Monetary Policy: RBI's front loaded action - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Monetary Policy: RBI's front loaded action

Sep 29, 2015

"Home loans to get cheaper!"

"5 rate sensitive stocks to bet on..."

Unfortunately our analysis of the RBI's policy actions is not as deep!

But what we must tell is which part of the assumptions that have gone into the making of the policy decision must be ignored and which mustn't.

As if a shout out to FM Jaitley that it has 'done the best it can', the RBI aggressive 0.5% cut in repo rate comes unexpected.

Apart from its hawkish inflation stance, the RBI has been averse to lower rates due to two key factors:

  • The possibility of global interest costs heading upwards in response to rate hike by the US Fed
  • The possibility of asset quality pain in Indian banks getting camouflaged with lower rates.

As we already know, the Fed's moves are anybody's guess and the asset quality pain in Indian banks will take time to get undone, irrespective of the rates.

Hence, as the RBI itself has declared, its policy action this time is 'front loaded'.

What that means is the 0.5% cut in interest rates was not immediately called for. And as we can guess, may have been a very reluctant move. The increasing pressure from the Finance Ministry and the corporate lobby may have resulted in the central banking giving in.

However, there are also some solid assumptions behind the big ticket cut:

  • More domestic demand will substitute weakening global demand and in turn help the domestic investment cycle to pick up.
  • Corporate capex plans are likely to respond more strongly if there is more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow.
  • Commodity prices will remain benign in the medium term and therefore allow the central bank to ignore the inflation demon.

Any of these assumptions not panning out on the expected lines could throw the RBI's monetary policy stance off the gear. And in such a case, investors be forewarned that the RBI will not refrain from undoing its generous act.

Rate cut for a country of savers or borrowers?

You should understand that in the current scenario, the dynamics of the global economy support borrowers over savers. Be it in the US, Japan or China, safeguarding the interest of borrowers has been of utmost importance. And therefore the rationale of the RBI's reluctance to lower interest rates sooner has been lost on Indian government and corporate heavyweights.

India being a country of savers stands to lose if the real interest rates begin to disincentivise savings.

At about 6.5% the average real interest rate in India over the past 35 years has not been very high. The RBI's front loaded policy actions will therefore bear fruits only if...

  • The government backs it with meaningful reforms and flawless execution
  • Big ticket corporate capex acts act as a catalyst for GDP growth...thereby offering investors alternative means of fetching commensurate risk and inflation adjusted returns.

Tanushree Banerjee

Tanushree Banerjee (Research Analyst), is the editor of Stock Select and, ValuePro Equitymaster's oldest recommendation services. She is also the editor of Equitymaster's most popular newsletter read by over 300,000 subscribers, The 5 Minute WrapUp. Tanushree started her career at Equitymaster covering the banking and financial sector stocks and scrutinising RBI policies. Over the last decade, she developed Equitymaster's research processes that 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.


Equitymaster requests your view! Post a comment on "Monetary Policy: RBI's front loaded action". Click here!

  

More Views on News

Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

Jun 1, 2020

Is too much data hurting your quest for market beating returns?

Quantum Mutual Fund: Hum woh nahi hain (The Honest Truth)

Apr 29, 2020

Ajit Dayal on how the mutual fund industry robs you of your wealth.

This One Trigger Could Turnaround Yes Bank's Stock Price (The 5 Minute Wrapup)

Oct 16, 2019

If Yes Bank manages to do this, it could be the start of a much-needed turnaround for the bank.

Gold could Hit 40,000 Sooner Than Expected (Profit Hunter)

Aug 16, 2019

Domestic gold prices are firing on both engines now. Gold prices could touch 40,000 faster than you could imagine.

3 Rebirth of India Opportunities Are Racing Ahead in These Gloomy Times... (Views On News)

Jun 28, 2019

Tanushree Banerjee shares an update on the Rebirth of India and reveals her top 3 trends...

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS