Apr 1, 2014|
Monetary Policy: Even the RBI is banking on election outcome!
We were not surprised to find these words of the RBI governor in the latest Macroeconomic and Monetary Developments report. "If electoral outcomes fail to provide a stable government, the downside risks to growth could accentuate. To a large part, the recovery remains contingent on improvements in the investment climate.." If at all, it indicated that even the central bank is in a wait-and-watch mode ahead of the elections.
In-line with market expectations, the Reserve Bank of India (RBI) in its first Bi-Monthly Monetary Policy FY15 review has maintained a status-quo. The repo rate or the rate at which the Central Bank lends money to commercial banks remains unchanged at 8.0%. Cash reserve ratio or CRR is also kept unchanged at 4.0%.
Sizeable fall in inflation since December 2013 has enabled the RBI to leave the key rates unchanged in the current policy review. But the risks to retail inflation (current 8%) remain on account of expected subnormal monsoons due to uncertain weather conditions. The GDP growth at below 5% levels is stable, but the signs of economic revival are still distant.
Slowdown in growth in US, UK, Japan and continued sluggishness in Eurozone followed by tepid growth in emerging economies have restricted the global growth. Fiscal adjustments in some economies have dragged the recovery. Back home, while the GDP growth stood modest, the industrial activity continues to be a drag on the economy. Amidst this, the decline in current account deficit (CAD) (0.9% of GDP in 3QFY14) brought some respite signaling reduced external economic vulnerabilities for Indian economy. Also, while the economy is already set on a disflationary path, loss in business confidence and weak fiscal policy defies economic recovery. More importantly, if the election outcomes fail to match the positive expectations, the risks to growth could accentuate. Therefore, an improvement in investment climate can only ensure a stable economic recovery.
The way forward....
That the inflationary risks have softened is a good sign. However, this is unlikely to sustain as the retail inflation is expected to remain sticky going forward in FY15 too. This indicates the demand-side pressures would continue to stay even in the new fiscal. Moreover, the agricultural output is expected to remain sluggish in the next few quarters ensuring higher inflationary pressures.
Depending upon the inflationary outcome, the RBI expects GDP growth to settle down in the range of 5-6% in FY15. Besides, moderation in CAD during FY14 brought cheers to the economy and markets alike. However, during FY15 the CAD is expected to hover around 2% levels. But despite few positive economic developments, the consumption and investment demand continues to remain subdued.
The central bank too is banking on the election outcome. With a new and stable government in power, favorable developments such as structural reforms and the fiscal consolidation are expected to tame inflation and stoke growth rates. Easing of supply bottlenecks and clearing of stalled projects would be instrumental in lifting corporate profitability. This coupled with improvement in liquidity conditions would also provide the much required boost to the credit growth.
However it would be too premature to estimate the impact of reforms on RBI's policy stance since global geo political risks can also play a part. Hence we believe that investors have very little reason to change their allocation in response to Monetary Policy or ahead of elections.
More Views on News
Aug 22, 2017
State Bank of India (SBI) continues to battle sliding asset quality and sluggish credit growth.
Aug 10, 2017
IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.
Aug 10, 2017
Asset quality will be the key thing to watch out for going forward.
Jul 6, 2017
Does the stock score on the value versus price equation?
Jun 27, 2017
Should one subscribe to the IPO of AU Small Finance Bank Ltd?
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 10, 2017
Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
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: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407