Though short-term noise in the market doesn't disturb Sudhakar Shanbhag, chief investment officer at Kotak Mahindra Old Mutual Life Insurance, he is fully aware that it is testing times for the market where it's difficult to see anything beyond 3 months. Talking to Businessworld, he says in the next 3-6 months, Indian market will remain volatile with Sensex moving in a range following the tug of war between global risk on and risk off and domestic policy. In such a scenario, global trend will dictate the trend in the market (Sensex) which is close to its bottom purely in terms of valuation. More than timing, he feels the focus should be on the time and therefore is confident it's a good time to increase equity allocation. He feels that more than liquidity rally, the Indian market needs a structural rally which will come only when interest rates fall and therefore he is disappointed with the recent RBI policy that kept key rates unchanged. Excerpts from the conversationWas the RBI credit policy a disappointment? And why?As a market participant it was a disappointment since focusing on growth is important at this stage. Post the Q4 FY12 GDP and April IIP data release of 5.30 per cent and 0.10 per cent, respectively, as also the fact that core inflation numbers were less than 5 per cent for the past few months; the market had built in expectations of a repo rate and/or a CRR cut, hoping that RBI would change its focus on growth from inflation. In fact, over the last couple of weeks, the debate was on the quantum and combinations of cut rather than the probability and the index gains and rally in GOI bonds was reflecting the same. The RBI while continuing to focus on inflation has chosen to preserve some of the monetary action possible for adverse developments globally and in line with the premise for frontloading rate cut in April is expecting to see movement on the fiscal side as well as resolutions on the supply bottlenecks. Why do you think the current scenario is great for investing? Shouldn't one wait and watch before venturing into the market?Long-term investors should focus on the time rather than timing the market. Having said that, let's look at the market from a valuation perspective and we find that based on moderated earnings growth expectations for FY13 (expected growth is for FY13 is around 10 per cent on the back of last few months of downgrade cycle, the market is about 13 times FY13 earnings. This valuation is lower than the long term average (it's around 15 times) and is close to all time lows of about 10 times. The choice can be to increase equity allocation at this stage or hope and wait for a correction to 10 times to activate an asset allocation call. The belief is that the current global and domestic factors which are largely pessimistic would turn around and get better over time. And as investors in a risky asset class one should be ready to absorb any event based value reduction and actually take advantage to increase allocation. What is your view on the overall financial market? What do you think of the crisis in Europe (especially Greece and Spain) as well as US and why?From a global perspective, growth is a challenge and most countries are expanding their balance sheet and infusing liquidity with a hope that growth would revive on the back of this support, before they can start moderating liquidity measures. So currently the financial markets are about LTROs, QE3s and soft landings being the flavour. The risk of a contagion is far higher from the Euro Zone since the sovereign debt defaults and the impact it can have on banks which hold these debts is unimaginable. On a relative basis, US banks post the crisis period capitalization are in a better shape and the probability of growth is also better. What is your take on the Indian equity market for the next three to six months? What are your concerns for the Indian equity market?Having discussed the positive from the valuation perspective with moderate earning expectation in a pessimistic backdrop, the challenges from domestic perspective are largely linked to the revival of investment demand supported through policy action on fiscal and supply side which will also lead to lower interest rate environment to support growth. From a global perspective we will have to go through a phase of risk on and risk off since the challenges faced are being currently resolved through postponement measures. Hence from a three to six month perspective, we will see a tug of war between global risk on, risk off and domestic policy action, leading to volatile or range bound market. In current market where will you advice investors to invest? (Any short-term strategy). Don't you think it's better to be sector and market-cap agnostic in this market or stick to the large-cap stocks. What's your view? Assuming we are discussing strategies only in the equity allocation part, it has to be a combination of stock selection, sectoral views and market cap mix. On a relative basis since the price to book ratio between large and mid cap is in the neutral expectation zone, one can be marginally overweight on mid caps. From a sectoral perspective, due to the expected volatility one can avoid taking aggressive calls on sectoral deviations. Having said that, a combination of stock selection within the sector call would decide the fate of the strategy. Above all these, the risk taking ability of the portfolio being managed will also influence the strategy.At Kotak Mahindra Old Mutual Life Insurance what has been your current strategy in investing in equities? How much of an inflow are you receiving in a day? Of this, how much are you investing in equities? If you are investing in the equity market which are the sectors that you are purchasing stocks and which ones you are avoiding?At Kotak Life Insurance, in our equity schemes we do not believe in taking cash calls since the mandate is for managing equity. With a moderate risk and process oriented approach we actively take decisions on stock selection, sectoral calls and market cap mix. From a ULIP perspective the selection of asset class is primarily made by the policyholder while selecting the fund option. First quarter of a financial year is relatively muted in terms of business for the insurance industry with the pace picking up and peaking in the last quarter. About 50 per cent of the ULIP portfolio is in equity based on policyholders' selection of funds.We are overweight on the BFSI and Outsourcing theme. Within BFSI we are overweight private sector banks. Within Outsourcing theme we are overweight pharma and underweight IT. In Global Commodities theme we are underweight metals, mining/minerals and Oil and Gas with the only overweight being in fertilizers. Infrastructure as a theme we are underweight but within Infrastructure we are marginally overweight on construction while remaining underweight on capital goods / engineering and utilities. For the domestic consumption theme we are close to neutral weight with FMCG being overweight and Auto being underweight.On the fixed income side, where are you investing? What is your take on the 10-year G-Sec yields and why?From a debt market perspective, the overhang of supply and probable slippages in the fiscal deficit numbers are in consideration as also growth moderation which has impacted long-term interest rates. The comfort offered by RBI on the liquidity front in terms of OMOs should help provide a cap on yields. The yield curve is more or less flat with overnight and 1 year government securities (G-Sec) at about 8 per cent and 10-year G-Sec at 8.10 per cent levels. Based on the current dynamics the 10-year G-Sec is expected to be in a range of 8-8.20 per cent .Traditional or the Non Unit Linked portfolios have a need for long term assets based on liability profiles and hence at current rates we are investing long term for this portfolio. In the ULIP portfolio as well we have increased our allocation to G-Sec relative to corporate bonds and money market instruments and are higher in duration to what we were a couple of months back. For traditional portfolio, the pattern of investment is regulated, while for our ULIP we are currently at 40 per cent invested in G-Sec, 50 per cent in corporate bonds and 10 per cent in money market instruments, and the same was about 30 per cent, 55 per cent and 15 per cent, respectively a couple months back.What is your take on the 1 year, 2 years, 3 years, 5 years and 10-years yields in corporate bonds? Will you be a buyer in corporate bonds and what would be the tenure? Do you prefer a corporate bond over a G-Sec and why? Corporate bonds spreads are all about credit risk and maturity premium. If we compare the annualised G-Sec yields for the given tenures and compare the spreads available on corporate bonds, the 1-5 year segment looks attractive with a good carry benefit. The credit deposit ratios of banks suggest that deposit rates may not come down in a hurry. Also, system liquidity would keep short term interest rates elevated. Allocation between G-Sec and corporate bonds is not only a function of spreads but also the probability of movement in interest rates and impact on both the categories. Based on our current view we have increased allocation to G-Sec compared to corporate bonds. Where are you investing your money in this market? Which asset class would you prefer in the current market environment and why?Personally I am a strong believer is asset allocation based on risk appetite and I practice what I preach. I have a predefined allocation between equity / risky assets (these includes equity, gold, real estate funds and even PE funds) and fixed income. This allocation is reviewed annually and is rebalanced quarterly or if there is a more that 5% deviation in the allocation percentages.
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Under attack for not reducing interest rates, Reserve Bank Governor D Subbarao said on Tuesday inflation at current levels is unacceptable and monetary tightening is required to ensure sustainable growth.The central bank Governor also said the Indian government must reduce spending and not just raise taxes for fiscal consolidation, the Reserve Bank of India's Governor Duvvuri Subbarao said on Tuesday, a day after the central bank kept interest rates steady.He said raising taxes was not the same as reducing the fiscal deficit and added it was important to look at the quality of fiscal consolidation.The government failed to contain its fiscal deficit in the last financial year that ended in March and economists expect it to overshoot the target of 5.1 percent of GDP this year also.On Monday, the RBI left policy interest rates and cash reserve minimums for banks unchanged, disappointing investors and defying calls from government officials and companies for looser monetary policy, putting the burden on the government to bolster sagging growth.Irked by the policy decision, Commerce and Industry Minister Anand Sharma had said he would take up the matter with the Finance Minister and the RBI Governor.In May, the wholesale price index (WPI) accelerated to 7.55 per cent from a year-earlier, leaving less room for monetary easing. Discounting fears that the country is heading to a 1991-like condition, when the government had to pawn the sovereign in offshore banks, the Governor said, "we are not at a 1991-like implosion situation in 2012 (and that) our growth story is still credible but not inevitable. We need to work hard."On the sharp fall in crude and other commodity prices, he said this has been undone by the sharper decline of the rupee.
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Dhawal Dalal, executive vice-president and head, fixed Income at DSP BlackRock Investment Managers, was sitting on 50 per cent on cash in its government securities (G-Sec) portfolio ahead of the monetary policy. “We were underweight and were lighter on our G-Sec assets", says Dalal. Talking to Businessworld, he says in the current market situation, one can't take a view beyond 1-2 months. That is why he has been investing in papers with 2-5 years maturity which can capture a price appreciation when interest rates decline and at the same time mitigate the risk of widening of credit spreads. He feels it is worrisome when downgrades are more than upgrades and one has to be very cautious about picking up the right paper. Concerned over the health of banks, he has also been searching for alternatives for certificate of deposits (CDs) and has been investing in commercial papers (CPs). Meanwhile, based on supply-demand dynamics and near-term pressure on inflation, he believes that G-Sec bond yields are likely to remain higher in the near-term – and go up to 8.40 per cent – before trending down in the second-half of the year. Excerpts from the conversation:Most of the market was hoping Reserve Bank of India would cut interest rates. Was no rate cut a disappointment and why?Surprisingly, this time, there was almost unanimity on no rate cut as the Reserve Bank of India (RBI) had clearly articulated the criteria for a rate cut in their June credit policy. Also, in the run-up to the policy in July, they were quite vocal about risks from inflation and need to contain fiscal deficit. Based on that, a majority of market participants expected the RBI to keep interest rates unchanged in their July policy. At the same time, there was a section of analysts who thought the RBI may participate in the coordinated action by various central banks which have reduced interest rates in their respective economies and therefore were expecting an interest rate cut in India as well. With no rate cuts do you see market still struggling for liquidity? When do you think the RBI will start cutting rates and why?Systemic liquidity is likely to improve gradually from here as declining credit off-take, government spending and likelihood of open market operation (OMO) bond purchases starting second-half of the year may generally contribute to improvement in the systemic liquidity. At the same time, market participants are cognizant of the fact that systemic liquidity could be adversely affected if there is a sudden FII outflow in case India’s sovereign credit rating is downgraded. Given, the RBI’s own projection of inflation this year and the prospects of suitable government steps to contain fiscal deficit, we believe that the RBI could look to reduce interest rates in the last quarter of 2012. Are these testing times for the Indian economy and market and why? When do you think we can see recovery?If one looks in the past, Indian economy has been able to cope with higher inflationary pressures so long as it was growing above trend-line. Same was the case for higher fiscal deficit. In the current scenario, our economy is facing a series of challenges from both external front as well internal front. These challenges have culminated in a dramatic slowdown of our economic growth. Higher commodity prices, weak currency and severe pressure on fiscal deficit has aggravated the situation. These market conditions are similar to what economists describe as stagflation (stagnant growth accompanied by higher inflation). Economists believe that stagflation-like conditions can be dealt with a combination of effective economic policies to promote growth, which is the government’s prerogative, and an environment of easy liquidity, which is the RBI’s prerogative. We believe that the government is poised to take suitable actions to spur economic growth. At the same time, the RBI is ready to reciprocate. Therefore, we remain cautiously optimistic on the prospects of economic recovery.What is your take on the recent cut-off of 10Y G-sec yield of 8.15 per cent? Where do you see the yields in the next 3 months which has already surged to 8.24 per cent?Indian investors tend to pay a premium for the newly auctioned benchmark 10-year government bonds. The premium ranges from 10 to 15 basis points. This premium tends to evaporate as more and more benchmark 10-year bonds are auctioned by the government and eventually, the bond may trade at similar yield to the old 10-year benchmark government bond. We expect the newly auctioned 10-year government bond yield to trade at a premium for a while. At the same time, looking at the supply-demand dynamics, future trajectory of inflation, the RBI’s bias and external factors give us an impression that the benchmark 10-year government bond yield is likely to trade in a range of 8.30-8.40 per cent in the near-term.Do you think it is good time to buy government bonds as further demand for government bonds will help in making some capital gains?In India, government bonds are more likely to react to supply-demand dynamics and the RBI’s bias on interest rates. In the current scenario, the Reserve Bank of India is pretty much done with rate hikes that started in early 2010. However, supply of government bonds is likely to remain on a higher side in case the government’s fiscal deficit overshoots the early estimates of 5.1 per cent of GDP. At the same time, market participants expect the RBI to step in and purchase government bonds in the second-half of the year by way of OMO. Based on this supply demand dynamics and near-term pressure on inflation, we believe that government bond yields are likely to remain higher in the near-term before trending down in the second-half of the year. Investors who understand and appreciate the volatile nature of the government bond market and have an investment horizon of more than 6 months should consider investing in the government bonds at these levels.As a fund manager how are you managing the money in your portfolio and where are you investing in this market? In the current market condition, where will you advise investors to invest?With RBI’s interest rate hiking cycle over, we expect a gradual decline in interest rates in India. Therefore, fixed income fund managers are looking to increase duration in their portfolios.At the same time, we are aware that credit environment is steadily deteriorating in India. Credit rating agencies have announced more downgrades in India this year-to-date than upgrades. We expect this situation to last for a while before things stabilise after some time. Moreover, current credit spreads are relatively tight for the existing credit environment. We expect these spreads to widen gradually from their current levels. Based on these factors, we are looking to invest in high credit quality & relatively liquid assets maturing in 2-5 year tenor. This portfolio strategy is aimed at capturing a possible price appreciation in the fixed income assets when interest rates decline and at the same time aimed at mitigating the risk of widening of credit spreads.What is your take on 1 year, 2 years, 3 years, 5 years and 10 years yield in corporate bonds? Will you be a buyer in corporate bonds and what would be the tenor?The current term structure of interest rates for corporate bonds is a bit flattish. The spread between current 1 year & 10 years AAA PSU bonds is around 30 basis points as against a long-term average of 70 basis points. We expect the yield curve to gradually steepen as short-term yields are likely to fall in line with possible reduction in interest rates by the RBI. Also, interest rate cycles in India have shortened to around 3 years. That means time period from two interest rate peaks is around 3 years. From all these perspectives, we believe it makes sense to consider investing in 2-3 year AAA rated high quality liquid assets in the portfolio.
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There is a disconnect between markets and economy. While the Indian economy has been going on a downward spiral, shares price have been moving up. This disconnect between improving asset prices and worsening macro fundamentals has developed in recent weeks, say Deutsche Bank analysts. As globally stocks have rallied, Indian stock prices have also started going up. Both rates and liquidity indicators suggest investors are in a somewhat comfort zone. In fact, on 6 August, Morgan Stanley said the stock market in is in the early stages of a bull phase. However, the bullish market contrasts with the sticky inflation that might become worse owing to a poor monsoon, a reversal in commodity prices that may take away a much needed disinflationary impulse, weak industrial production, worsening agriculture production outlook, and greater fiscal slippage. The disconnect between the market and economy therefore is quite obvious. Deursche Bank analysts point out that the markets are clearly trying to look beyond the dataflow, betting on a major improvement in the policy environment. While this puts welcome pressure on the authorities to expedite reforms, the risk is that markets will be disappointed as realisation sets in that policy constraints accumulated over a long period cannot be resolved with a changing of the guard in a few offices. The return of a pro-market reformer to India's finance ministry has cheered investors and contributed to a market rally, but Palaniappan Chidambaram will need both political deftness and some luck to tackle the problems dragging the economy down.Fiscal ConsolidationFiscal data in first quarter of FY12-13 show that the budget deficit has already touched 37 per cent of the budget estimate, as compared to 32 per cent in the corresponding period of the last year. Revenue (44 per cent vs 35 per cent) and primary deficits (67 per cent vs 47 per cent) are also higher in the first three months of the current fiscal year relative to past trend. While total receipt (12.4 per cent vs 12.5 per cent) was broadly in line with past year’s trend, a higher non-plan expenditure outturn has pushed total expenditure to touch 21 per cent of budget estimate, 1 per cent point higher than last year. The fiscal trend of the first quarter highlights considerable upside risks to the budgeted fiscal deficit of 5.1 per cent of GDP for FY12-13. To help him deliver, Chidambaram is likely to appoint former International Monetary Fund Chief Economist Raghuram Rajan as his chief economic adviser. Rajan, currently a professor at Chicago University's Booth School of Business, is credited for predicting the 2008 global financial crisis and is a vocal critic of New Delhi's populist policies.The new minister's biggest test will be controlling the fiscal deficit, which overshot a target of 4.6 per cent of GDP by 1.2 percentage points in 2011/12 due to slowing growth and increased spending on fuel and fertiliser subsidies.India's sovereign credit rating is at risk because of the high fiscal deficit, whose funding from domestic savings is crowding out private investment and lowering growth prospects.However, a drought due to disappointing monsoon rains will push the government to spend more on relief for farmers. Rural demand for cheap fuel to drive irrigation pumps and tractors has further delayed a promised increase in subsidised diesel prices, which the government concedes is vital to fixing the deficit.Privately, finance ministry officials warn a lack of action on subsidies could push the deficit to 6 percent of GDP this fiscal year, above the government's target of 5.1 per cent.However, once must not forget the government will have only about six months to improve the state of fiscal affairs before the next year’s budget is announced in end-February 2013. In a study on FII shareholding in Indian equities, Citigroup said FIIs were trimming their bigger overweights, such as financials and industrials, as well as some of their underweights, such as IT services and energy.Foreign investors bought a net Rs 3,587 crore ($17.94 million) into the Indian stocks last week, according to data released, their biggest purchases since the week ending July 6.Foreign investors bought a net Rs 10,273 crore ($1.84 billion) into Indian stocks in the month July, their biggest purchase since February. According to official data, foreign inflows in the stock markets for the year 2012 now stand at a net Rs 52,266 crore ($9.37 billion).A lot of money has come in, but they are not taking too many chances, analysts said. Citigroup said foreigners' portfolios were positioned for higher markets, tilting towards cyclical stocks, including banks, consumer discretionaries and industrials.
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Yes, the market is a discounting mechanism: it discounts future events. But does it really discount events that far into the future? Barely two days after he took charge as finance minister — again — Palaniappan Chidambaram announced that he would soon present a blueprint for fiscal consolidation, greater clarity in tax law, review recent controversial changes in tax policy — like the retrospective application of general anti-avoidance rules or GAAR — and introduce measures for insurance and mutual funds to boost investment that has fallen to 32 per cent of GDP in FY12 from 38 per cent in FY08.The things that the finance minister said are obviously welcome, but if you are expecting instant results, perhaps dialling back some of those expectations might be a good idea. First, fiscal consolidation — as measured by achieving the fiscal deficit target of 5.1 per cut in FY2013 (as the first step) — is likely to be a long-drawn process. Economic and monsoon conditions being what they are, cutting back on spending is not very likely.Second, it’s not clear what the results of reviewing the GAAR and other tax policy changes introduced by the last finance minister will produce. Will some of the measures be revoked? We’ll have to wait and see, at least until the review is over, which could take a few months.Third, taking the investment to GDP ratio back to 38 per cent will take a lot of pushing; entrepreneurs and industrialists are holding back capital expenditure because of uncertainties beyond our shores. Those uncertainties will linger on for some time. Chidambaram will, in all probability, succeed, but not tomorrow, not next month, or the next year.Any announcement on mutual funds and insurance is read as domestic capital flows into the equity markets; actually, that could just as well be misread. People’s savings are not going into the market to the degree hoped because the faith in the market’s ability to reward investors is somewhat lacking. Like everything else, it will take time.So before you get up and dance to the positive rhythms of the music that the finance minister’s statement makes to your ears, pay a little attention to the tempo. It’s slow classical, not disco dandiya.(This story was published in Businessworld Issue Dated 20-08-2012)
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RBI Governor Duvvuri Subbarao had a room full of dignitaries — like a top official from the European Central Bank's statistical department, many academics from the field of statistics and economic analysts — in spilts on 17 July when he cited his receding hairline and the high rates for his hair cut to make a point on inflation. Speaking at the Sixth Annual Statistics Day Conference in Mumbai, Subbarao said he used to pay Rs 25 for a haircut 20 years ago which went up to Rs 50 even as his hair thinned. However, in recent times, though the hair growth has been almost nil, he is paying Rs 150 for a haircut. "Now when I have virtually no hair left, I pay Rs 150 for a haircut," said the bureaucrat-turned-central banker. The Governor said : "I struggle to determine how much of that is inflation, how much is the premium I am paying to the barber for the privilege of cutting the Governor's non-existing hair".On a serious note, the RBI governor said "the Reserve Bank maintains that interest cost is only one of the several factors that have dampened growth, and the increase in policy rate by the Reserve Bank alone cannot explain the investment slowdown." (Read: Policy Rate Not Responsible For Slowing Growth)."I have asked our economic research department to do a detailed study on the time-series relationship between real interest rate and investment activity. We expect to put out that report in the public domain in the next couple of months," he added.His comments come two weeks ahead of the quarterly monetary policy review which is due on July 31.Producer Price IndexIn order to get a a clearer picture of the price rise trend, RBI Governor also proposed a producer price index (Read ), saying that the present structure of measuring inflation does not capture the price movement of services and is a hybrid of rate quotes.The Producer Price Index or PPI will be better able to measure the average change over time in the sale prices of domestic goods and services, he said."In its present structure, the wholesale price index does not capture the price movement of services. Also, it is a hybrid of consumer and producer price quotes," he said.Sellers' and purchasers' prices differ because of government subsidies, sales and excise taxes, and distribution costs, Subbarao said."For these reasons, it is, therefore, desirable that we move towards developing a Producer Price Index that measures the average change over time in the sale prices of domestic goods and services," he added.The RBI Governor also raised issues concerning data gaps with regard to computation of inflation, national income and growth and underlined the need for rectifying them.He also questioned the linkage between deceleration in industrial growth to 6.5 per cent in 2011-12 and the increase in policy rates by 3.75 per cent by RBI during March 2010 and October 2011. "... it is necessary to look behind the data and explore what lies underneath," he added. On the current situation, the RBI Governor said, "the uncertainty surrounding economic activity has heightened in the post-crisis period. India is no exception."Core Inflation Better Than WPI-Based InflationThe RBI Governor said core inflation gives a better picture of price trends as it is less volatile than WPI-based inflation.Core inflation is usually estimated by excluding food and energy prices from the basket of goods and services that represents a household's spending."The rationale for exclusion is that the prices of food and energy tend to fluctuate sharply and such volatility from the supply side, if passed on into the general price index, makes it difficult to interpret the overall trend," he said."The surmise is that core inflation, being less volatile, gives a better sense of future price trends," Subbarao said."If one takes a longer series of over three years, there is some evidence that core inflation does have statistically significant predictive power," he added.At present, apart from the WPI, India has several measures of inflation. The country also had four consumer price indices or CPIs – for Urban Non-Manual Employees, for Agricultural Labourer, for rural labourer and for industrial workers.In February this year, the government introduced a new CPI series that has the CPI rural and CPI urban, and a combined CPI that takes in both with suitable weights.Subbarao said the RBI in its annual report for 2009-10, had said that the potential output of the Indian economy may have dropped from 8.5 per cent pre-crisis to 8.0 per cent post-crisis."Latest assessment following the standard filtering technique suggests that potential output growth may have further fallen to around 7.5 per cent," he said."Assessing India's potential growth rate, consistent with our objective of low and stable inflation, remains a challenge," he added. (BW Online Bureau & Agencies)
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India Inc today slammed RBI's 'inflation centric policy' to keep interest rates unchanged, saying the central bank has missed the bigger picture at a time 'when millions of livelihoods are under threat due to declining GDP growth'."It needs to be understood that with a steadily declining GDP growth, millions of livelihoods are under threat and therefore, a very inflation-centric policy measure appears to have missed the bigger picture," CII Director General Chandrajit Banerjee said.In a scathing attack to the RBI, Ficci said: "The RBI decision to not reduce the repo rate is even more difficult to understand in light of its own admission that 'the persistence of overall inflation both at the wholesale and retail levels, in the face of significant growth slowdown points to serious supply bottlenecks and sticky inflation expectations'."RBI, however, defended its decision of not tinkering with the rates, saying in the current growth-inflation dynamic, several factors were responsible for the slowdown in activity, particularly in investment, "with the role of interest rates being relatively small".It is not clear at all how the supply bottlenecks and high level of vegetables and protein prices, which is the main cause of persistent inflation, will be tackled by keeping interest rates high, Ficci added.Due to lack of reforms, coupled with continued high interest rate policy by the RBI, the economy is headed for a long period of 'slowflation' which will bring us closer to a major crisis, the chamber added."Therefore, a cut in the repo rate would have been very timely and may have provided some boost to the already flagging growth," Ficci Secretary General Rajiv Kumar said.Expressing similar sentiments, Assocham President Rajkumar Dhoot said: "A cut in the policy rates could have given some boost to the industrial sector and helped the economy regain the growth momentum. This is more so when the fiscal situation does not allow much leeway for introduction of any fiscal stimulus."The wholesale price-based inflation was 7.55 per cent in May. At the retail level, the Consumer Price Index (CPI)-based inflation for May was 10.36 per cent.Economic activity in 2011-12 moderated sequentially over the quarters to take growth to a 9-year low of 5.3 per cent in Q4. For the entire fiscal too GDP growth rate plunged to 6.5 per cent, lower than the 6.7 per cent reported during the peak of post-Lehman collapse credit crisis, triggered in 2008.Besides, the Index of Industrial Production (IIP) increased by just 0.1 per cent in April 2012.Car makers and real estate players also expressed disappointment with the RBI's decision to keep rates unchanged saying the sectors, which are already reeling under a slump, will continue to suffer due to the high interest rate regime.Firms, including Maruti Suzuki, Hyundai, General Motors, Hiranandani Constructions and CHD Developers, said a rate cut would have helped in pushing growth."It (rates remaining unchanged) is a disappointment for the auto industry. For the car industry, it is very important that the interest rates come down as 70 per cent of sales are financed," Maruti Suzuki India Chief Operating Officer (Marketing and Sales) Mayank Pareek told PTI.The sluggish demand will continue as sentiments are still low, he added.Expressing similar views, Hyundai Motor India Ltd Director (Marketing and Sales) Arvind Saxena said: "With the GDP growth rate coming down, industry was expecting RBI to ease interest rates, in that sense it is disappointing."(PTI)
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Dismissing fears of stagflation, Former Reserve Bank governor Y V Reddy said on 17 July India is still one of the fastest growing large economies.""Where is the issue of stagflation? Though inflation is a concern but that does not mean that we are de-growing?. Still we are one of the fastest growing large economies," Reddy, who is credited with formulating policies that absorbed the shock emanating from 2008 global financial crisis, told PTI."There are issues facing the economy..." Reddy said, adding that some confidence boosting measures are needed."Yes, confidence among the industry and investors have to be improved. But that does not mean we are in 2008 crisis like situation," the former RBI governor, who is now the emeritus professor at the Central University of Hyderabad, said.Reddy was in town for the launch a book containing the unpublished essays of the late RBI governor IG Patel, titled, "Of Economics, Policy and Development: An Intellectual Journey by IG Patel.The book, launched by Governor D Subbarao at the RBI headquarters this evening, was edited by Reddy along with ex-RBI research director Deena Khatkhate and is published by the Oxford University Press.Indraprasad Gordhanbhai Patel (November 11, 1924-July 17, 2005) was the 14th RBI governor and served a five-year tenure from December 1977 to 1982. While 2011-12 GDP growth hit a nine-year low of 6.5 per cent, a slew of financial institutions have significantly downgraded their growth forecasts for this fiscal as well, saying the Indian economy is facing a stagflation-like situation.Speaking on the relevance of Patel's thinking today, Reddy said, the late governor was closely involved in the policymaking for nearly five decades and reading about him can help the current policymakers as his credo was pragmatism in all policy decisions.When asked if the four-year-old crisis facing the global economy was a failure of economics or its practice by a greedy few, Reddy said the still lingering crisis arose because certain people began to think only in one particular way, which became the over-riding principle of economics.When asked about his views on the RBI way is handling the crisis arising from the steep fall in the rupee, Reddy said, "we should make a distinction between countercyclical measures and monetary policies. The RBI has been for long following a policy of moderating volatility in the currency market."As a prescription for the euro zone crisis, he said what is needed is a combination of fiscal and financial measures, apart from a political will to resolve the crisis."What is happening in the euro zone is due to the absence of combined effort at the fiscal, financial and political fronts. Therefore, what is needed are some institutional changes. These are very important for the European economies to come out of the crisis."Going by the way things are moving in the Eurozone, the region may not even come out of the present crisis before 2014, Reddy said.On what is the best tool to control inflation, the former RBI governor said, "inflation is not simply a monetary phenomenon, it also calls for prudential measures." (PTI)
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India's non-inflationary growth rate has fallen to around 7.5 per cent from 8 per cent in the post-Lehman crisis period, RBI chief Duvvuri Subbarao said on 17 July.He was speaking at the RBI's sixth statistics day conference.Assessing India's potential growth rate consistent with the objective of low and stable inflation remains a challenge, Subbarao said in a speech at the Reserve Bank of India's sixth statistics day conference.Before the 2008 global financial crisis, the country's potential output, defined as growth without fuelling inflation pressures, was 8.5 percent."An accurate estimate of potential output is critically important for central banks to assess demand conditions and the output gap. Reliability and timeliness are critical," he said.The RBI projects the economy to grow at 7.3 per cent in 2012-13.The RBI governor also said core inflation gives a better sense of future price trends since it is less volatile."If one takes a longer series of over three years, there is some evidence that core inflation does have statistically significant predictive power," Subbarao said in the speech.He also said headline inflation will definitely have a larger momentum than core inflation.India's headline inflation slowed to its lowest level in five months in June helped by a moderation in fuel prices, adding to pressure from business leaders for a cut both in interest rates and fuel subsidies to help revive the lacklustre economy.India's industrial output grew more than expected in May at 2.4 per cent from a year earlier, while headline inflation slowed to its lowest level in five months in June to 7.25 percent.While a lower inflation number added to pressure from business leaders to cut policy rates, a faltering monsoon -- key to volatile food prices -- tempered such expectations with the government warning inflation could accelerate without more rain.Asia's third-largest economy posted its slowest growth in nine years at 5.3 percent in the March quarter, fuelling concerns of a sharp slowdown in the current fiscal year that began in April.Subbarao added that the central bank should focus on price changes at the industry level or the producer price index, which reflects the actual price excluding government subsidies, sales and excise taxes.There has been reported divergence between the government and the RBI, which has been focusing mainly on controlling inflation.Union ministers have been vocal about the need for a soft interest rate regime.In its bid to rein in inflation, the Reserve Bank hiked key policy rates 13 times, totalling 350 basis points, between March 2010 and October 2011.Besides, the RBI has called for the government to set its house in order and get fiscal deficit under control.Subbarao also said in the last four years, RBI has raised some issues, including the independence of the central bank and the need for the government to set exemplary corporate governance standards, as it feels they need to be debated.He said while discharging its duties, the central bank also needs to be sensitive and accountable."We are unelected...but we take decisions that affect the entire country. So, we must be very sensitive to rendering accountability for our actions and the results of those actions," he said.In his speech, he also said he has doubts over the age-old model code followed by civil servants wherein they don the mantle of advising the decision-makers and then are expected to follow the decision taken by the political leaders, even if it went against their wishes.(Agencies)
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The Reserve Bank of India left interest rates and the cash reserve ratio for banks unchanged on Monday, defying widespread expectations for a rate cut as it warned that doing so could worsen inflation, disappointing markets.The RBI kept its policy repo rate unchanged at 8 per cent and left the cash reserve ratio (CRR) for banks at 4.75 per cent."Further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures," the RBI wrote in its mid-quarter policy review.Indian bond prices and stocks dropped while the rupee weakened against the dollar after the RBI's unexpected decision to hold rates steady.The benchmark 10-year bond yield rose 9 basis points to 8.43 per cent from levels before the announcement, while the new 10-year bond yield rose about 7 basis points. The BSE Sensex erased gains to fall 0.6 per cent from before the decision."The Reserve Bank of India's action is clearly disappointing," said Sujan Hajra, chief economist at Anand Rathi Securities in Mumbai."Inflation remains a concern, but the slowing growth needed at least a 50-basis-point rate cut. The RBI will have to ease sooner or later, otherwise there will be further challenges to growth," he said.After cutting its policy rate by 50 basis points in April, the Reserve Bank of India had been widely expected to leave rates unchanged in June. But global and domestic economic conditions have deteriorated sharply since then, driving expectations for a cut in both interest rates and the cash reserve ratio.India's March quarter economic growth of 5.3 per cent was far worse than expected and the weakest annual pace in nine years. The data sparked calls from industry for immediate action to lift an economy that Standard & Poor's says could be the first BRIC nation to lose its investment-level credit rating.April industrial output figures last week suggested little pickup in economic growth heading into the current quarter.The government is politically hamstrung, so is unable to drive reform and its deep fiscal deficit leaves it no room to provide stimulus spending at a time when the euro area debt crisis is weighing on the global economy, a factor set to dominate a G20 meeting in Mexico on Monday and Tuesday.However, RBI Governor Duvvuri Subbarao had less room for maneuver after May benchmark inflation rose to 7.55 per cent, the highest among industrialised countries and the BRIC group of Brazil, Russia, India and China.Investors and companies have long called for India to implement pro-growth policies that would spur investment and help remove bottlenecks in the economy blamed both for restricting growth and keeping inflation high.(Reuters)
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