Will the 'New RBI' Hurt Your Pocket? - The 5 Minute WrapUp by Equitymaster
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Will the 'New RBI' Hurt Your Pocket?

Aug 23, 2016
In this issue:
» Investment in Gold - An Outperformer Against Equities in 2016
» Loss Making PSUs Could Soon Become History
» ...and more!
00:00
Rohan Pinto, Research analyst

The government finally found a replacement for Raghuram Rajan. Urjit Patel is the new RBI governor. In yesterday's edition of The 5 Minute WrapUp, we presented our view on this selection. In case you missed it, you can read it here.

So what will change? And what won't? The media and the markets are betting on 'policy continuity'. Maybe Dr Patel won't change the policies introduced by Rajan. Maybe he will. No one knows yet. But there is something that we do know. India's monetary policy won't have his stamp on it.

This is because the big decisions on interest rates will now be taken by a committee, the monetary policy committee (MPC). It will have equal representation from the RBI and the government. Dr Patel will have a veto in case of a deadlock. But he won't set the repo rate by himself.

This is how it's done in many counties. In the US, this committee is called the Federal Market Open Committee (FOMC).

So I thought it would be a good idea to find out how it works. After all, in the 'new RBI', this group will (indirectly) decide the interest rate on your bank FD, your EMI, the inflation rate, and even GDP growth (to an extent).

It surprised me to learn that the FOMC doesn't come to decisions as a group. Each member comes up with his or her own forecasts for the economy (including the interest rate) every quarter. The FOMC considers all these views separately. And only then tries to find a consensus.

It's hard to imagine the RBI's MPC working in this way. Here's a possible scenario. Let's suppose that GDP growth starts to slow. But CPI inflation remains at current levels (around 6%).

The government's representatives come up with detailed reasons for the repo rate to be cut. The RBI's representatives come up with equally detailed reasons to stay put. Can they really come to a consensus? If not, then it will boil down to a vote where the governor will then have to cast a deciding vote.

If this were to happen, then of what use is the MPC? If the governor ends up deciding interest rates, wouldn't it be similar to how things are done now?

The point I'm making is that other countries have processes in place that can handle such disagreements. As far as we know, there is no such process in India.

In fact, keeping the history of the government and the RBI in mind, chances of disagreements are high. Predicting how this dynamic will pan out is hard. The media is certainly not capable of it. Markets care about it only once every two months, when the policy date comes near.

But this is a very important. It's a big change in India's monetary policy framework. It will influence the course of our economy. You must have a credible way of understanding the 'new RBI'.

Thankfully, there is a way. Vivek Kaul has explained the challenges that Dr Patel will face in his recent article, The Biggest Challenge for the New RBI Governor Urjit Patel Is... Do check it out.

But this is just the beginning. For the last few months, Vivek has been working on something big, a unique project. It is a kind of project that will enable you to stay on top of big macro trends in India. The ones that could directly impact you and your family.

These are the big issues like India's disastrous jobs situation, the government's handling of oil prices, the mess in public sector banks, the current state of India's real estate bubble... and a lot more!

Vivek has put together something truly special. He is really excited about it and will bring it to you at 5 P.M today.

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03:10 Chart of the Day

The year 2016 has been marked by extreme volatility, especially for the Indian equity market. From witnessing gut wrenching lows during Feb-2016 period, presently the market is close to its year highs this year. However, for those invested from the start, the returns from equities have been below expectations.

The NSE total return index which also takes into consideration the returns that are obtained from dividends, returned almost 10% till date.

Gold Set to Outshine Equities in 2016


Gold, which people consider as a safe haven has witnessed a solid rise this year, with returns of 26% till date. Considering the turmoil in the global markets, gold prices have seen a steady rise with increasing demand for physical gold as an investment.

Interestingly, in 2015, both gold and equities failed to generate positive returns for its owners. It remains to be seen if the present rally in gold can continue its steep climb up going forward.

03:50

According to a leading financial daily, the top three loss making PSU's BSNL, Air India and MTNL might soon become history. The government has finally decided to address the problems relating to the loss making state run companies. We have been extremely vocal with our views on these companies that are bleeding money hand over fist.

Our colleague Vivek Kaul, believes this crony socialism show that the government has been running clearly proves that all is not well within these public sector units. A huge amount of tax payer's money has gone into turning around these companies with no fruitful result. This has resulted in a huge question mark on the present government's ability to take tough decisions against such companies. This is primarily because the public sector units provide employment to a large population and any adverse action would in turn affect the government's vote bank.

This is now set to change. A new uniform policy is proposed to help close down such companies. The policy will also ensure that all employees are offered with better severance packages and provide guidelines to ensure proper closure of these firms. We applaud the government's decision to address these issues, however, we believe there is an increasing need for a proactive policy to bring a resolution to these chronically sick companies in a speedy manner which in turn would benefit all the stakeholders alike.

04:25

After opening the day flat, the Indian stock markets continued to trade just below the dotted line. At the time of writing, the BSE-Sensex was trading lower by about 21 points while the NSE Nifty was trading lower by 6 points. Sectoral indices were trading on a mixed note with Oil and gas, FMCG and Capital goods witnessing the maximum selling pressure. While IT stocks were trading in the green.

04:50 Today's Investing Mantra

"You only have to do a very few things right in your life so long as you don't do too many things wrong." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rohan Pinto (Research Analyst).

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