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RBI’s job is to make sure growth doesn’t suffer: Gopinath

It would be safe to say the Reserve Bank governor Raghuram Rajan surprised most by not hiking rates. Gita Gopinath, Professor-Economics at Harvard University, who got her PhD from the University of Princeton, agrees it was a surprise, but is quick to add that monetary policy works with a lag. She says it is RBI’s job to make sure that growth does not suffer either, in a bid to curb inflation. Also the governor has made it clear that if inflation doesn’t cool by January then he will perhaps hike rates even on a  non-policy date, she adds.

Also Read: RBI policy: Rajan is making same mistakes as Subbarao

She says it is also important to have the second side of policy working which is the supply side. It is not just about controlling demand but being able to smooth out these problems with respect to supply, she says. “It is interesting that when Rajan made his first policy statement, he spent a lot of time talking about financial sector reforms because his thinking was that it is not so much about the amount of liquidity that is available in the economy, the amount of credit that is available in the economy but it is also a question of where the credit is going,” she adds.

Below is the verbatim transcript of Gita Gopinath’s interview on CNBC-TV18

Q: The first question has to be an event that is just upon us that is credit policy. We were coming out of consumer price inflation of 11.24 percent and a wholesale inflation as you would know of 7.52 percent both a good percentage above what the street was expecting and yet we didn’t get a rate hike. Your first comments, does this put Reserve Bank of India (RBI) behind the curve or is the bank justified?

A: I think this does come as something of a surprise. A lot of people were anticipating an increase in interest rates given Rajan’s strong statements earlier that he would keep his eye on the numbers and on inflation and the inflation numbers that came up were actually high. One good argument is the fact that monetary policy works with lags and so he has gone through two rate increases and so it’s possible that inflation numbers will come down in the future.

He has also been very clear in his policy statement that he is keeping his eye on the number very closely. So, if there is any reason to think that inflation is accelerating or this is not something temporary and we could see further inflation going up that he would respond very quickly to it. So, it comes as a surprise. It is also a reflection of the fact that growth is slowing down and he is concerned about the consequences of a weak growth situation in the economy and as a monetary policy authority, you have to be concerned both about inflation and growth and so while you want to be aggressive about fighting inflation, you do worry about bringing down growth to a level that might be something that the economy cannot handle at this point.

Q: It is a fair argument to say that if at all he has waited or if at all he is behind the curve, he is at best six weeks behind the curve because the next policy is on January 28. It is not a long wait in economic terms but what is your assessment of this inflation that we have seen, for the last 21 months we have been at near double digits in consumer price inflation, 9 or closer to 10. Even if it is largely food inflation, core inflation has been, non-food consumer price index (CPI) has been around 8 percent and food has its either potatoes on onions or eggs or rice after a bumper harvest still at 12 percent year on year. Is it giving you the sense that we do not need more evidence, this is rather entrenched?

A: Yes. I think this is partly the reason behind Rajan’s first policy move – to raise interest rates. That was partly reflection of the fact that we already know that inflation is a problem for the country. If you wanted to kill inflation, it can be done through monetary policy. If you raised rates high enough, you will bring inflation down and there is hardly a country in the world – I cannot think of a single country in the world that has been able to bring down inflation without some pain. Economy goes through pain, growth comes down, it is painful so there is no easy solution to bring down inflation. So, the question is how much of pain do you want and do you want now or want it later or you kind of hope for some good news either on the weather or on agriculture.

The problems that are coming from food inflation, some of it were world prices but a big problem with food inflation in India is also the kind of details of how food goes from the farm to the final retail market. There is a lot of logistics, it’s broken in so many different ways that it is not surprising that a small mistake here or there shows up spike in food prices. So, it is important to have the second side of policy working which is the supply side of policy working, it is not just kind of controlling demand but being able to smooth out these problems with respect to supply, is a crucial part which is why it is interesting that when Rajan made his first policy statement, he spent a lot of time talking about financial sector reforms because his thinking was that it is not so much amount of liquidity that is available in the economy, the amount of credit that is available in the economy but it is also a question of where the credit is going.

So, let us try to improve the allocation of those resources, it is a very Chicago way of thinking about problems of an economy – not so much about the resources that are available but making sure it is used efficiently and even his recent statement about non-performing assets, how to restructure them and how banks should interact with companies. These are all trying to have multi-pronged approach dealing with the problem as it was just coming out and talking about interest rates.

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Petrol price hiked by 41 paise, diesel by 10 paise

Petrol price was today hiked by 41 paise a litre following the government decision to raise commission paid to petrol pump dealers and firming global oil rates.

Simultaneously, diesel rates were increased by 10 paise per litre due to a hike in dealers commission . The two increases, which are excluding local sales tax or VAT, will be effective from midnight tonight.

State-owned oil firms, which restrained themselves from revising petrol price for past seven weeks despite weakening of rupee against US dollar, used the government decision to raise dealer commission on the fuel by 21 paise to effect
another 20 paise increase.

Petrol in Delhi currently costs Rs 71.02 per litre and after the increase it will be price around Rs 71.50. The actual rates, which haven’t been worked out yet, will vary from city to city.

Diesel rates will go up marginally from Rs 53.67 a litre to about Rs 53.80 in Delhi.
Petrol price, which are normally revised on 1st and 16th of every month based on the global trend in previous fortnight, were last revised on November 1 when rates were cut by Rs 1.15, excluding local levies.

Indian Oil Corp, the nation’s largest fuel retailer, said commission paid to petrol pump operators is being raised by 10 paisa on diesel (from Rs 1,089 per kilolitre or 1.089 per litre to Rs 1,186 per kl) and 21 paisa on petrol to Rs 1.95 a litre.

“In addition to above, for petrol, due to strengthening of prices in international markets and slight weakening of rupee, it has been decided to increase retail selling price by Rs 0.20 per litre (excluding state levies),” IOC said in a statement.

Diesel prices were last revised on December 1 following the practice of increasing rates by up to 50 paise a litre every month. Prices in Delhi were hiked by 57 paise, after including VAT, to Rs 53.67 per litre.

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Diesel price raised by 10 paise/litre on hike in commission

Diesel prices were increased by a little less than 10 paise a litre today after the government raised the commission paid to dealers selling the fuel. The government has “decided to revise the dealer’s commission on diesel from Rs 1,089 per kilolitre (or 1.089 per litre) to Rs 1,186 per kl for the entire country with immediate effect,” according to an official statement.

Diesel, which is sold at Rs 53.67 a litre in Delhi, will cost Rs 53.77 after the hike in commission. Diesel prices were last revised on December 1, when they went up by 57 paise.

The commission on diesel was previously revised on October 26, 2012, when it was raised from Rs 912 per kl. The annual revision was delayed this year because the Model Code of Conduct was in force on account of assembly elections, which ended earlier this month.

“Public sector oil marketing companies were requested by the ministry to rework the quantum of dealer’s commission on diesel (as due) keeping in mind escalations that may have occurred in the meantime. The industry worked out the same and submitted its recommendations to the ministry,” according to the statement.

The government had on December 10 raised commission paid to cooking gas (LPG) dealers by Rs 3.46 per 14.2-kg cylinder to Rs 40.71. That resulted in the retail selling price of cooking gas being hiked by Rs 3.50 to Rs 414.

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ICICI Bank’s KV Kamath gives a thumbs up to RBI policy

Hailing the Reserve Bank of India ’s (RBI) latest monetary policy, announced on December 18, KV Kamath chairman  ICICI Bank says the move to keep interest rates unchanged was a bold one.

Numerous rate hikes, Kamath says, were taken earlier as effectively the RBI did not see any other medicine to cure inflation.

On the market reaction, Kamath says that the Indian equity market tried to factor in the Fed tapering. The message that it will take place in a very gradual manner helped in not causing any market hiccup.

RBI governor Raghuram Rajan pleasantly surprised the market by keeping key rates unchanged. In its mid-quarter monetary policy meet on Wednesday, the Reserve Bank of India left repo rate unchanged at 7.75 percent and CRR at 4 percent of net demand and time liability (NDTL).

Keki Mistry, vice-chairman and CEO of HDFC , too echoed Kamath’s sentiment. He says impact of tapering will not be as intense as it was the first time around. At that time there was a lot of speculative pressure on the rupee. When the rupee touched levels of 67-68/ USD, he felt it was completely unrealistic and unsustainable. “This time around we are much more prepared.”

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See reinforcement of India growth story: HSBC India

The year has been fairly good for open offers, but Sunil Sanghai of HSBC India, whose company has been an advisor on three major deals recently, does not see it as “trend”. The country has seen a number of multinationals (MNCs) hiking their stake in their Indian arms egged on by the depreciating rupee and the much stronger growth rate in emerging markets compared to developed peers. 

Earlier this year, the world’s second largest consumer firm Unilever increased its stake from 52 per cent to 75 per cent through a Rs 29,200 crore open offer, the largest so far. According to market regulator SEBI, Indian companies require a minimum public shareholding of 25 percent to maintain a public listing in the country.

More recently, healthcare giant GlaxoSmithKline Plc has planned to pump in USD 1 billion by raising its stake from 50.7 percent to 75 percent in its pharma arm.

There is a reinforcement of the India growth story, says Sanghai. “They (MNCs) know the business; there are no diligence issues. Therefore, it makes sense for them to really increase the stake and increase the economics of their overall investment,” he told CNBC-TV18 in an interview.

Below is an edited transcript of the interview on CNBC-TV18

Q: HSBC has been involved in all the three big open offer deals that we have seen this year. Do you expect this particular trend to continue in 2014?

A: I am not sure whether this is a trend because these decisions are made by each of the companies individually. I do not think the decision depends on what somebody else has done. However, you have seen this kind of transaction in 2009, 2010 and we did one in 2011 as well. This year we have done three transactions. There have been transactions in the last few years but no two years are same.

Therefore, one cannot generalise whether it will happen in future going forward because these decisions are very individual decisions and therefore you cannot call it as a trend but there have been number of transactions of this nature.

Q: The big talking point these days is how multinational corporations (MNCs) are increasing their stake in their Indian subsidiaries. We saw it with GSK and now there are talks that Maruti could be the next recipient of that. I wanted to understand from you, what is the main incentive that MNCs have to up their stake in their Indian subsidiaries?

A: One thing which is common all across is reinforcement of faith in Indian growth story. Indian growth story is attractive and that is the reason why so much of foreign direct investment is coming into India. If you look at the number for the current year, current year has not been the best of the year for us and still foreign direct investment is almost at par with the last year.

Therefore, reinforcement of the Indian growth story and having said that I do not think these decisions are in lieu of any inorganic opportunities available in the market. I think this will be in addition to inorganic opportunities.

The way these corporate look at it: they have an existing subsidiary in India. They control that; they have been operating it for many years. Some of them have been operating it for even 100 years. Therefore, they know the company. They know the management. They know the business. There are no diligence issues and therefore it makes sense for them to increase the stake and increase the economics of their overall investment.

Q: 2013 league table and we are already done with that. This table does not suggest any large outbound transaction. Would you say India Inc is losing its appetite for global acquisitions, at least as of now?

A: Last time also when I had appeared on your channel, I talked about outbound transaction. My view remains the same, which is we will see outbound transactions more for the strategic regions, more for suiting the requirement and niche for the corporate. We will see less of outbound which will be for the size and scale and therefore you would see limited outbound activities, not too many very large transactions.

Q: Within inbound deals, the trends are suggesting merger and acquisition (M&A) activity was largely concentrated in sectors where the government has opened foreign direct investment (FDI) like aviation where companies have to sell assets to deleverage balance sheets. Are you also noticing similar trends?

A: As far as inbound is concerned you can put them into three buckets. The bucket one which is existing companies where the promoter are increasing their stake so the three transactions this year GlaxoSmithKline Consumer Healthcare , GlaxoSmithKline Pharmaceuticals now and Hindustan Unilever falls in that category. The second as you mentioned the sectors which have opened up now namely aviation we saw couple of transactions in aviation happening the moment the policy change happened. The other example could be telecom the moment the announcement of 74 going up to 100 percent you heard some transaction getting announced there. Consumer retailing, there was a situation today which got announced so when the guideline changes and the sector opens up, the new flow comes in.

As far as deleveraging is concerned, I would wait to see the capacity utilisation. There is a lot of capacity there which is not utilized. Once you have a capacity utilisation taking place, cash flow will improve and automatically deleveraging would happen. We will have to wait and see how that pan out the next couple of years and the trend for 2014 would a lot depend on how much capacity utilisation we will be able to in the next couple of years.

Q: The other big thing that people are talking about is the supply of paper that is going to hit the market. We have about USD 6 billion of government paper that is lined up within the first quarter of calendar year 2014. Do you see enough appetite among global investors for this kind of paper?

A: The government paper is always liked by the investors because these are good quality companies, very stable companies and stable cash flow. The long-term investors like it and prefer it. First quarter next year we will see fresh allocation happening, current year 2013 has not been the great (chck—ECM) year therefore people would be looking to make some investment in India and considering all of that the government paper will be liked and will be appreciated.

Q: What about PE deals? They have done extremely well in 2013. Will the trend continue in 2014?

A: The private capital which is the private equity is established mode of capital now in India and in the last couple of years it has done very well, not only just the minority investment but also controlled transactions has done extremely well and we see that trend continue and even this year we had two very significant control transactions, buyout situations. Last year we did couple of transactions for private equity funds and we see private capital becoming a very important source of capital in the Indian markets.

Q: A word on GSK Pharma’s open offer. Do you expect it will be as successful as Hindustan Unilever ( HUL )?

A: You heard GSK management talking about in media yesterday that it is a fair price, 26 percent premium to last closed. The stock had run up quite a lot, if you see the stock went up by 20 percent last year on the top of 26 percent premium. So, it is a fair price from the investor’s perspective. It gives an opportunity for investors to book some gain and get some liquidity in the stock. We hope that it gets good response.

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‘Immediate challenge for India is to go back to 8% growth’

Observing that India’s growth declined during the last two years and was lowest during last financial year, President Pranab Mukherjee today said the immediate challenge was to reverse the deceleration and nurse growth back to 8 percent plus levels often clocked in the past.

“This Congress is being organised at a time when the world is beginning to emerge from the second-round impact of the global economic crisis. India too felt the repercussions of global slowdown”, Mukherjee said. He was speaking at the inauguration of the 28th annual Indian Engineering Congress organised by Institute of Engineers here.

Also Read: Growth prospects weak, less chance of improvement, says Moody’s

 “Our economic growth declined during the last two years. At five per cent in 2012-13, it was the lowest in the last ten years,” he said. “Our immediate challenge is to reverse the deceleration and nurse our growth path back to the eight percent plus levels often clocked by us in the past,” Mukherjee, a former Union Finance Minister, said.

He expressed confidence that India would be able to “secure a faster growth” with some of the positive factors like “continuing rise in per capita incomes, expanding middle-class consumers and young energetic workforce”. Noting that a nation’s progress was not guaranteed by its “stock” of natural resources alone, he said “deficiency of natural resource also does not close the gates of prosperity”.

The development status of a nation is fashioned by its technological prowess. Japan and Singapore are instances who have developed on “sheer strength of cutting edge technology,” he said. “We have to leverage our knowledge infrastructure to develop growth-inducing technology. We have to make a choice of technologies for development based on socio-economic, environmental and security factors and on availability of resource and infrastructure,” he said.

He called upon the community of scientists and engineers to provide technology foresight. Earlier, Mukherjee received the first copy of a souvenir released by Tamil Nadu Governor K Rosaiah. Union Shipping Minister G K Vasan, State Industries Minister P Thangamani, Institute of Engineers Association President Rathore were also present on the occasion.

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UN lower’s India growth forecast to 4.8% for 2013

United Nations has lowered India’s economic growth forecast for 2013 to 4.8 percent while warning that emerging markets should be prepared to deal with the impact of US Federal Reserve’s quantitative easing programme.
 
India’s economy is forecast to grow at 4.8 percent in 2013, down 1.3 percent from its earlier projection, the UN’s World Economic Situation and Prospects 2014 report said.

Similarly, it has lowered the growth projection for 2014 to 5.3 percent, down 1.2 percent from earlier forecast. The UN sees India to grow by 5.7 percent in 2015.

“In China, growth was expected to maintain a pace of about 7.5 percent over the next few years, while India’s economy was forecast to grow by more than 5 percent,” the UN’s World Economic Situation and Prospects 2014 report said.
     
Growth in South Asia remains lacklustre as a combination of internal and external factors hamper activity, particularly in the region’s largest economies, such as India, it said.

India’s growth in the first half of 2013-14 stood at 4.6 percent. To achieve 5 percent growth in this financial year, the economy has to expand by 5.4 per cent in the second half.

Shamshad Akhtar, UN’s Assistant Secretary-General for Economic Development, Department of Economic and Social Affairs, said much of the world’s economic weakness stemmed from developed economies which continued to struggle, including the euro area and the US.

Capital flows declined for many developing countries and associated volatility generated macroeconomic complications, she said, adding volatility of flows, particularly with regard to the US Fed Res’s tapering of the quantitative easing programme, had strong consequences.

“The potential for substantial downside risks of the premature tapering of quantitative easing could impact global growth. Emerging markets should be prepared to deal with the impact of global outflows as quantitative easing was (being) tightened,” she said.
    
The US Federal Reserve last night announced that it would reduce the monthly bond purchases to USD 75 billion from the existing level of USD 85 billion from January.

Meanwhile, Finance Minister P Chidambaram said India is better prepared to deal with the situation arising out of a cut in US bond purchases and that markets have already factored in the impact of such a move.

He said this is a mild reduction and the US Fed has not announced any sequential reduction.

“The government is of the view that the markets had already factored in the US Federal Reserve’s decisions and therefore is not likely to be surprised by these moderate changes,” he said in a statement.

Further, the UN report said the global economy was expected to grow at a pace of 3 per cent in 2014.

Pingfan Hong, Chief of the Global Economic Monitoring Unit, Department of Economic and Social Affairs, said the world economy in 2013 was unable to meet even the most modest projections.

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RIL gas pricing: Govt decision pragmatic says SC Tripathi

SC Tripathi, Former Oil Secy said the decision taken by the cabinet of allowing RIL to double the price of natural gas with bank guarantee is pragmatic and fair.
           
He said:” ‘Bank guarantee the practical way to move forward” 

The Cabinet today decided to allow  Reliance Industries to almost double the price of natural gas from April provided the firm gave a bank guarantee to cover its liability if gas-hoarding charges are proved.

Also read: Higher gas price for RIL good news but unfortunate: Taneja 

Excerpts of his interview on CNBC-TV18

Q: There has been so much back and forth on this issue. The Rangarajan Committee had submitted its report over six months ago, the cabinet had approved the new gas price regime and then there was this confusion on what should be done with the shortfall from the KG-D6. Our understanding is that the cabinet today has said that Reliance will be able to sell even the shortfall at the new gas price subject to the company submitting bank guarantees; your first reactions to that.

A: These are separate issues so if the cabinet has taken that decision that appears to be fair because the issue of cost recovery and not enough wells having being dug, therefore the government imposing some penalty of USD 1.8 billion, etc that is a separate issue.

As far as the gas pricing is concerned this is a different issue. So, if the government had decided earlier based on Rangarajan committee report then the government should stick to it so that the confusion is removed and the users of gas will also take into account at what price the gas will become available.

Q: Do you think this is the most practical way to go forward because the finance ministry was the one that had raised concerns and had said that because the shortfall was obligated on part of Reliance to the government of India hence an arbitration proceedings were under way. Hence the government should make sure that a bank guarantee is submitted. We understand that the law ministries opinion was the same that the bank guarantee from the company should be submitted to safeguard the interest of the government. In this context do you believe that this is the most practical approach to be able to move forward from hereon?

A: I think so. As I said the two are two separate issues; neither Reliance is going away or running away from the country nor the wells dug by them are going to go away, nor is the gas in KG-D6 going to disappear. So, that is a separate issue whether Reliance has done the part of commitment it had made or not, or there is a shortfall and how to go about it, how to penalise Reliance or to ask them to fulfill their commitment.

However, Price of gas is a separate issue so I think this is a practical way of going forward. I would comment that decision of cabinet is pragmatic and at least now there is scope for things to move forward.

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Monetary policy can’t check vegetable prices: PMEAC

The Reserve Bank desisted from raising rates in its monetary policy review despite inflation for the month of November coming in at 7.52 percent. Speaking about the move, Saumitra Chaudhuri, Member, Planning Commission said it is a step in the right direction since monetary policy cannot check the prices of onions and tomatoes, no matter how well intended.

He sees December WPI at 7 percent and believes it won’t go much lower unless there is a significant correction in food prices.

Chaudhuri believes the country should continue with curbs on gold imports for some more time.

Also Read: Expect food inflation to ease going ahead: Rangarajan

Below is the verbatim transcript of Saumitra Chaudhuri’s interview on CNBC-TV18

Q: The Reserve Bank of India (RBI) did not hike rates from 7.75 percent although everyone expects the year end consumer price index (CPI) inflation to be at least 9 percent. Is the RBI behind the curve?

A: The point is if you are going to reduce the prices of onions and tomatoes by tightening monetary policy I don’t think you will get a result that you wish to have. Manufactured inflation is running at historically low levels at about 3 percent, even in November and that is the element that reflects the weakness of domestic demand. Domestic demand is very weak and that is what you need to address. Monetary policy cannot address the prices of onions and tomatoes no matter how well intended it might be.

Two, this was a temporary spike and in December onion prices are around 40 percent lower than it was in October and tomato prices are 33 percent lower than in November. So if you extrapolate on account of vegetables alone, your headline number would be down to around 7 percent if not little bit lower for December which has been achieved because we have maintained a tight monetary policy stance. So the governor is well advised to have waited.

Q: What is your trajectory and your estimates for inflation both CPI and Wholesale Price Index (WPI) by March 31?

A: I think CPI is a bit problematic because there seems to be a significant variation from what numbers we get from other sources. How many hands are working on it I cannot speak.

On WPI, I suspect that it would come down to around 7 percent for December but subsequently unless vegetables correct a lot, it is not going to come down beyond that. So it may be somewhat below 7 percent but it may not be significantly below 7 percent.

Q: You said that the current account deficit (CAD) situation has improved quite a bit hence do you think we should reduce some of the gold curbs that are currently underway?

A: CAD has been brought under control largely because of curbs on gold. I feel the curbs on gold should continue a little while longer. One, we had imported much excess gold in the last two years. If we take a look at customary demand it is about USD 23-25 billion of gold annually. We imported USD 62 billion two years ago, we imported USD 57 billion last year which is much above the customary needs. We have imported some USD 15 billion dollars in two months of April and May so we can do without gold for a while. I think the external balance has been set right largely because of these initiatives and I hope these initiatives will continue for some more time till things stabilize.

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UN lowers India’s growth forecast to 4.8% for 2013

United Nations has lowered India’s economic growth forecast for 2013 to 4.8 percent while warning that emerging markets should be prepared to deal with the impact of US Federal Reserve’s quantitative easing programme.

India’s economy is forecast to grow at 4.8 percent in 2013, down 1.3 percent from its earlier projection, the UN’s World Economic Situation and Prospects 2014 report said.

Similarly, it has lowered the growth projection for 2014 to 5.3 percent, down 1.2 percent from earlier forecast. The UN sees India to grow by 5.7 percent in 2015.

“In China, growth was expected to maintain a pace of about 7.5 percent over the next few years, while India’s economy was forecast to grow by more than 5 percent,” the UN’s World Economic Situation and Prospects 2014 report said.

Growth in South Asia remains lacklustre as a combination of internal and external factors hamper activity, particularly in the region’s largest economies, such as India, it said.

India’s growth in the first half of 2013-14 stood at 4.6 percent. To achieve 5 percent growth in this financial year, the economy has to expand by 5.4 percent in the second half.

Shamshad Akhtar, UN’s Assistant Secretary-General for Economic Development, Department of Economic and Social Affairs, said much of the world’s economic weakness stemmed from developed economies which continued to struggle, including the euro area and the US.

Capital flows declined for many developing countries and associated volatility generated macroeconomic complications, she said, adding volatility of flows, particularly with regard to the US Fed Res’s tapering of the quantitative easing programme, had strong consequences.

“The potential for substantial downside risks of the premature tapering of quantitative easing could impact global growth. Emerging markets should be prepared to deal with the impact of global outflows as quantitative easing was (being) tightened,” she said.

The US Federal Reserve last night announced that it would reduce the monthly bond purchases to USD 75 billion from the existing level of USD 85 billion from January.

Meanwhile, finance minister P Chidambaram said India is better prepared to deal with the situation arising out of a cut in US bond purchases and that markets have already factored in the impact of such a move.

He said this is a mild reduction and the US Fed has not announced any sequential reduction.

“The government is of the view that the markets had already factored in the US Federal Reserve’s decisions and therefore is not likely to be surprised by these moderate changes,” he said in a statement.

Further, the UN report said the global economy was expected to grow at a pace of 3 per cent in 2014.

Pingfan Hong, chief of the Global Economic Monitoring Unit, department of economic and social affairs, said the world economy in 2013 was unable to meet even the most modest projections.

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India better prepared to deal with Fed tapering: FM

India is better prepared to deal with any consequences of the US Federal Reserve’s move to reduce monetary stimulus, Finance Minister P. Chidambaram said in a statement on Thursday, that has supported inflows of cash to emerging markets.

After agonising investors for months, the Fed decided on Wednesday to trim its bond buying by USD 10 billion to USD 75 billion a month as a modest step and one the US economy could well withstand. Crucially, the US central bank softened the blow by making its forward guidance even more dovish.

“(The) government is of the view that the markets had already factored in the US Federal Reserve’s decision and therefore is not likely to be surprised by these moderate changes,” Chidambaram said in a written statement released by his office.

Also Read:  No case for asset reallocation, positive on EMs: Experts

Worries over the Fed’s possible tapering had triggered massive capital outflows between May and September from emerging markets.

Saddled with hefty current account and fiscal deficits, India looked the most vulnerable. The rupee went in a free fall, losing as much as 20 percent against the dollar before recovering. This prompted India to unleash a slew of measures to bolster its forex reserves and rein in the current account gap.

Chidambaram also spoke to Reserve Bank of India Governor Raghuram Rajan on Thursday morning to discuss the Fed tapering, the statement added.

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RBI policy: Rajan is making same mistakes as Subbarao

R Jagannathan
Firstpost.com

Raghuram Rajan has flunked his first major test. After huffing and puffing about inflation, he has taken the easy way out and decided to wait for more data before raising rates.

His monetary policy statement is a complete contradiction in several ways.

First, he goes hyper on inflation, leading us to believe he is going to slam the brakes. But he doesn’t do that at all. He waffles. He said: “High inflation at both wholesale and retail levels risks entrenching inflation expectations at unacceptably elevated levels, posing a threat to growth and financial stability. There are also signs of a resumption of high rural wage growth, suggesting second round effects that cannot be ignored. High and persistent inflation also increases the risks of exchange rate instability.”

But far from raising repo rates to indicate a determination to douse those very “inflation(ary) expectations” he instead feeds the hope that things could better if we wait a while. He sees vegetable prices falling – anyone who has lived in India knows that vegetable prices always fall in winter – and uses this to suggest that maybe, just maybe, the next bit of data will bring out better numbers and bear out his reluctance to raise rates.

This is exactly what everyone, from P Chidambaram to Kaushik Basu to Montek Singh Ahluwalia , has been urging – that inflation will come down in “unspecified” coming months. And it’s never happened for over four years now.

So Rajan contradicts himself again. He says that “there is merit in waiting for more data to reduce uncertainty” but then goes on to increase the uncertainty by pointing out that “there are obvious risks to waiting for more data, including the possibility that tapering of quantitative easing by the US Fed may disrupt external markets and that the Reserve Bank may be perceived to be soft on inflation.”

Instead, he promises stronger action if he is wrong on guessing the direction of inflation. He says: “If the expected softening of food inflation does not materialise and translate into a significant reduction in headline inflation in the next round of data releases, or if inflation excluding food and fuel does not fall, the Reserve Bank will act, including on off-policy dates if warranted, so that inflation expectations stabilise and an environment conducive to sustainable growth takes hold. The Reserve Bank’s policy action on those dates will be appropriately calibrated.”

In short, he is merely praying that inflation falls, and promised action if things get worse.

Is Raghuran Rajan on some other planet? Elections are round the corner, and both public and private spending will accelerate through the winter and right upto summer – which will keep inflation up in several commodities.

The government is unlikely to take bold action on raising diesel prices, and subsidies are exactly where they are – heading upwards of Rs 1,20,000 crore in 2013-14, and still largely unpaid by the government.

The fiscal deficit is worse than ever – at over 84 percent as at the end of seven months.

Food inflation may ease (only in vegetables and pulses, though), but the food subsidy bill and minimum support prices are expected to rise as election season approaches. The good monsoon and expectations of a good rabi mean that fertiliser subsidies will soar.

Chidambaram can cut capital spending to meet his fiscal deficit target, but this will worsen the slowdown, and make the deficit terrible since the denominator (a lower GDP) on which the deficit is calculated will be smaller.

To shore up foreign exchange reserves, Rajan has already given banks a free lunch of $34 billion by offering a rupee swap at 3.5 percent; this has released Rs 2,10,000 crore of highly inflationary money into banks’ books. This is the largest one-time money-printing exercise in Indian history. It will give a fillip to inflation unless the money is sterilised.

Rajan said: “Robust inflows into the swap windows opened by the Reserve Bank during August-November have contributed significantly to rebuilding foreign exchange reserves, thus covering possible external financing requirements and providing stability to the foreign exchange market. Looking ahead, these favourable developments should help to build resilience to external shocks.”

One wonder is borrowing money at high rates to shore up the reserves is a wise move when it could be inflationary.

As for the current account deficit, it is down largely because the economy isn’t growing – and oil imports are down.

India is deep into stagflation – and only serious reforms to free up the supply side and deregulation of energy prices will give it the necessary zip to start growing again.

No matter what Rajan does, the economy will slow, and it is pointless to keep interest rates low when the reason for lack of growth is not the high cost of money – it is about lack of clarity on the shape of politics in 2014.

In these circumstances, Rajan had only one thing to do: deliver a shock to the system by raising repo rates substantially – say by 0.5 percent or even 1 percent – so that the government is forced to act on its core revenue deficit. Now it won’t.

By chickening out, Rajan has flunked his test. He is making the same mistake made by his predecessor D Subbarao – giving the government too much of the benefit of doubt. He has eroded his own credibility as an inflation fighter.

The writer is editor-in-chief, digital and publishing, Network18 Group

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Rajan says time not ripe for lifting curbs on gold imports

The Reserve Bank today said it is not the right time to take back measures it adopted to control rising current account deficit, but favoured removing curbs on gold imports. “At this point, it will be premature to withdraw these restrictions for a variety of reasons,” RBI Governor Raghuram Rajan told analysts on a conference call after announcing the mid quarter review of the monetary policy wherein he left all key rates unchanged.

The RBI measures, the prime driver to narrow the current account deficit (CAD) to 1.8 per cent in the second quarter, will be withdrawn once the the deficit stabilises on its own, beyond the imposed gold restrictions, he said. “Once we feel more comfortable with the current account deficit, once we have a sense that tapering, at least the threat of it, is behind us, we will certainly consider unwinding these distortionary actions,” Rajan said.

“I would be much happier if we had the kind of CAD we have without significant curbs on anything, including gold. We should aim to have a CAD without any distortions, removing the incentives for smuggling, that is what we will be working for,” he said earlier in the day.

CAD, which is the difference between the inflow and outflow of foreign currency, came down to 1.2 per cent in the September quarter, from 4.9 per cent in April-June period. In the first half of this year, CAD stood at USD 26.9 billion (3.1 per cent of GDP), down from USD 37.9 billion (4.5 per cent of GDP) in the first six months of 2012-13.

The government and the RBI expect to contain CAD at USD 56 billion in 2013-14. In the previous fiscal, it had touched a record high of 4.8 per cent. Ever since the release of official data pointing out to a reduction in CAD, there has been speculation that RBI and the Finance Ministry may withdraw the extraordinary steps, saying they were leading to smuggling of the precious metal.

The government had increased import duty on gold imports, considered a prime reason for soaring CAD, from 2 per cent in January 2011 to 10 per cent as of now. RBI had imposed the 80:20 rule for bank funding of gold imports meant for exports, under which an importer to get bank funds should export 80 per cent back after value additions.

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Net oil swap repayments less than USD 7 billion: RBI

Dec 19, 2013, 11.47 AM IST

The total amount of oil swap which the RBI engaged in between August 28 and the first week of December was USD 12 billion, he said. The measures were initiated after the rupee touched a lifetime high of 68.85 to the dollar on August 28.

Tags  RBI Governor Raghuram Rajan, USD 7 billion, oil marketing companies, Hindustan Petroleum, HPCL, Bharat Petroleum, BPCL, Indian Oil, IOC

RBI Governor Raghuram Rajan today said state-run oil marketing companies have about USD 7 billion in pending settlements after they availed of the central bank’s special swap window to meet their dollar needs. “The net amount is less than USD 7 billion right now,” he told analysts over a conference call after announcing the mid-quarter review of the monetary policy.

The total amount of oil swap which the RBI engaged in between August 28 and the first week of December was USD 12 billion, he said. The measures were initiated after the rupee touched a lifetime high of 68.85 to the dollar on August 28.

Also read: Bold or risky: Experts’ take on RBI policy

As part of various steps, the RBI introduced the special window under which it met the dollar requirements of Indian Oil ,  Bharat Petroleum and  Hindustan Petroleum by selling them dollars. The OMCs, which need around USD 8-9 billion a month, are supposed to pay back in rupees over the next six months.

The RBI encouraged the OMCs to gradually move into the open market for their dollar requirements and closed the special window earlier this month. “As and when the time comes, we will take a view as to how the repayment happens and how it will be settled through an exchange of rupee fund-based on the settlement amount,” Rajan said today.

If necessary, the swap can also be rolled over and can be repaid if the market conditions permit it, he added.

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Growth expected to improve in second half of 2013-14: RBI

The Reserve Bank today said it expects economic growth to improve in the second half of this financial year on the back of expansion in the agriculture sector, exports and movement in stalled projects.

Addressing a media conference, RBI Governor Raghuram Rajan said he would stick with the earlier 5 percent growth projection for the full year, with minor fluctuations in the number.

“Growth in the second half will be stronger than growth in the first half. Of course, the factors that will play out are agriculture, exports and stalled projects coming back online. We hope they will come back on line. That will help improve growth and sentiment,” he said.

Rajan said it was important that the government and the RBI “be vigilant to the growth scenario.”

The RBI left key policy rates unchanged in its Mid-Quarter Monetary Policy Review today. Shifting his stance from inflation management, Rajan said continuing weakness in growth was the main driver of his policy action .

Increased investments helped the economy to grow 4.8 percent in the July-September quarter compared with a 4.4 percent expansion in the first quarter.

Growth in the first half of 2013-14 stood at 4.6 percent. To achieve 5 per cent growth in this financial year, the economy has to expand by 5.4 per cent in the second half.

Rajan said subdued domestic consumption demand and a lacklustre services sector suggested continuing headwinds to growth.

“Tightening government spending in Q4 to meet budget projections will add to these headwinds. In this context, the revival of stalled investment, especially in the projects cleared by the Cabinet Committee on Investment, will be critical,” Rajan said.

He said the government is committed to the path of fiscal consolidation and to implement it there could be a certain amount of expenditure contraction in the fourth quarter.

“Of course, an increase in disinvestment, greater revenue from state-owned companies will help meet the deficit target,” he said.

Finance Minister P Chidambaram has said the government will not breach the red line of 4.8 per cent of GDP targeted for the fiscal deficit in 2013-14.

The government has budgeted Rs 40,000 crore from disinvestment and has so far raised Rs 3,000 crore.

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RBI move sends strong signals to the market: Motilal

The Reserve Bank’s decision to keep rates on hold despite widespread expectations on the contrary has sent a few firm messages to the market, says Motilal Oswal, CMD, Motilal Oswal Financial Services (MOFSL).

According to him, the RBI policy henceforth would be more intelligent than just a ‘policy rates chasing last inflation print’ game.

“There is a clear signal of RBI’s inclination to see through the noise in the data. Thus, if vegetables with just 1.7% weight in the WPI inflation index has contributed 2% out of the 7.5% overall inflation, there is a reason to wait for more evidence to arrive to conclude whether this is purely temporary or durable. Thus, RBI clearly doesn’t want to act in haste; particularly in a weak economic condition. The RBI Governor also clarified that the status quo doesn’t imply that the policy rates are ‘on hold’ but he is simply ‘waiting’ for more data – clearly articulating that the sum-total of indicators doesn’t clearly indicate the accentuation of ‘generalised inflationary pressures’ in the economy,” he said.

“Most importantly there is a fundamental shift towards framework akin to ‘decision making under uncertainties’ whereby the single instrument, single-target approach is replaced by multiple instruments and multiple-target approach. This would create headroom for a more nuanced policy response in future freeing it from the straight-jacketed simplicity of a ‘hawkish’ or ‘dovish’ stance,” he added.

Going ahead, he expects the inflation to fall sharply in December; as by most common accounts vegetable prices have started softening widely.

“That such incoming evidence outside the formal data release has been taken into account in policy decision is another positive aspect of today’s announcement,” he said.

He feels the core inflation that has stayed stable so far may not slide down further rapidly and may continue to set a floor to policy easing. Meanwhile; liquidity conditions have improved on forex flows and slower credit growth; but should be more proactively eased when inflationary concerns subside further.

“Also, fear of tapering need to hold us back further as a slow domestic recovery and a more responsive monetary policy improves our preparedness for global events,” Oswal added.

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See no rate hike in FY14; investments key now: Experts

The Reserve Bank Governor Raghuram Rajan will not hike any rates in FY14, believes Siddharth Sanyal, chief India economist, Barclays.

Speaking to CNBC-TV18, Sanyal says the rate hikes have to be balanced between inflation, growth and other macro factors. He says the non-performing assets (NPAs) will only worsen further if the central bank keeps hiking rates.

The status quo, Pramod Gubbi, vice-president-Sales, Ambit Capital says may be keeping in mind that Governor Rajan may be privy to how the inflation is going to pan out in the days to come.

The RBI today kept key rates unchanged , thereby pleasantly surprising economists and market analysts alike who had expected atleast a 25 basis points (bps) repo rate hike.

Below is the edited transcript of the interview to CNBC-TV18.

Q: You were probably the only one we know who said or called a status quo. Most people expected a 25 basis point hike. In our poll yesterday, we had 10 percent respondents saying this could be 50-basis points as well. You said zero. Do you think we have just postponed the inevitable?

Sanyal: I completely agree. I don’t really think that there are any inevitable rate hikes which he has just postponed. What makes all of us very bearish is that over the last few months, headline inflation has moved up by around 300-basis points. However, if one just digs one level deeper, 200 basis points out of that 300 basis points came only from vegetable prices. The weight of that in the index is less than 2 percent. If one excludes that, 98 percent of the basket for the inflation rate today is 5.5 percent.Capacity utilisation in the industrial segment is extremely low – it is the lowest since 2009. The way monetary policy can act in terms of reducing inflation is through this route. It will impact manufacturing industry in general by reducing capacity utilization. That can take away pricing power from the economy and that way it can reduce inflation and that is already at a low.

Q: Have you left the rupee a little open to attack, because if the Fed should announce even a mini-taper what is going to happen?

Gubbi: More than the taper, the high level of inflation itself is pretty bad for the rupee in any case. The question is, does the governor know more than what the market knows in terms of how the inflation is going to pan out in the next two months? Clearly, he seems to know as vegetable prices are a big component of the inflation driver over the last few months, if that cooling off enters the season, we can expect the overall food inflation basket to cool off.

However, inflation in terms of raising savings which he has reiterated multiple times is key. So, unless and until, we can attack inflation, cool that down, get the financial savings back into the mix, we are not likely to see an investment cycle pick up. That is going to be the focus even if there is a balance between growth and inflation. So, to that extent he still needs to go after inflation, get it below that 5.5 percent comfort zone and then we can look forward to grow.

Q: He linked any sort of shift in rates or rather let us say he has predicated this non action on two things; a reduction in food inflation as well as in core inflation. He said and he stressed that this is not or both have to come down and that is what we expect to happen. What is the timeline for that to happen? He did not specify what numbers he liked to see in terms of either the consumer price index (CPI) or the wholesale price index (WPI) and therefore how we would link or expect any rate action here onwards. When do you expect to see if at all any rate action because many people do believe that this is now been pushed out and not just pushed out he may have to respond with a 50 basis point hike?

Sanyal: The inflation needs to be divided under three categories-the first one is the headline inflation; second is food inflation and lastly, the core inflation.

There has been a deep drop in food inflation in December. The drop is to the extent of 25-50 percent on a month-on-month (MoM) basis in terms of certain vegetables. If I just factor that in my December inflation, the number suggests closer to 6.5 percent from the current 7.5 percent.

There has been quite a bit of negativity around the revision we have seen in the past inflation numbers in the past two or three occasions; 90 basis point upward revision, 60 basis point upward revision we have seen.

If someone sees that a little more closely one can see there had been a bit of upward – big component had come from upward revision in electricity prices. The same electricity prices are already – they have been captured well already in the preliminary numbers in subsequent months. So, the revisions will also be somewhat less going ahead from this point onwards.

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RBI’s decision is aimed at boosting growth: Montek Singh

The Reserve Bank of India’s decision to keep the interest rates unchanged is aimed at boosting economic growth, Planning Commission Deputy Chairman Montek Singh Ahluwalia has said.

“Keeping in mind the need to give the economy stimulus and not wanting to take too hasty a step, the (RBI) Governor has surprised the markets. Markets were expecting a hike,” Ahluwalia told reporters here.

“He (RBI Governor Raghuram Rajan) is expressing confidence that price inflation will come under control and let’s hope that he is right. If he is right, then definitely in retrospect it will be proved to be a very good decision,” he added.

In its mid-quarter review of monetary policy, RBI today kept all the key interest rates unchanged notwithstanding persistent high inflationary pressure.

The decision to keep the rates unchanged will be a big breather for the industry and retail borrowers in particular as the markets had expected another 25 bps hike in the short-term lending rate.

According to Ahluwalia, RBI thinks that recent indication suggests that the pressure on inflation, which is mainly because of food prices, will come down. The spike in prices of food items is seasonal in nature generally and RBI expects the food inflation to ease in the coming weeks.

“RBI Governor has said that there is some expectation that high inflation, which is largely driven by food inflation and that too mainly driven by vegetable inflation, will ease,” he added.

Retail inflation for November stood at 11.24 per cent, while the headline inflation measured in terms of Wholesale Price Index stood at 7.52 per cent during last month.

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RBI launched degree of volatility, uncertainty: BNP Paribas

With the Reserve Bank governor Raghuram Rajan putting action in the ‘wait and watch mode’, he introduced a certain degree of volatility and uncertainty into the market, says Manishi Raychaudhuri, MD & Asian Equity Strategist at BNP Paribas Securities. He says till the next set of data points come through in first half of January; the market would continue to behave this way.

The RBI today kept rates unchanged today . The governor, however, said action may be taken even on off policy dates if inflation does not behave.

Also Read: Expect food inflation to ease going ahead: Rangarajan

With the domestic policy behind us, global factors once again become important. He says the US Federal Reserve wants to make sure of growth certainty before embarking upon the journey of tapering. He feels Fed will begin tapering only in March. But the good news is, whenever Fed may begin tapering, its impact on emerging markets won’t be of the same magnitude as seen during the summer. A lot of concerns that were plaguing countries like India and Indonesia do not exist now.

He expects some degree of decline in earnings estimate coming from Indian corporates. He feels this consolidation phase will continue for sometime. He does not see the Nifty going to 6400.

He is positive on private banks, but advises investors to tread with caution and go in for better quality names like the IndusInd Bank . He continues to remain bearish on PSU banks despite the RBI draft norms.

Below is the verbatim transcript of Manishi Raychaudhuri’s interview on CNBC-TV18

Q: What is your reading of the credit policy and now does this make you positive on rate sensitive in any sense?

A: The credit policy is a short-term reprieve and a positive surprise. We were expecting about 25 bps repo rate hike and it now seems clear that the Governor is waiting for more data on inflation and he seems to believe that in the interim food inflation and even core inflation on both Wholesale Price Index (WPI) and consumer price index (CPI) would decline. However, having said that I think that this space is watched carefully because he has kept the space open for a potential rate hike if the data points going forward are not in favour of what he did today. So, I would think that there is a degree of uncertainty or volatility that’s been introduced into the market by this action and till the next set of data points come through in first half of January; the market would continue to behave this way.

Q: What is your approach to markets now? Do you think the markets can make a dash towards that 6400 mark pretty easily if Yellen were to be Yellen later on today?

A: I think after the domestic credit policy is now behind us the global factors would become important again. We do not know what is going to happen this evening, but our expectation is that a December tapering from the Federal Open Market Committee (FOMC) is possibly not on the cards or has cues that it will start in March and it seems clear that though the Fed chairman and the incoming chairman are quite clearly in the camp who would possibly want a growth certainty before they embark on liquidity contraction. Even when tapering eventually starts it will possibly not have the same impact on equity market volatility in India and other Southeast Asian countries to the extent that they have in May to July period this year, because some of these current accounts have been addressed to a certain extent by India, Indonesia and the other countries.

I think those are the variables that would become important now and in January we step into another result season where I would expect some degree of earnings decline come from Indian corporates. So I would think that this consolidation phase that the market has entered into would possibly continue for sometime. I am not really betting for another race to that 6400 which you talked about and I would think that the market will become possibly more attractive with some degree of correction in the near-term.

Q: What would your stock specific approach be right now? In the last 4-5 days we saw some of these banks, the rate sensitives, some of the capital goods names be slightly subdued. What would you buy on a dip?

A: Apart from our usual favourites which are the exporters and the rural and semi-urban consumption plays I think one would be a little bit biased to get somewhat into the private banks. Earlier we were clearly of the opinion that the private banks with a liability franchise who do not have to depend on wholesale deposits would be the winners. Now after this some of the banks with a relatively weaker liability franchise with some wholesale deposits could also come back into focus. That said I would suggest that investors be slightly cautious and go for the better quality names, let us say IndusInd Bank . That could really be the strategy in the medium-term.

Q: When we spoke to you earlier this week you did mention that you would not be very bullish on the PSU banking space. Post the draft norms which have come out with regards to final restructuring or on bad loans, would that change your opinion in any which way for the PSU banking space?

A: Not really. I would think that the restructured loans showing up as bad assets or the whole affair of non-performing loans (NPL) accelerating, we would continue to see that over maybe next 2-3 quarters. So I am not really dipping into the PSU bank space at this point of time. Admittedly, there are some very cheap banks there, but one needs to be reasonably certain about asset quality correction before dipping into that space.

Q: I did not get your take on Trent . That is a big investment being announced by Tesco. Would you grab into that stock now?

A: We do not cover Trent, so I cannot make any specific comment on it. I would think that this trend of MNCs investing either through subsidiaries or joint ventures will accelerate going forward, because many of these subsidiaries have excess cash lying on their balance sheets and in the developed economies that earn very little returns. So it is actually beneficial for them to invest it in some of these emerging market countries, maybe in their own subsidiaries or joint ventures where it earns significantly higher return on equities than in home markets.

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Bold or risky: Experts’ take on RBI policy

The Reserve Bank of India on Wednesday decided to leave key policy rates unchanged, in spite of recent data showing inflation hovering at levels the central bank is uncomfortable with.

During its quarterly monetary-policy review, Governor Raghuram Rajan said left the repo rate and the cash reserve ratio (CRR) unchanged at 7.75 percent and 4 percent respectively.

Repo is the rate at which the central bank lends to banks; CRR is the percentage of deposits banks have to necessarily keep with the central bank as cash.

Also read: RBI keeps repo, CRR unchanged; to act if inflation warrants

The RBI in its policy statement said that inflation had increased mainly due to food prices and even as the high headline number leaves no room for complacency, there was merit in waiting for data after recent indications that food inflation could turn down.

The central bank had to take a nuanced view in the wake of high inflation that has remained consistently in the “uncomfortable” zone despite nearly 15 rate hikes in four years and in the face of record lows in economic growth resulting from the interest-rate policy.

Also read: 5 reasons why RBI chose to keep rates unchanged

Economists and markets were widely expecting a 25 basis points hike in the repo rate.

Experts’ reaction

“The governor did not go by the strict book-ish response,” Arundhati Bhattacharya, Chairman of the country’s largest lender State Bank of India , said. “Kudos to that.”

Vegetable and food prices in the mandi had come off in the last week of November and by mid December, so it was right for the central bank to think December inflation should head lower, she added.

The bank, which has been sitting on large deposits, however, would be in no rush to cut deposit rates for average savers. “It will hurt the depositors if we cut deposit rates on the retail side.”

“It’s a balancing act,” C Rangarajan, Chairman of the Prime Minister’s Economic Advisory Committee and a former RBI governor himself, said, adding that he was also expecting food prices to turn lower in December.

But he pointed out that the RBI governor had also indicated that the central bank will have to tighten policy if food prices do not cool in the near future.

Also read: Expect food inflation to ease going ahead: Rangarajan

“The recent spike in food prices did appear transitory in nature,” Abheek Barua, Chief Economist, HDFC Bank . “It was a nuanced reaction by the RBI to not read much into one reading and make it the basis of a rate hike.”

But not everyone in the market was as impressed. “We’ve had double-digit inflation for about all of four years now. This is a central bank in denial,” said Jahangir Aziz, Chief Economist, JP Morgan India said. He added that the central bank was risking getting into a position where it is compelled to take action too late.

Also read: RBI in denial; will play catch-up to inflation: JPMorgan

Market view

Nirmal Jain, Chairman of brokerage firm IIFL, was more outspoken in support of the move and went so far as saying there was no connection between monetary policy and vegetable prices.

“So, you have been giving a medicine, which is not appropriate for the disease you have. You draw the graph of the recent interest rate hikes and inflation and you will see there has been no correlation,” he said. “As a result, it only had the side effects that we have seen [by way of low growth].”

“Also, when you increase the policy rate, banks that are already saddled with huge non-performing assets, the burden on them also goes up and the sentiment becomes further negative”

“The market was clearly expecting a 25 basis point hike. This [move] will cheer both the bond and equity markets,” Ananth Narayan of Standard Chartered Bank , said.

Shorter-maturity fixed-income instruments would get a boost as markets were expecting a rate hike, Narayan said. Prices of longer-term instruments, however, would also likely rise but may not be able to sustain the rally, added.

To watch Naina Lal Kidwai, President, FICCI comments watch video

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