Should the RBI bow down to govt. pressure?

Jun 9, 2012

In this issue:
» Foreign cos. are slowly leaving India
» Defence to be a lucrative opportunity
» Spain to seek bank bailout
» Employers find it difficult to fill jobs
» ...and more!

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Why is it that when India's GDP grew at a lower than expected rate of 5.3%, the first response was the Reserve Bank of India (RBI) should cut rates? True, high interest rates have impacted growth. Manufacturing industries have especially seen demand dive as rates firmed up. But why were interest rates raised in the first place? Because inflation was too high and a tough monetary policy stance was the only way for the central bank to bring inflation down. In all of this, the government conveniently chose to stay on the sidelines.

Readers would do well to recall that one of the major reasons for food prices skyrocketing were ineffective warehousing and storage facilities. Thus, despite bumper crop seasons, foodgrains were left outside to rot. Had the government pulled up its socks and attempted to rectify this, the burden of managing inflation would not have fallen solely on RBI's shoulders.

So now with the GDP slowing down, should the RBI bow down to pressure and cut rates? If inflation is still a problem then the central bank probably cannot afford to do so. Therefore, it all boils down to what the government chooses to do. And it needs to get its act together. The response so far has not been encouraging as decisions on important reforms continue to be delayed. After the retail FDI disaster, inability to push through the pension bill has once again exposed the current government's weakness.

In fact, Mr U K Sinha, Chairman of the Securities and Exchange Board of India (SEBI) and one of the architects of the country's pension sector reforms, has already expressed displeasure to such stalled reforms. He opines that reforms in various segments could help revive the faltering investor sentiment and economic growth.

There have to be major attempts made by the government to push growth through reforms and make life easier for the average Indian. For how long can you continue blaming the global economic problems and RBI's high interest rates? With respect to the latter, there is only so much that the central bank can do. Who knows, maybe the RBI's unwillingness to budge on rates will finally compel the government to wake up from its slumber. One will have to wait and see.

Do you think that the RBI's unwillingness to cut rates will finally compel the government to push through some reforms? Share with us or post your comments on our Facebook page / Google+ page.

 Chart of the day
At a time when unemployment is reigning high in developed countries, any mention of vacancies not filling up should be taken with a pinch of salt, right? But that apparently seems to be the case.

According to a survey conducted by the Manpower Group and published in the Economist, more than a third of employers around the world are still having trouble filling vacancies. As today's chart of the day shows, employers in Japan were having the hardest time filling job vacancies. The problem seems to be that of skilled labour shortage. In Japan, shortage of talent has largely been attributed to an aging population. India has also not been far behind in this regard. Thus, it is all very well to highlight India's demographic dividend as a key growth driver going forward. But it will have no meaning unless the right skills are imparted which will help people secure jobs.

Data Source: The Economist

Editor's Note: Thank you for all the feedback that you have shared with us in the past on this "Chart of the Day" feature. Taking a cue from this, we are now starting to collate our most popular charts in a new section on Equitymaster. We invite you to visit this new section, and share the charts you like with your friends!

Foreign investment is something nearly every government aims to increase. It helps drive the investment driven growth of the country. But boosting this kind of investment is tough. The government has to instill the confidence in foreign companies that their investment interests would be safe. Unfortunately in recent times India seems to be doing exactly the opposite. The government is doing everything in its power to kill foreign investor confidence rather than boosting it. Therefore, it would not come as a surprise that foreign companies are actually exiting India. The latest to join the list is Germany's Fraport, the world's second largest airport operator. Earlier telecom carriers Etisalat and Bahrain Telecommunications had decided to exit their businesses in India. The reasons for their negative sentiment are the government's policy paralysis and regulatory uncertainty. Add to this the spate of scams and slowing economic growth and the foreign companies are seeing little reason to stick around. The government needs to do something about this. And do something soon. Otherwise the much needed foreign capital is going to leave India and find its way in to other developing markets.

There is this one industry which seldom witnesseses a recession. In the last one decade, this industry has grown threefold in India. But private Indian companies couldn't make much dough out of it because this space was highly restricted. Can you guess which industry this is? If you haven't guessed yet, we are referring to the defence industry. Did you know India is the world's largest importer of weapons? Of our US$ 35 bn defence budget, about 70% is spent on imports. India is also the 7th largest spender on defence in the world. Last year, the Indian government revised its military procurement policy. This opened up the defence industry to the private sector. Currently, the private sector companies account for just 10% of the defence budget. However, this is set to rise significantly as the government has further revised the rules to the advantage of local players. Several major Indian business houses are vying to grab a pie of this lucrative market. This new opportunity certainly comes as a big relief for Indian companies that are battling a slowdown in the domestic economy.

The debt crisis in Europe is getting worse by the day. And now it seems it is the turn of the big boys to ask for help. Spain which is struggling to prop up its ailing banks without asking for external bailout is planning to ask Europe for help with recapitalizing its banks. Spain will be the fourth country to seek assistance since the Euro zone's debt crisis began. The move comes after rating agency Fitch downgraded the long-term debt of Spain by 3 notches to BBB from A, with negative outlook. Spain is forecasted to remain in recession throughout the rest of 2012 and 2013 against a mild recovery in 2013 previously estimated. According to Fitch, the cost to the Spanish state of recapitalizing banks stricken by the bursting of a real estate bubble, recession and mass unemployment could be between US$ 75-US$ 125 bn or 6 to 9% of Spain's Gross Domestic Product. The higher figure would be in a stress scenario equivalent to Ireland's bank crash.

Barring China, Hong Kong and Singapore the world stock markets closed the week on a positive note with healthy gains. The US stock markets were up 3.6% during the week. This was the best ever week for the US stock markets in 2012. As per Commerce department, the US wholesale stock piles grew by 0.6% in April. This was double of what was reported in March. This indicates increased production and resulting demand for the factory output. Markets reacted positively to it as consensus had priced in a lower growth.

The Indian equity markets too ended the week with strong gains. The markets were up by 4.7%, having registered the best weekly gains of 2012. Hopes of global stimulus and expectations of rate cut spooked markets. Further, declining crude oil prices and government's commitment to help kick start the stalled infrastructure projects buoyed the markets.

Amongst the other world markets, China was down 3.9% during the week. This was despite a rate cut by the Chinese central bank. Apart from China, both Honk Kong and Singapore were down 0.3% each. However, France and UK were up by 3.4% and 3.3% respectively.

Data Source: Yahoo Finance

 Weekend investing mantra
"Time is the friend of the wonderful company, the enemy of the mediocre." - Warren Buffett

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    Equitymaster requests your view! Post a comment on "Should the RBI bow down to govt. pressure?". Click here!

    9 Responses to "Should the RBI bow down to govt. pressure?"


    Oct 9, 2012

    No, RBI should not bow down. It is an institution which has to regulate. It is not like our politician who will come and go making us fool.



    Jun 12, 2012

    Our politicians are a class apart. They are the real citizens of India and we a big question mard. What ever they say we just sit and listen and nod our heads to say yes they are always right. Now the industries have been lobbying for interest rate cut as their profits are getting affected and big guys pay packet is getting thinner. So what RBI is another institution the Government needs to use.


    shome suvra

    Jun 12, 2012

    RBI should measure credit velocity and liquidity in the system before cutting rates. If income velocity is not stable RBI has to adjust money stock frequently. There should be a long term estimate of GDP growth and these intermediate measures should be consistent with that.



    Jun 11, 2012

    i do not think that this government is capable of taking and hard decision with regards to policy or reforms -so as helpless citizen are left with no choice but to wait and hope for the Best for outcome of 2014 General election!!


    g r chari

    Jun 11, 2012

    This govt. is only looking for an alibi to deflect attention from it's non-performance (read responsibilities) & RBI does come in handy to pass on the buck. One has to only hope that RBI will act with independence keeping the economic interest of the country as supreme.


    ajit maiti

    Jun 10, 2012

    This Govt only trying to save chair, they are afraid to loose chair in case their supporting parties withdraw support. Even this Govt do not know what policy they should adopt. They used to direct blame RBI always as RBI tops do not talk like minister. Always ministers talk to bring money from outside.. why? If we see, there is very poor efficiency of domestic money utilization. I think that may be the one of the main causes for inflation.



    Jun 10, 2012

    RBI is, in principle an independent agency and hence supposed to take decision keeping in view only one factor- what is good for Economy and citizens of India but in practice, this is not so. As appointment, extension and termination of serviices of Governor and other key officers of RBI is Central Govt's prerogatiive, RBI generally dance at the centre's tune. In spite of the fact that present inflation in India is not dur to money supply or shortage of essential commodities but due to Govt's mismanagement to handle supply of food grains and other essential commodities and hence it has no relationship with Interest rate, RBI maintained its hawkish stand on interest rate regimn and in process seriously damaged Indain Economy.


    Ganapathy Sastri

    Jun 9, 2012

    RBI should be independent and not bow to pressures from various govt officials. Interest rates should be pegged to inflation and until inflation comes down interest rates should not be brought down.
    On its part private sector should focus on productivity, cost reductions if it is to stay competitive. Wages cannot be allowed to rise indefinitely without increase in productivity.
    You cannot expect much honesty or efficiency from govt. So it is for the private sector to contribute.

    Like (1)


    Jun 9, 2012

    Etisalat type of foreign investments are needed for india my friend

    Like (1)
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