D H Pai's Feed
Sep 21, 2013
via Expert Zone

Was the repo rate hike necessary?

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The decision of the U.S. Federal Reserve to delay tapering its bond purchases cheered markets, and more so in India because they were convinced of a second bonanza from the RBI. But new Governor Raghuram Rajan gave the markets a jolt by turning hawkish and increasing the repo rate.

The gains of the previous day following the Fed meeting were nearly wiped out and the rupee, which was steadily crawling towards 60 to the dollar, also fell back. The only reason why the RBI increased the repo rate was the revival of inflation, which had dropped to less than 5 percent in April-June.

Sep 12, 2013
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Raghuram Rajan and the rupee

(Any opinions expressed here are those of the author and not of Thomson Reuters)

With Raghuram Rajan taking over as the governor of the Reserve Bank of India (RBI), it’ll make for a change in the central bank’s policy perception.

His predecessor Duvvuri Subbarao used conventional methods and got no results. It is likely Rajan will opt for innovative means and his initial steps are already showing results. It’s evident that the complex problems of today demand out-of-the-box solutions.

Aug 26, 2013
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When will the rupee stabilize?

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The rupee hit a series of record lows in August, rattling the stock market and forcing policymakers to step in. But the fall was necessary to correct India’s past mistakes and improve the dynamics of the economy. Stock markets were jolted because the rupee’s slide was sudden. But then that is how markets behave.

International markets, be it for currencies or commodities, are sensitive and therefore volatile due to underlying speculation that is difficult to control. Eventually, however, a stable point is reached at which point they settle down.

Aug 19, 2013
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Focus should be inflation, not just stemming rupee’s fall

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Indian stocks have been battered over the past few sessions. The market condition is not unexpected, thanks to over-action by policymakers and over-reaction by stock investors.

The apparent anxiety on the part of the government was that even if the fall of the rupee was inevitable, left entirely to the market, speculative activity would push the economy into a crisis. Presumably, the rupee at 60 to the dollar was the benchmark for intervention.

Aug 7, 2013
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A bumper crop may energize Indian industry

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Industrial growth in India in 2012 was less than a percent and data from April and May this year doesn’t show a lot of promise. The reluctance of industry to grow has been the reason for GDP growth dropping to a disappointing 5 percent, raising doubts about whether the India story has come to an end. That may be an extreme view considering that even the best performers, such as China, are having problems.

But there is a glimmer of hope. Monsoon rains have been above average this year and a bumper crop is expected. Agriculture contributes to around 20 percent of India’s GDP and even an 8 percent increase in agricultural production will at best improve GDP growth by a percent. But agriculture does have an impact on industry and both together can make a perceptible difference.

Jul 31, 2013
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Sooner the better for RBI to unwind grip on liquidity

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(Any opinions expressed here are those of the author and not of Reuters)

The Reserve Bank of India (RBI) wasn’t expected to do anything new at its policy review on Tuesday and it did exactly that. But the markets still reacted adversely. The stock market moved in consort with the rupee with the Sensex falling 245 points.

It is generally true that markets overreact, more so in India, partly because market sentiment is affected far too quickly. What evoked these sentiments was the undue concern expressed by RBI Governor Duvvuri Subbarao about external uncertainties, more so about quantitative easing by the U.S. Federal Reserve and food inflation in India.

Jul 22, 2013
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Time to get used to a weak rupee

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The fall of the rupee has become politically embarrassing. When the rupee crossed 60 to the dollar, the government and the Reserve Bank of India (RBI) thought it was time to act. The RBI tried to suppress speculation that had exaggerated the rupee’s fall and the government sought to increase foreign resources to fund the current account deficit (CAD).

The RBI complied half-heartedly. “We let our exchange rate be largely market determined, but intervene in the market to smooth excess volatility and/or to prevent disruptions to macroeconomic stability,” Governor Duvvuri Subbarao said in a speech in London.

Jul 10, 2013
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Why the rupee is linked to jobs in the U.S.

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

It appears odd that an increase in job offers in the United States should pull the rupee down in India. After all, any improvement in the U.S. economy should benefit the rest of the world. It means an increase in imports by the U.S. and exports by other countries. But there is more to it than that.

Jun 10, 2013
via Expert Zone

Why the RBI should cut rates again

(Any opinions expressed here are those of the author and not of Thomson Reuters)

In May, the Reserve Bank of India (RBI) had hesitatingly cut the repo rate by 0.25 percent, which made no impression on the stock market or commercial banks. That was because both expected the cut to be more substantial. But the RBI had not obliged.

Perhaps the monsoon, which arrived on the dot and is progressing satisfactorily, may make some difference to the RBI’s expectations of food inflation – which had been its principal reason for hesitancy. While it’s too early to predict monsoon behaviour for the rest of the season and the likely improvement in agricultural production, it does appear the improvement should be significant and inflation dampened perceptibly. Reduction in inflation, however, is not the only reason why the interest rate should have been cut.

Jun 3, 2013
via Expert Zone

Will the rupee fall further?

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

On May 31, the rupee fell to an 11-month low of 56.51 to the dollar. It wasn’t the only currency to suffer a loss. Most currencies depreciated during the month; some more than the others.

The appreciation of the dollar reflects an improvement in the performance of the U.S. economy and partly the related possibility of the phasing out of quantitative easing (QE) by the U.S. Federal Reserve. The latter would make the dollar even scarcer.

    • About D H Pai

      "I undertake research on current macroeconomic issues of interest, mainly to industry, as president of RPG Foundation, a private think tank. I have also been bringing out for the past 18 years a monthly publication entitled 'State of Business' for circulation electronically among select contributors."
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