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.
Monetary Policy: Prevention is better than cure - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Sep 17, 2012

    Monetary Policy: Prevention is better than cure

    Every 45 days the Reserve Bank of India (RBI) gives us a check up on the health of the economy and accordingly prescribes a dosage of medicine. The central bank believes that prevention is better than cure and while its methodology takes time, it actually works quite well. For the third time running since April 2012, the central bank has decided to keep rates unchanged. Under current circumstances the RBI believes that easing policy rates would aggravate inflation. This is especially given the liquidity enhancement measures undertaken by the US Fed and the European Central Bank.

    The RBI maintained status quo on the rate front. It kept the repo rate unchanged at 8%. The rate at which RBI borrows from banks (reverse repo) remains at 7% post the review. However it reduced the cash reserve ratio (CRR) for banks by 0.25% to 4.5%.

    The CRR is the ratio of bank's deposits that is to be kept with the central bank. This money doesn't earn any interest and according to State Bank of India (SBI) Chairman, Pratip Chaudhuri it is like a tax on the system that costs banks Rs 210 bn annually in interest. The 0.25% rate cut is welcome as it is expected to enhance system liquidity by Rs 170 bn. Last monetary policy the central bank reduced the statutory liquidity ratio (SLR) of scheduled commercial banks from 24% to 23% of their deposits. Rather than cutting interest rates directly, the RBI seems to be adopting a supply side strategy. It is enhancing system liquidity and deposit rates are coming off. It has also issued a directive for banks to reduce their exposure to bulk (high cost) deposits. Plus in order to increase credit demand banks have started cutting rates in certain categories of advances especially auto and home loans.

    A rate cut at this juncture; especially given the situation globally would increase inflationary pressure in the economy rather than propel growth. Inflation remains high at close to 8%, GDP growth is still below 6% and Index of Industrial Production (IIP) growth is feeble. Higher flow of cheap money from developed economies may increase asset prices, especially commodity prices. Thus, the central bank has decided to continue to target inflation by keeping rates elevated. Government measures on the policy front have also come as a relief. The government has eased FDI norms for aviation and retail FDI in retail over time can help increase investments and lead to higher productivity in the food supply chain. The Government has also undertaken highly anticipated measures towards fiscal consolidation by reducing fuel subsidies and selling stakes in public enterprises. If the government keeps up the pace of reforms and manages to control to control the opposition, India may see a brighter future.

    Going forward...

    The primary focus of monetary policy this time was on inflation control in order to secure a sustainable growth path for India over the medium-term. Plus, holding rates steady comes as a precautionary measure in light of the upcoming tidal wave of cheap capital, post QE3. Overall economic activity remains subdued and credit off take remains muted. However what adds to comfort levels is that the rainfall deficit has also progressively reduced and water storage levels in reservoirs has improved. This may help ease inflation levels somewhat. Over the longer term, holding down subsidies to under 2% of GDP as indicated in the Union Budget for FY13 is crucial to manage demand-side pressures on inflation. The RBI's cautious stance coupled with the government's new found resolve may just help macro numbers going forward. However, the global economic situation and inflation numbers will have to be carefully watched before any rate reduction happens.



    Equitymaster requests your view! Post a comment on "Monetary Policy: Prevention is better than cure". Click here!


    More Views on News

    IDFC Bank: Strong Trading Income Shields Credit Slowdown (Quarterly Results Update - Detailed)

    Aug 10, 2017

    IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.

    ICICI Bank: Loan Slippages Trending Downwards (Quarterly Results Update - Detailed)

    Aug 10, 2017

    Asset quality will be the key thing to watch out for going forward.

    Axis Bank: Outside Watchlist Slippages a Big Worry (Quarterly Results Update - Detailed)

    Jul 31, 2017

    Almost 74% of the watchlist as provided by the bank of Rs 226 billion in FY16 has turned into non-performing assets.

    Should You Take SBI Chief's Advice and Load up on SBI Shares? (The 5 Minute Wrapup)

    Jul 6, 2017

    Does the stock score on the value versus price equation?

    AU Small Finance Bank Ltd. (IPO)

    Jun 27, 2017

    Should one subscribe to the IPO of AU Small Finance Bank Ltd?

    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.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    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


    Aug 16, 2017 (Close)