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Monetary Policy: Banking on monsoon - Views on News from Equitymaster
 
 
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  • Jun 17, 2013

    Monetary Policy: Banking on monsoon

    Let the rain gods be generous! Amen! This seems to be prayer that the Reserve Bank of India (RBI) governors are mouthing even as the economy remains finely balanced. In the central bank's own words, global growth at best remains 'patchy'. Hence the RBI was not able to derive much confidence from the possibility of lower interest rates fuelling growth. The only hope remains in the form of good monsoons. Since the showers have come in early, the central bank is hoping that a good crop could stem food inflation.

    Lower inflation will give it some headroom to lower borrowing rates. Plus a good crop could also bring more purchasing power in the hands of rural populace. That automatically will mean more consumption and industrial demand. For the time being however, the RBI chose to keep its fingers crossed. The monetary policy review today did not see any changes to key rates, be it the repo rate (currently at 7.25%), bank rate or cash reserve ratio (CRR, currently 4%). Though a non event, it clearly signaled the fact that managing growth rate is not the central bank's job alone. The government needs to do more than relying on lower commodity prices and dampening gold imports to curtail current account deficit (CAD).

    On inflation

    As per the RBI, easing commodity prices at the global level and weaker pricing power of domestic corporates are having a softening influence on prices. Given that food inflation remains high, the RBI will continue to keep a close watch on consumer price inflation (CPI) before making any further changes to interest rates. The RBI also hopes that revisions to the minimum support prices (MSP) for crops will bring food inflation under check. Particularly so, given the possibility of better crop yield and depreciation of rupee versus the dollar.

    On growth

    With industrial and mining activity having slowed down, the RBI expects GDP growth to improve very marginally after the record low of 4.8% in 4QFY13. The sharp weakening in the growth of capital goods production is expected to continue to dampen investment demand. Thus, infrastructure and non consumer durable sector will have to wait longer for a strong recovery.

    What to expect?

    While the interest rate cycle is unlikely to turn anytime soon, banks in India may continue to witness muted growth in credit. Pressure on margins, however, could ease off with lower rate on deposits. Lower interest on credit will follow with a lag. What however remain to be seen is whether the restructured loans in the books of banks show better recovery rates going forward.

      Tanushree Banerjee (Research Analyst), is the editor of ValuePro, The India Letter, and Stock Select, Equitymaster's oldest recommendation service. She is also the editor of Equitymaster's most popular newsletter read by over 200,000 subscribers, The 5 Minute WrapUp. Tanushree started her career at Equitymaster covering the banking and financial sector stocks along with scrutinizing the RBI policies. And over the last decade, developed our research processes that have helped us pick out various multibaggers, across all sectors. A firm believer of "safety first" when it comes to investing, Tanushree closely follows the investing philosophies of Warren Buffett, Jeremy Grantham and Joel Greenblatt.

     

     

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