen, Australian Dollar, Canadian Dollar, Swiss Frank.

The FCNR account can be open for minimum 1 year and maximum of 5 years term. An NRI can use the deposit balance to make local payment and yes the interest rate fetched will be tax free in India.

As the Indian banks raise funds through FCNR channel, they take the deposits in other currencies and exchange that with Indian Rupee in the market with prevailing forex rates for domestic lending.Once the term of deposit is over they return the fund with promised interest rate. Since the deposit term ranges from 1 year to 5 years, they hedge FCNR deposits by entering into the derivative market (Forwards contacts, NDFs etc).

Now, how does RBI’s FCNR swap going to work? Currently, in the forward market banks are paying per annum 7 percent premium for the US dollars.But RBI promises 3.5 percent premium per annum for 3 years FCNR deposits. Thus overall cost of hedging is going to be reduced for Indian Banks. On the side note, this facility is only for US Dollar deposits.

The Missing Sense: Indian Economy

“Expect the unexpected”. I must say today’s monetary policy decision by RBI (worth to mention the US Fed as well few days back)has made it clear to the market.

When everyone at financial street were expecting for a repo cut and more ease in the liquidity the RBI Governor kept the ‘inflation mandate’ intact.

The main reasons for RBI to increase rate (further tightening of liquidity) was primarily based on the CPI data and possible ‘Fed tapering’ in coming months which might drag the economy further.

Meanwhile, RBI Governor made it clear, he can’t ignore the inflationary pressure on the behest of so called liquidity ease; which banks are demanding from past few months.

In its mid-quarter policy, the RBI gave respite to short term borrowing by decreasing the Marginal Standing Facility (MSF) rate to 9.5 percent from 10.25 percent. Although it increased the repo rate by 25 basis points (0.25%) to 7.5 percent.

On the side note, most of the banks channelise short term funds through MSF, when the common way of borrowing dries up in the market. So, reduction in the MSF would bring down Certificate of Deposit (CD) rate in the market i.e. short term borrowing rates will gradually come down to sub 9.5 percent level. MSF rate was increased in July to curb the rupee depreciation.

With all the concerns on liquidity and growth I would like to bring some missing links which many of market pundits are ignoring. So, here are few missing sense which we need to check:

1. Our first quarter GDP ticked at 4.4 percent versus 5.4 percent year on year; lowest in four years.

2. One of the main components of Service Sector – Trade, hotel, transport and communication which comprises of small shops, restaurants and rickshaw-wala grew just at 3.9 percent (having 25 percent of weightage in the service sector). The slow pace of growth in the ‘trade, hotel, transport and communication‘ means there is slow employment growth for low income and low skill people.

3. Mining contacted by 2.8 percent in first quarter so were the manufacturing sector and capital formation by 1.2 percent, indicating the investment and consumption cycle are weak.

4. The Gross Fixed Capital Formation (GFCF) which accounts property, plant and equipment and excludes land purchase and depreciation was at 32.6 percent of GDP. The GFCF is a gauge used to check how good the economy is in utilising its capital. Previously estimated figures suggest the GDP should be around the level of 6.5 to 7 percent if the GFCF is 30 percent of the GDP but in the present scenario its is way behind that observed level. 

The bottom-line remains the same for our economy – we are failing to utilise our capital. If we can channelise our investment capital the economy will definitely shape up in a proper direction letting the RBI concentrate on the inflation check .  

D-Day: RBI strikes back

ImageToday, the Reserve Bank of India (RBI) will auction short term Cash Management Bills (CMBs) in the market. This step by RBI is seen as a dire desire to contain the liquidity and Indian Rupee in the market.

Under this scheme, every Monday the RBI will auction an amount of Rs. 22,000 crore of CMBs, wherein,  it will be selling Rs11,000 crore each in two CMBs maturing for 35 and 34 days on Monday and Tuesday, respectively. Although, the CMBs will carry characteristics of Treasury bills but the major difference lies in flexible maturity date. Unlike Treasury bills which carry fixed maturity date like 30 days, 91 days, 182 days, the CMBs will have flexible maturity dates between seven days and one year based on RBI’s view on prevailing market situation. RBI did sell CMBs On 25th July, 2013 which was for 28 and 56 days.

Will it strike and contain Indian Rupee?

Since the measure is for short term liquidity the CMBs will attract many institutional investors and fund houses as the bill maturing before 60 days will not be evaluated based on the prevailing market price thus fund houses will be free from any kind of accrued profits/losses in case of rise or fall in these CMBs.

Second point, this measure will keep the Indian Banks form speculating the Indian Rupee in the currency market as sell of CMBs will keep the short term liquidity at an elevated level thus there will be no leeway for banks to speculate Indian Rupee.

As the fall of Indian Rupee can be attributed to many economic factors but there is no doubt the speculative market is prudent enough to create further damage to the Indian Rupee in the currency market. Hopefully, this move will try to contain Indian currency in coming months.

I ask Rupee: Are you ‘Tumblr’ or ‘Tumbling’?

The headline seems funny, right? But it is a grave concern for the Indian economy.
Tumblr was worth so, Yahoo! bought it. But do you think rupee is worth in the current market situation? The Indian rupee is no more blockbuster currency among Asian currencies as it has fallen miserably this year.


If we see the quantum of fall this month itself, it fell more than 10 percent. To  evaluate how rupee has performed, read the article from; Rupee to see worst quarter in 10 years.

Now if we come to the basics, rupee’s downward spiral can be attributed majorly to the current account deficit, sudden policy change by major central banks, read: U.S. Fed and Bank of Japan (BoJ) and the Indian economic bottlenecks. To understand more about economic bottlenecks please check one well written article by Mr. Swaminathan Aiyar; Why RBI’s fears about India’s growing current account deficit are misplaced.

In the present market scenario everybody expects more exports from the country and more internal consumption driven system. To do so banking entirely on Reserve Bank of India to cut the interest rate so that we can boost the competition and make money easily available in the economy is not justified. When your currency has depreciated to a level where foreign investors are dumping bonds and getting rid of the Indian stock market, plus overall investment to the country is low, an interest rate cut is definitely not a wise step. Thus, RBI is not in position to cut the interest rate even though the headline inflation has eased a bit.

Situation has become tricky for the Indian economy which has lost many opportunities in past few years. Its failure to implement GST, lack of clear cut investment policy, tax regime for corporates and FIIs/FDIs are few major points to be noted here.  Now, the Indian economic system has to wait and get played by other influential central banks else accept the new level of its currency value against the dollar for the coming months- expecting it will get subsidise soon.

When India had chance to grab investment flow it failed to capitalize. So far, asian counterparts have done good enough to keep their currency level under control and they are still favoured as investment avenues when compared to India. I wish, the Indian currency could have shined just like Tumblr. Alas! rupee is tumbling indeed.

RBI’s never ending dilemma

ImageIt seems the Reserve Bank of India (RBI) is having very hard times these days. No wonder if they complain the current bond yield and rupee fall is all because of the U.S. Fed and Bank of Japan (BoJ). Meanwhile, RBI has got entangled in the current account deficit and inflation problem, adding more headache to it is – the fall of Indian currency against the U.S. dollar. The fall in Indian Rupee has forced FIIs to dump the G-sec (Indian Bonds), and they had dumped bonds at record level during last few trading sessions. For the FIIs there is no point to hold their investment in the Indian bond market as the U.S. 10-year bonds are looking much more attractive. Plus the weakening of Indian rupee will hurt further investments (read article from Economic Times). The yield differential of U.S. 10-yr bond with Indian debt is at one year low.  According to the bond spread calculator of Bloomberg, the spread between US 10-yr bond and Indian 10-yr bond is around 504 basis point or 5 percent, it was at 7 percent, last year . It is very pertinent to mention that not only G-sec even yield for corporate bonds have also fallen in the market. Many fear the banks (PSU and private) might play the spoil sports and sell bonds in the market to book profits.

The Indian currency  is down almost 10 percent since first week of May, now hovering around 59 against the dollar. Today, traders reported RBI sold dollars in the market to curb the fall of rupee but previously done acts by RBI suggests it has failed to curb the fall of rupee due to structural economic problem. Meanwhile, chief economic advisor, Raghuram Rajan believes the rupee’s fall is a temporary phenomenon. Many economists think more liquidity in the market will ease the pressure from rupee.  In the coming weeks macro economic data will decide if the RBI is willing to cut the rates in July. RBI might give its  stance regarding the comfort zone with rupee in the currency economic circumstances on its June 17 monthly meeting.