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 .  

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