Category: Economy

The unfortunate incident of a farmer committing suicide in the AAP rally has polarized the debate on the Land Acquisition Act even more, and it has become virtually impossible to get to know the factual details of the act, and the amendment, and learn for yourself whether it is good or bad.

I spent a few hours last week reading the original bill from 2013, and the recent amendment, and there are three main points that are the sticking points as far as I am concerned.

Consent Clause: The existing act has a consent clause which states that 80% of the “affected families” should give their consent to the land acquisition before any land can be acquired by a private company, and 70% for a project under public private partnership.

Notice that this is not 80% of the landowners but 80% of affected families that include the landowners, the tenants, anyone else who depended on the land for their livelihood in the last 3 years, as well as any scheduled tribes or forest dwellers who may lose the right to access the land because of the acquisition.

The new amendment lists out five categories for which it waives off the consent clause, and these five categories are defence, rural infrastructure, affordable housing, industrial corridors, and infrastructure and social infrastructure.

If you look at these five categories, pretty much any project that you can think of can be categorized under this and subsequently you can waive off the consent clause on them.

So, you have an existing situation where you have such a strict clause that not only do you require 80% consent from the landowners, but 80% consent from all affected families, and you have an amendment which for all practical purposes waives off any consent at all.

I think both these situations are really bad. It is not practical to expect 80% approval for any land acquisition specially when you include affected families because just to assess who those affected families are will pose a very real practical and challenging problem. It is not hard to see why land acquisitions have become really difficult in the current situation.

On the other hand, if you remove the consent clause altogether, you give the government wide reaching powers to acquire land from people even when a large percentage of them are unwilling, and I think that is not a fair situation either.

Getting rid of the affected families terminology: The amendment gets rid of the affected families phrase and from what I understand only the landowners will have a say in acquisition. It is very difficult to practically ascertain who the affected families are  and unless someone has any ideas on how this can be practically implemented, I don’t see how you can continue to have this terminology and have a good act.

Impact Assessment: The existing act provides for an impact assessment which means that there would be a committee of people who will evaluate whether the potential benefits of the project outweigh the costs, and if there is un-utilized land at the end of the project it is returned within five years, among other things.

The new amendment removes the impact assessment for the five categories, which means you don’t need an impact assessment at all if you are under one of these five categories. I have presented a very simplified version of the impact assessment because they want to get rid of it altogether which I think is completely unreasonable because if you are going to potentially displace a large number of people the least you owe them is a proper assessment of what it is going to take to rehabilitate them.

In my opinion the existing act cripples action because you just can’t go through the restrictive clauses, but the amendment is over-reaching as well because it will remove all the checks that were present to protect the rights of the people.

There has to be a middle way to do this because it is essential that India finds a way to make this happen. There is no way that the millions of Indians who come into the labor force every year can be absorbed in the agricultural or services sector, so developing manufacturing is a must, and to develop an industrial base, land is an imperative.

The Make in India Concept

I don’t think there are many Indians today who haven’t heard of the Make in India campaign that was launched last September by the Modi government.

The idea behind it is rather simple – increase the share of manufacturing in the GDP, and the reason for that is rather simple as well.

With the exception of oil producing countries, there hasn’t been a single country in the world that has been able to go from developing to developed without having a strong manufacturing base.

This is simply because agriculture can only support a small percentage of population in a developed country and services can only support the better educated ones, so there are millions of people who have to rely on manufacturing jobs to get a better life that an industrialized and developed country promises.

This is obviously a great concept and anyone can see the utility of it, but how does it translate into reality and if you were to evaluate this tangibly – how would you do that?

How do you measure the success of Make in India?

I think the answer to that is fairly straightforward – If five years from now – the share of manufacturing in Indian GDP grows considerably then the campaign would have succeeded in its goal else it would have failed.

I have kept this statement deliberately qualititative because you could say that the Modi government has set up a target of doubling exports to $900 billion by 2020 and if they don’t meet that target then the campaign would have failed, or have any other hard number like that, but realistically, after the last ten years, would falling short of a hard number really be a failure if the manufacturing sector has improved in general?

But how do you know whether the campaign is just a lot of publicity without any real weight behind it before the lapse of five years?

I think you have to look at the GDP numbers and manufacturing PMI index every quarter to see if you can detect any trend and look at the reforms and big ticket investments that take place day to day.

For instance, the currently concluded Hannover Messe fair doesn’t seem to have gone down well because investments for only a few hundred million dollars have been committed as opposed to investments of 1.3 billion dollars when India was the partner country in 2006.

On the other hand, there have been several proposoals and deals from companies like Airbus, Areva, Asus, and Volkswagen that sound promising and will be a very good boost to manufacturing if they come to fruition.

Obviously, the key question here is if they will ever come to fruition, and that hinges on policy changes like the Land Acquisition Bill as well as overcoming the bureacracy and red tape that genereally exists in the Indian landscape.

Will Make in India be successful?

There are a lot of challenges that the current government face in order to make this successful. They don’t have a majority in Rajya Sabha so passing any reforms are difficult, the global economy has picked but it is still not at the pre-recession levels, and in general, it is now believed that it won’t be as easy for a developing country to create a manufacturing base as it has been in the past due to a number of technological advancements that allow roboitics to replace people on the shop floor.

That said, I have no doubt in my mind that this endeavor will be successful because there is a lot of political will to make things happen and this can be seen with the number of small steps that are taken almost every day.

Where the previous government was mired in inertia and scams, the current government has been action oriented and energetic.

Just the absence of self goals like going after Vodafone or Nokia with huge tax bills will go a long way in promoting investment in India.

I don’t think I’m alone in my optimism and since we started consulting people I’ve seen a general change in the mental outlooks of almost everyone I speak and this is best expemplified in the willingness to accept a much higher return on equities over a long period of time. People are in general much more optimistic on what the future holds for them, and I agree with that optimism.

The way things are going, the next ten years are going to be a lot better than the last ten years.

I’ve heard interesting tidbits about Isreal’s desalination program over the years, but never realized how big it was, or how successful it was until recently when I came across this article which started with this impressive line:

“After experiencing its driest winter on record, Israel is responding as never before — by doing nothing.”

India and Isreal have vastly different geographies but I was still curious to see if there were any lessons for India from this program specially since California has tied up with an Israeli company to build a desalination plant which will be operational in 2016 and provide 50 million gallons of potable water in a day.

Fundamentally, water desalination is the process of taking sea water and purifying it to make it potable. One method to do this and used by Israeli companies is called “Seawater Reverse Osmosis“. In this process, seawater is run through pre-filtration pipes to clean it prior to running it through another filtration process that removes all of the salt.  About half the water becomes potable, but the remaining half retains higher concentration of salts and minerals, and that is then returned to the sea.

This is an expensive process, and it is estimated that desalinized water costs $0.65 per cubic meter while water from fresh water sources costs about $0.15 per cubic meter.  This process also requires electricity of course, and the usual sources of generating electricity are hydro, coal or natural gas.

Then there is the impact to the environment, although I couldn’t find any reports that conclusively said the effects were bad for the environment, it probably hasn’t been that long since this process has been in use to provide any conclusive evidence one way or another.

Interestingly enough, desalination is not only done to sea water but also to brackish water, which is the kind of water that’s more saline than fresh water, but less so than regular sea water, which immediately reminded me of how water used to be in Noida several years ago. This kind of water is usually found in estuaries where sea water and fresh water meets.  Israel has got several smaller plants that treat  brackish water in addition to its larger plants that treat seawater.

While desalination is the attention grabbing action, there are other things that they have done which are less glamorous but also quite effective. They have what is called the “National Water Carrier of Israel” which is a system of canals, pipes and reservoirs that transfers fresh water from the Sea of Galilee in the north to the central and southern regions of the country.

They also have a highly efficient system of recycling water, and using treated sewage water for irrigation purposes which is done very efficiently there, and in 2009 the UN named Israel the world leader in water recycling. 

Going through all this information about Israel’s program shows you how effective their multi-pronged effort has been and they have not only made progress in sea-water desalination which grabs headlines but other relatively cheaper alternatives too like treating brackish water or building a network of canals which might be easier for other countries to follow at first.

I was delighted to read that the government has already moved to allow 100% FDI in the defense sector, and I hope the measure passes, and doesn’t get stalled like multi brand FDI.

Currently, India allows 26% FDI in defense but the policy is so restrictive and unfriendly to investors that hardly any FDI has been received in the sector at all.

A few years ago India was reported to become the biggest arms importer in the world, and that trend has continued since then, and India was still estimated to be the biggest arms importer in 2013.  In fact it is estimated that India imported 14% of the global arms between 2009 – 2013 and among the top ten countries that import weapons, India’s domestic production is the second lowest trailing only to Saudi Arabia. Last year India became the top importer of arms from the US estimated to be $1.9 billion, and the total defense imports were estimated at $5.9 billion.

Given India’s geography, and relations with neighbors, there is no chance that the need and spending on defense reduces any time in the near future. India’s defense budget was hiked by 10% last year and Rs. 2,24,000 crores are expected to be spent in defense services this financial year, and World Bank estimates put India’s military spending at 2.4% to the GDP. 

All of this simply points to the fact that India has traditionally, and will continue to spend a lot on defense, and a lot of that money goes abroad since the country simply doesn’t have the knowhow to produce most of this arms and equipment domestically.

It is a no brainer to create conditions that allow India to procure more of its weapons domestically instead of sourcing it internationally, as not only does it save on the imports bill it gives a much needed boost to manufacturing as well, which will of course spur employment and boost the economy. India has opened up to foreign companies in several fields so far and hasn’t experienced any downside in any of those fields, and if you look at the consumer goods in your own house, you will see that the normal customer has benefitted from the presence of international companies in India tremendously.

When the multi brand FDI proposal was introduced there was a lot of discussion about what it would mean for Indian traders and customers, and not enough on whether it was attractive enough for foreign companies to even contemplate investing in that area. This proposal might be similar in that there are so many safeguards, and conditions built in that the deal is no longer attractive to an investor and that’s something to be wary of or at least keep in mind so that further amendments can be made to make it attractive and tenable for both parties.

I read the AAP Lok Sabha Manifesto today, and was rather disappointed with it. I think it is only fair that I mention my bias before I get to my opinion on the AAP Manifesto.

I started out as a supporter of AAP, and considered them the best bad option we had, but I have now changed my position, and do not believe that they present a viable alternative to the other political parties because of their performance in Delhi.

That being said, here are my thoughts specifically on the “Economy and Ecology” section of the AAP Manifesto.

AAP has listed down the following goals under their Economy and Ecology section.

• Facilitating Robust Economic Growth with Holistic Well Being
• Creating Decent Jobs and Gainful Employment for our Youth
• Simplify Rules, Create Accountable Institutions, Curb Black Money
• Promoting Honest Business, Unleashing India’s Entrepreneurial Energy
• Empowering Citizens, Particularly Poor and Vulnerable
• Reinvigorating the Rural Economy
• Improving Farmers’ Livelihoods
• Environment and Natural Resources Policy
• No Contractualization of Jobs
• Social Security for the Unorganized Sector
• Protecting the Common Man from Rising Prices

I think most people would agree that these are all worthy goals, except perhaps the contract labor ones, but the goals themselves are not the problem, the problem is how these goals will be achieved, and there AAP has not presented any concrete ideas on what they will do to achieve any of their goals.

For example, here are the measures they have suggested to fight rising prices.

• Fight corruption and crony capitalism.
• Arrest black marketers, raid their godowns and release food grains in the open market.
• Bring a law to regulate the fee charged by schools.
• Increase the number of government hospitals and substantially improve the quality of services.
• End corruption in the public distribution system with the involvement of gram sabhas.
• Instead of direct cash transfer, transfer materials to families.
• Include dal and oil in ration materials.

It seems to me that AAP’s answer to every question is reduce corruption, and everything else will fall into place, but their short rule over Delhi didn’t inspire confidence this is in fact the case.

When I supported AAP earlier, I didn’t agree with several of their policies, but I did believe that reducing corruption would outweigh everything else. However, their short stay in Delhi convinced me otherwise. A case in point were their policies on water supply in Delhi.

They had listed out a number of items to deal with the water supply issues in Delhi like tackling the tanker mafia,  restructuring Delhi Jal Board, installing bulk meters, and giving out 700 liters of free water etc.

In the end however, they only handed out the free water, and did nothing else. Granted, they didn’t have enough time to implement anything else, but at least in my mind it would have been better if they hadn’t implemented the populist and economically unsound idea of handing out free water as well.

 

And more importantly, if they come to power in center, or become part of the coalition, they will have to deal with a number of partners much like they did in Delhi, and they didn’t anything that inspires confidence that they will be able to work with the same parties at the center.

Writing a post on the Congress Manifesto for the Lok Sabha elections seems like an utter waste of time because it’s quite unlikely that they come to power, and even if they did, past record shows that they aren’t likely to implement any of what they say anyway.

Much of what I read seemed to be a continuation of the policies discussed earlier with promises for faster implementation, but it would take a foolishly optimistic person to believe that the time frames discussed can ever be reality.

One thing that did catch my eye was the promise to spend a trillion dollars on infrastructure over the next decade, and I was interested to see how they arrived at that number, and if it was anything more than a sound bite.

In order to do so, I first started with the comparison of how much money the government currently spends on infrastructure.

I found that Rs. 1,81,634 crores was allocated to infrastructure in the 2014-15 budget, and that translates to about $35 billion according to the current exchange rate. So, just based on the what the government spends on infrastructure this target seems really ambitious and been inserted there for a sound bite instead of really ever having any real hopes of being met.

However, the Twelfth Five Year plan which runs for the years 2012 – 17 also gives  an infrastructure spending target which is the same – a trillion dollars in 5 years. The key difference is that the five year plan says that the share of the private sector should be 48% in the total infrastructure spending, so in that sense I feel that the origin of the trillion dollar in a decade number must really be the five year plan, and while I think it is improbable that the Congress or any other government achieves this, the target is not a complete sound bite.

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

It was again a day of monetary policy announcement and with CPI inflation rising to 11.24% and WPI inflation rising to 7.52%, most of the analysts on the dalal street had already factored in at least 25 basis points or 0.25% rate hike to be a done deal.

But, contrary to market expectations, Dr. Raghuram Rajan today surprised most of us and decided not to hike the policy rates, including the Repo Rate, Marginal Standing Facility (MSF) Rate and the Cash Reserve Ratio (CRR).

He left the Repo Rate unchanged at 7.75% and the MSF Rate at 8.75% and also assured the markets about its commitment to keep the difference between these two rates at 100 basis points or 1%. It was really a pleasant surprise and gave both the equity markets as well as the debt market a much needed relief.

Why he did not hike the rates despite high inflation?

Dr. Rajan has a view that the recent unusual spike in inflation, due to unseasonal upturn in vegetable prices, is temporary in nature and the prices have already started declining in some of the metro cities, as swiftly as they had increased.

Also, as most analysts believe, a rate hike has not been a successful tool so far to anchor inflationary trends, Dr. Rajan wants to wait for more macroeconomic data to pour in before he takes his call next month.

This is what the RBI did and had to say today:

Repo Rate left unchanged at 7.75% – RBI has left the Repo Rate unchanged at 7.75%. This is the rate at which the commercial banks borrow money from the RBI for a short period of time.

Though it has been left unchanged for now, the governor has made it very clear that the central bank will not stop itself in hiking these rates quickly if the inflationary situation doesn’t improve as expected.

Reverse Repo Rate unchanged at 6.75% – As the Reverse Repo Rate is linked to the Repo Rate, it has also remained unchanged at 6.75%. This is the rate at which the banks deposit their excess money with the RBI for a short period of time.

MSF Rate unchanged at 8.75% – Marginal Standing Facility (MSF) Rate is also linked to the Repo Rate and though people were speculating that it will also be hiked by 0.25% along with the Repo Rate, the RBI has left this rate also untouched at 8.75%. This is the rate which the RBI charges to the scheduled commercial banks for the money borrowed for their overnight liquidity requirements.

Cash Reserve Ratio (CRR) unchanged at 4% – Along expected lines as always, RBI has left the CRR unchanged at 4%. After Pratip Chaudhuri, the former Chairman of SBI, now nobody asks the RBI to cut CRR from its current levels.

Note: If you want to know more about RBI’s monetary policy tools & their intended impact in detail, please visit this post – RBI’s Monetary Policy – Tools & Expected Outcomes

Impact of the Monetary Policy

Impact on stock markets – After ending in the red for six straight sessions, the stock markets today rejoiced the RBI’s decision and called it a pre-Christmas surprise gift by Dr. Rajan. Markets opened on a positive note and had a sharp spike immediately after the RBI announcement at around 11 a.m. BSE Sensex closed up 247.72 points (or 1.20%) at 20,860 and NSE Nifty closed up 78.10 points (or 1.27%) at 6,217.

Impact on debt markets – 10-year benchmark 8.83% G-Sec yield closed at 8.78%, 13 basis points lower than Tuesday’s close of 8.91%. It was again a good news for the debt fund investors as most of these schemes ended the day on a positive note.

Impact on currency – Despite a strong upmove in the markets, the rupee declined 8 paise to close at 62.09 against yesterday’s close of 62.01. Market participants were cautious to deal in the currencies markets ahead of the US FOMC meeting today.

So, after RBI’s policy decisions and market closing, this is where we stand as of today:

Though we are still facing higher and higher growth in consumer inflation in the last few months, today’s so-called ‘brave’ decision by Dr. Rajan has brought much required welcome relief for the markets. What I have been able to make out of Dr. Rajan’s policy decisions and the RBI’s commentary is that they want to give India’s economic growth a chance to recover and probably one more opportunity to the government also to take measures to curb speculative inflation.

As I finish writing this post, the US Federal Reserve has decided to start tapering quantitative easing (QE) by cutting down its bond purchases to $75 billion a month as compared to $85 billion earlier. It would be the first such step towards unwinding the stimulus that has been in place for quite a long time now.

After the Indian markets rejoiced on its central bank’s Rate hike decision, now it is the turn of the US markets to rejoice on its central bank’s QE3 tapering decision. Dow is already up 237 points in today’s trade and we should also have a rally in the Indian markets tomorrow.

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

It is once again a bad month from India’s macroeconomic health point of view. On the one hand, Index of Industrial Production (IIP) for the month of October 2013 has contracted 1.8% against analysts’ expectations of a contraction of 1.2% and on the other hand, inflation based on the consumer price index (CPI) has again jumped to a nine-month high of 11.24%.

Vegetable prices, led by onions and tomatoes, rose 61.6% in November from their prices a year earlier and have been the biggest contributor to a sharp increase in inflation.

Both these figures carry a lot of disappointment for the RBI, the government, manufacturers, importers, traders, investors, people who are already finding it difficult to sustain their lifestyle due to high inflation and many others here is India.

Inflation based on the wholesale price index (WPI) is up for announcement on Monday and market participants don’t have high hopes out of this number as well.

India’s export-import data for November 2013 also got announced yesterday by the Department of Commerce. As expected, India’s trade deficit has been consistently under control to remain at $9.22 billion for the month after the Diwali season. Here is the summary of trade data including gold and oil imports:

(Note: Figures are in US $ billion)

Trade Deficit in November came out to be $9.22 billion, lower than last month’s $10.56 billion, and much lower than last year’s figure of $17.20 billion. Trade deficit figure of less than $10 billion is psychologically satisfactory and makes analysts confident about CAD to remain below its targeted levels.

Exports – After a growth in the last few months due to various reasons, including a mild recovery in the U.S. or European countries, weak Indian currency and the government’s incentives for exporters, India’s export numbers in November contracted somewhat to settle at $24.61 billion.

Exports in November have seen a fall of 9.75% month-on-month as against last month’s $27.27 billion and a jump of 5.85% year-on-year in comparison to last year’s exports of $23.25 billion.

Imports – Imports in November came out to be $33.83 billion as against last month’s imports of $37.83 billion, a fall of 10.57% and last year’s imports of $40.45 billion, a decline of 16.37%. People who wanted to see a lower trade deficit or lower current account deficit (CAD) cheered after seeing the positive shape of our import numbers. But, sadly their joy would be short-lived with today’s bad IIP and inflation numbers.

Gold Imports in November were at $1.05 billion as compared to last month’s $1.37 billion, a decline of 23.36% and last year’s $5.33 billion, again a steep decline of 80.3%.

Oil Imports in November came out at $12.96 billion as compared to last month’s $15.22 billion, a fall of 14.85% and last year’s $13.11 billion, a dip of 1.14%.

Though trade deficit has been satisfactory, inflation, growth and fiscal deficit pose a big challenge for both the RBI and the government. High CPI inflation will put a lot of pressure on the RBI to raise the Repo Rate again in its upcoming monetary policy on December 18th. But, will another rate hike be able to control vegetable prices and overall inflation to move up even higher? I really doubt.

With an expected jump in bond yields tomorrow, tax-free bond investors can now expect even higher rates with the upcoming issues. But, for the equity investors, it has been a short-lived relief rally again which we saw after the state election results. A deep fall from here might bring an opportunity for the long-term investors.

I also want to question the government – what it was doing when the prices were going up due to its so called ‘hoarding’ by a few traders? Did we see/hear any kind of action being taken against those hoarders? I did not. So, its consequences are in front of us. It would be a big trouble for the policymakers in the near term. What is up next – more trouble for the government, the consumers and the investors of India?

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

After a brief rally in its value, Indian rupee has been falling again. Concerns of higher fiscal deficit, higher current account deficit and rising inflation have again started putting enormous pressure on the rupee, due to which it fell to 63.44 in today’s trade, before closing at 63.24 against the dollar.

Falling rupee makes our imports costlier and that ways we will again have a higher inflation, which in turn will result in higher interest rates. Yield on India’s benchmark 10-year govt bonds once again crossed the psychological mark of 9% today before closing at 8.95%. It indicates that we are in a difficult situation as far as cost of capital is concerned and it is going to put more pressure on corporates’ profitability figures.

For quite a long time now, India has been struggling to contain its trade deficit and current account deficit (CAD). Department of Commerce today released the trade deficit data for the month of October at $10.56 billion. While import figure stood at $37.83 billion, India exported goods & services worth $27.27 billion during last month.

Though the current trade deficit data is not scary, it is not great either. Gold imports have been tied at artificially lower levels by imposing steeply high import duties. Gold prices, which have been ruling significantly lower in the international markets at $1282/oz, are ruling at around Rs. 30,000 per 10 gram here in India. So, this way, current buyers are paying higher prices for gold just to benefit those people who earlier bought it cheaper and the government by paying higher taxes.

Moreover, infrastructure & capital goods sector are also bleeding here in India. So, our imports of heavy machineries & other capital goods are also in a state of crisis. That also must have contributed to lower imports.

(Note: Figures are in US $ billion)

Gold Imports in October were at $1.37 billion as compared to last month’s $0.8 billion and last year’s $6.78 billion. The lower this number remains, the better it is for the Indian economy. But, with the marriage season starting, it is expected to remain higher this month also.

Oil Imports in October came out at $15.22 billion as compared to last month’s $13.2 billion, an increase of 15.3% and last year’s $14.96 billion, a jump of 1.7%. Thanks to lower international crude prices and rupee appreciation in October, this figure came out lower. Slower economic activity should keep our oil imports in check in the coming few months also.

Exports in October stood at $27.27 billion as against last month’s exports of $27.68 billion, a decline of 1.5% and last year’s exports of $24.03 billion, a rise of 13.5%. Thanks to a steep depreciation in rupee, our exports have been rising for the past four months. With continued pressure on rupee, it is expected to see this momentum also to continue in the coming months.

India has set an export target of $325 billion for the current financial year. I think we should not rely only on services exports for this momentum to continue and diversify our exports by focusing on manufacturing & exporting quality products.

Imports in October stood at $37.83 billion as against last month’s imports of $34.44 billion, a jump of 9.8% and last year’s imports of $44.24 billion, a decline of 14.5%. This is a concern area for the Indian economy. We are becoming too dependent on products manufactured outside our country that it is becoming extremely difficult to contain our imports without some curbs being imposed.

Trade Deficit in October came out to be $10.56 billion, higher than last month’s $6.76 billion, but much lower than last year’s figure of $20.21 billion.

With import curbs working in our favour and exports keeping the momentum, India’s biggest worry of high current account deficit is finally coming under control. Now, the government should target keeping inflation and fiscal deficit under check. These two factors are potentially very dangerous to disturb all the financial calculations that the financial ministry has done for its current financial year.

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Infosys did it a few days back, now it was the turn of Dr. Raghuram Rajan. I mean both had made people to have low expectations and then delivered somewhat better for markets to cheer the outcomes on both the occasions. In his second review of monetary policy, the Reserve Bank of India Governor, Dr. Raghuram Rajan, did not do anything unexpected to annoy the markets.

In fact, markets cheered the fact that most of his policy related decisions were along expected lines and there were a few announcements with which he intends to further streamline India’s financial sector.

Before we take a look at what he has in store for us, let us first check what he has done in the current policy itself.

0.25% hike in the Repo Rate to 7.75% – RBI has increased the Repo Rate by 25 basis points from 7.50% to 7.75%. This is the rate at which the commercial banks borrow money from the RBI for a short period of time. RBI has hiked this rate second time in a row to discourage banks to borrow and further lend money in the market, as the inflation has again started moving up with a steep fall in the value of rupee due to fears of QE3 tapering by the US Federal Reserve.

Though I had a minor hope from him to leave the Repo Rate unchanged, but then it was too much to ask for in a highly inflationary environment.

0.25% hike in the Reverse Repo Rate to 6.75% – As always, the Reverse Repo Rate also got increased in line with the Repo Rate by 25 basis points from 6.50% to 6.75%. This is the rate at which the banks deposit their excess money with the RBI for a short period of time.

0.25% reduction in the MSF Rate to 8.75% – RBI has cut the Marginal Standing Facility (MSF) Rate by 25 basis points from 9% to 8.75%. This is the rate which the RBI charges to the scheduled commercial banks for the money borrowed for their overnight liquidity requirements.

After this cut, Dr. Rajan has restored the corridor between the Repo Rate and the MSF Rate back to its normal level of 1%.

No change in Cash Reserve Ratio (CRR) – Along expected lines, RBI left the CRR unchanged at 4%. RBI felt that there was no requirement for such a change and market participants feel it was again the right decision.

Doubled bank’s borrowing limit to 0.50% under longer tenor repo – Dr. Rajan also doubled the borrowing limit of banks against their cash positions or NDTL (Net Demand and Time Liabilities) with immediate effect from 0.25% earlier to 0.50%, for both 7-day and 14-day repos, in order to increase the required liquidity in the system.

As widely expected, the central bank also reduced India’s GDP growth forecast for the current fiscal to 5% from 5.50% it projected earlier.

Note: If you want to know more about RBI’s monetary policy tools & their intended impact in detail, please visit this post – RBI’s Monetary Policy – Tools & Expected Outcomes

Impact of the Monetary Policy

There were no surprises in the monetary policy this time as the policy actions taken by the RBI were widely expected. Most people had expected Dr. Rajan to hike Repo Rate, reduce MSF Rate & leave the CRR unchanged and he did exactly that. So, zero negative surprises actually turned it into some positive surprises for the investors.

Impact on stock markets – Around 11 a.m. in the morning, markets were trading marginally in the red. As the policy announcements were made, markets jumped initially, then came down a little, but then moved steadily up as there were no incremental negative moves by the RBI. BSE Sensex closed up 358.73 points (or 1.74%) at 20,929 and NSE Nifty closed up 119.80 points (or 1.96%) at 6,221.

Impact on debt markets – 10-year benchmark 7.16% G-Sec yield closed at 8.54%, 12 basis points lower than Monday’s close of 8.66%. It was a good news for the debt fund investors as most of these schemes ended the day on a positive note.

Impact on currency – Strong buying in the stock market as well as the debt market boosted the value of Indian rupee and it closed at 61.31 against yesterday’s close of 61.52, a rise of 21 paise in the value of Indian currency.

So, after RBI’s policy decisions and market closing, this is where we stand as of today:

New Initiatives in the Monetary Policy

1. Introduction of inflation-indexed NSS – RBI plans to introduce inflation-indexed National Saving Securities (NSS) for the retail investors in November or December after consultation with the government. Nobody knows its structure as of now but it will definitely open a new investment avenue for us.

2. Introduction of 10-year IRFs – RBI also plans to introduce cash-settled 10-year interest rate futures (IRFs) from December end. The guidelines for the same would be issued by the RBI by mid-November. I think, if introduced with the correct framework, it would be one of the most useful instruments for the market participants.

3. “Near-National Treatment” to foreign banks – RBI announced today that foreign banks, which set up wholly-owned subsidiaries here in India, will get some special treatments, closer to what nationalised banks get, including the freedom to increase their branches here. I think some serious foreign banks would take this move as a very positive step by the RBI and it could result in some M&A activity also in the banking space.

4. Interest on bank deposits at shorter intervals – RBI has given the banks an option to pay interest on savings bank deposits and term deposits at intervals shorter than quarterly intervals. Though banks are reluctant to do that, but, if implemented, it would raise returns on our bank deposits.

5. Charges on actual basis for SMS Alerts – RBI has asked banks to charge for SMS Alerts on actual basis. So, if your number of banking transactions is quite low, it is a good news for you, given your bank follows this RBI direction.

During Dr. Subbarao’s tenure as the RBI Chairman, the Finance Ministry was desperate to bring back growth to the government’s targeted levels of 6.1% to 6.7%. It was leaving no scope to make Dr. Subbarao reduce interest rates even when he was not fully convinced about the government’s seriousness to take policy actions.

I think Dr. Rajan has been taking the same policy actions what Dr. Subbarao would have taken. But, I think increasing the Repo Rate may not be a great idea to bring down food inflation or to make US Federal Reserve to postpone its QE3 tapering indefinitely. Higher interest rates at this stage may only worsen India’s growth prospects with no or minimal impact on inflation which is rooted more in supply-side constraints.

Again, it is the government which is required to manage its finances in an efficient manner and take some policy initiatives for us to have lower inflationary numbers, lower fiscal deficit and to augment India’s economic growth. But, I think it is too late for this government to take such bold policy initiatives. What do you think?