Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
RBI presses the exit button - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jan 29, 2010

    RBI presses the exit button

    Its Chinese counterpart made the move a couple of days ago. The RBI could not afford to be left behind. It too made up its mind on hitting the gear for sucking up liquidity. The Indian central bank released its third quarter review of Monetary Policy today. Not willing to let loose the inflationary spiral, it has come down strictly on the excess liquidity floating around the system.

    The instrument used has been the CRR or the cash reserve ratio. This ratio, at which banks maintain cash with RBI (as a percentage of their deposits), has been hiked by 0.75%. It is meant to suck out liquidity to the tune of Rs 360 bn. The hike will, in two stages, bring the CRR from 5% currently to 5.75% by the end of February 2010.

    This watershed event marks the bottoming out of the easy liquidity scenario which unfolded since late 2008. As the RBI in its own confession remarks about the divergence in inflation number at the wholesale (WPI) and consumers' level (CPI), such a move is well understood. The widely circulated WPI number has been giving a benign impression of the trend in price rises. The rise at the consumer's level has, however, been relatively steeper. Thereby causing change in consumption patterns.

    What however, has been a concern for the RBI is the risk of cheap liquidity being channelised to risky assets and creation of bubbles. Hints from China seem to have sufficed to make RBI more proactive. The rise in CRR therefore is not only well-timed but also in sufficient measure to contain macro risks.

    Coming to the challenges that the RBI foresees for the economy, fiscal deficit tops the list. The bank is also hoping for the government to phase out some of the stimuli offered to pump prime the economy. The Union Budget 2010-11 is expected to throw more light on this. Meanwhile, the RBI has raised its GDP growth projection for 2010 to 7.7%. At the same time WPI inflation estimate has been pegged at 8.5% until March 2010. More importantly the bank opines that even post the rate hikes, there will remain sufficient liquidity in the banking system. It has, however, lowered the banking sector's credit growth projection for the current fiscal from 18% to 16% YoY.

    Does the CRR hike solve the problem?

    The answer is - no. The RBI believes that its monetary measures will be of little consequence unless the government mends its ways. The reversal of accommodative monetary stance cannot be effective unless there is also a roll back of government borrowing. The RBI warns that although the abrupt rise in government borrowing was managed through excess liquidity over the past two years, the same is no longer feasible.

    Moreover, inflation pressures will remain and private credit demand will be stronger with the threat of crowding out becoming quite real. Thus the CRR hike is just a step in the right direction. It remains to be seen whether the government does its bit to ensure that the RBI's purpose is met.



    Equitymaster requests your view! Post a comment on "RBI presses the exit button". Click here!


    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms