Expert Zone
Straight from the Specialists
Why is RBI chief Subbarao so cynical?
(Any opinions expressed here are those of the author and not of Thomson Reuters)
In its policy review on May 3, the Reserve Bank of India (RBI) did bring down the repo rate by 25 basis points but it also presented a gloomy outlook on growth and inflation which left the stock markets cold. The Sensex, which had surged in anticipation, fell 160 points. What makes the RBI so negative when even rating agencies are inclined to accept the emergence of green shoots?
RBI Governor Duvvuri Subbarao has himself spelled out the risks. “Upside risks are still significant in view of sectoral demand supply imbalances, the ongoing correction in administered prices and pressures stemming from increases in minimum support prices,” he said. Is Subbarao’s risk assessment genuine or has it been exaggerated to put the government under pressure?
Sectoral imbalances may take time to fully correct but if as anticipated by the India Meteorological Department the monsoon this year is normal, the supply deficit will be considerably reduced. It is quite likely the correction in administered prices may also be downwards rather than upwards with international commodity prices, including that of crude oil, moving south.
But there is certainly the risk of an increase in minimum support price, which has been the cause of inflation creeping upwards. The increase in food grain support prices each year has become a source of inflation with the potential to spread throughout the economy. First, there is the direct effect. A 5 percent increase in prices can lead to inflation going up by 0.75 percent. Second, there is the derived effect. The increase in support prices is reflected in the cost of living and consequently wages, raising the cost of manufacture to push up inflation by 1.3 percent. The direct and indirect effect of a 5 percent increase in support prices adds 2 percent to inflation. This is a genuine risk but not too significant.
Why India slowed
This piece comes from Project Syndicate. The opinions expressed are the author’s own
For a country as poor as India, growth should be what Americans call a “no-brainer.” It is largely a matter of providing public goods: decent governance, security of life and property, and basic infrastructure like roads, bridges, ports, and power plants, as well as access to education and basic health care.
Need to bring repo rate in line with inflation
(Any opinions expressed here are those of the author and not of Thomson Reuters)
For nearly three years now, the Reserve Bank of India (RBI) monetary policy has had a single target. The presumption is that only when inflation is below the tolerance limit can the interest rate be made normal.
The last time the repo rate was reduced was on March 19 when it was cut by 0.25 percent, a change understandably ignored by commercial banks and other financial institutions. With the repo rate at 7.5 percent and inflation down to 5.9 percent, the market expects the RBI to cut the repo rate further at its next policy review on May 3.
Markets Weekahead: Not the right time to buy
(Any opinions expressed here are those of the author and not of Thomson Reuters)
The markets continued their winning streak in the past week, with the Nifty gaining another 1.52 percent to close at 5871 on Friday.
The yen impact helped Maruti surprise even the most optimistic earnings estimates and its stocks jumped 5 percent to close at a lifetime high of 1673 rupees. The company seems richly valued and does not take into account the slowdown which we may encounter over the next few months.
Bear market a golden opportunity to shore up coffers
(Any opinions expressed here are those of the author and not of Thomson Reuters)
The recent run of the gold bears in financial markets has been positive for India’s current account balance. If this continues along with the persistent softness of oil prices, as many expect at least for the short term, it just might give the government the opportunity it needs to implement certain measures that have so far run against popular sentiment.
The plunge in the gold price since the start of the year, triggered by speculation and hints that the U.S. Federal Reserve may trim its bond-buying program sooner than markets had assumed, has helped the rupee hold up well against the dollar. This is good for India’s fiscal house, where the trade and current account deficits are more or less permanent fixtures.
Gold not a good investment for now
(Any opinions expressed here are those of the author and not of Thomson Reuters)
Since November, the price of gold has been unstable but in April, its decline was precipitated. What is surprising is not the fall itself but its speed. In just two sessions, gold prices dropped 13 percent in the steepest fall in 33 years. It wasn’t gold alone that got caught in the bear grip. Prices of other commodities such as silver, crude oil, copper and so on also declined, but not as sharply.
India’s current account deficit: solution lies in exports
(Any opinions expressed here are those of the author and not of Thomson Reuters)
The U.S. dollar is the major currency for international trade. Most countries use it to pay for their imports and also peg the dollar for exporting products and services.
The balance of trade (net import or export) would determine if a country is a net payer or a receiver of dollars. Trade, along with other dollar inflows (portfolio/FII, FDI, inward remittances), determines the overall availability of the international currency for a country to engage itself in the global economy. This also has a bearing on determining the exchange rate of a country’s own currency with that of the dollar.
Pitfalls of the food security bill
(Any opinions expressed here are those of the author and not of Thomson Reuters)
The food security bill will be introduced in the current budget session of parliament, more because of its populist appeal than any economic urgency. Even when the bill was discussed by the Cabinet, Finance Minister P. Chidambaram and Agriculture Minister Sharad Pawar reportedly had reservations. They had valid reasons.
Subsidized food distribution is nothing new. Already 400 million people avail of it from over 500,000 fair price shops. What the bill intends is to widen the scope of the present scheme and cover two-thirds of the population with five kg of grain per beneficiary at nominal rates.
Why FIIs are dumping India
(Any opinions expressed here are those of the author and not of Thomson Reuters)
The Indian stock market is in a tizzy as foreign institutional investors (FIIs) seem to have pressed the sale button. Securities and Exchange Board of India (SEBI) data shows that while there was a considerable slowdown in FII inflow in March, we are seeing an outflow in April.
While net FII inflow in the equity markets remained above $4 billion for each month between December 2012 and February 2013, the net inflow for March was reduced to $1.68 billion. The trend reversed and during April 3-10, there was a net outflow every day, with cumulative outflow of $269 million during this period.
India Markets Weekahead: Time to wait and watch
(Any opinions expressed here are those of the author and not of Thomson Reuters)
A volatile week saw the Nifty closing 0.45 percent lower at 5528 after disappointing numbers from IT bellwether Infosys, which missed expectations on most parameters. The Bangalore-based company’s results also affected other IT stocks, with a number of them closing lower.
The markets have again proved that the biggest challenge for industry leaders is to manage expectations. Infosys, which was given a big thumbs-up after spectacular December quarter results, was pushed back to levels from where it had earlier risen like a Phoenix.
