Tuesday, May 31, 2011
Sunday, May 29, 2011
Thursday, May 19, 2011
Saturday, May 14, 2011
An open letter to my readers
Hi Guys,
From now onwards, I may not be able to express my views on financial markets, economy and others, where in mass-interest exist. So for time being, I will not post my views "publicly" due to some "professional issues", which I am trying to negotiate and find alternatives. Thats why I have not posted anything from last one week, as discussions/negotiations were on and I was very upset as the proceedings went on! Still I am waiting for final decision, and lets hope for the best! Till then I thought, I can arrange for "private-mailing", by group-mailing system. So interested readers can reply to this post with your email ids.
Keep reading...
Thanks & Regards
Naveen Mutnal
From now onwards, I may not be able to express my views on financial markets, economy and others, where in mass-interest exist. So for time being, I will not post my views "publicly" due to some "professional issues", which I am trying to negotiate and find alternatives. Thats why I have not posted anything from last one week, as discussions/negotiations were on and I was very upset as the proceedings went on! Still I am waiting for final decision, and lets hope for the best! Till then I thought, I can arrange for "private-mailing", by group-mailing system. So interested readers can reply to this post with your email ids.
Keep reading...
Thanks & Regards
Naveen Mutnal
Wednesday, May 4, 2011
Good article from Jahangir Aziz about RBI's rate hike
We economists are an arrogant lot. If reality doesn’t match with our theory, we find faults with reality.
And so it has been in India for the last several months. Having decided that if it is food inflation then it must be supply shocks, we spent the last year in collective denial that it was loose fiscal and monetary policy pushing demand beyond the economy’s capacity that was the primary driver of inflation, exacerbated by the supply shocks and not the other way around.
And so both the government and the Reserve Bank of India (RBI) kept assuring us that we should not worry needlessly. If the record harvest didn’t tame inflation, base effects would. RBI did raise rates, in fact eight times, but with none of the urgency or aggression that was warranted. Secure in the same belief, the government went on pumping more fiscal stimulus into the economy.
With every passing month as the data unerringly surprised expectations on the upside and as the authorities kept raising inflation forecasts and exhausting one ad hoc explanation after another, these assurances sounded just a little less convincing and just a little more unreal. Instead, tolerating high inflation for this long only hardened expectations, pushing the economy into a generalized inflation spiral as it inevitably does.
More ominously, core inflation appears poised to accelerate further with inflationary expectations hardening by the month, crude prices remaining elevated and leading indicators such as the purchasing managers’ output price index underscoring that even the past rise in input prices have not been fully passed into manufacturing inflation.
Yet, some are still arguing that monetary tightening could cripple growth. Nothing could be more disingenuous. We know at least since 1972 (Bob Lucas’ paper) that the growth-inflation trade-off exists only when expectations are stable, not when they are rising as now, or falling as in Japan in the 1990s. Empirically, we know at least since the late 1980s (Stan Fisher’s paper) that such trade-offs exist only when inflation is low, not when the quarterly rate of core inflation is over 11%. Instead, at these levels, bringing down inflation is essential to safeguard future growth by sacrificing near-term growth.
It is against this context that the central bank came good in its credit policy today. It shrugged off its institutional inertia of moving in predictable 25 basis points (bps) steps, raising rates 50 bps. One basis point is one-hundredth of a percentage point.
The central bank acknowledged that inflation was now driven by demand factors and inflationary expectations were coming unhinged, and laid to rest the growth-inflation trade-off by making inflation control and safeguarding medium-term growth its primary objectives rather than worrying about near-term growth. These are the clearest signals yet that RBI is not afraid of turning on the heat to curb inflation and that we should expect similar aggressive tightening, which most likely will be needed, in the coming months.
Also important was the introduction of the marginal standing facility, which would allow banks to repurchase at any time 1% of deposits at 100 bps above the repo rate. With this change, the banking regulator has now a much better chance of keeping the overnight call rate within 100 bps of the policy rate—the repo rate, something the central bank has struggled to do in the absence of conducting daily open market operations.
That apart, raising the savings rate hopefully is a harbinger of deregulating interest rates on savings accounts. I am sure that there are many good reasons for continuing with our paternalistic attitude to protect the less sophisticated investors such as pensioners and the poor, but presuming them to be naïve is both untrue and disrespectful.
And so it has been in India for the last several months. Having decided that if it is food inflation then it must be supply shocks, we spent the last year in collective denial that it was loose fiscal and monetary policy pushing demand beyond the economy’s capacity that was the primary driver of inflation, exacerbated by the supply shocks and not the other way around.
And so both the government and the Reserve Bank of India (RBI) kept assuring us that we should not worry needlessly. If the record harvest didn’t tame inflation, base effects would. RBI did raise rates, in fact eight times, but with none of the urgency or aggression that was warranted. Secure in the same belief, the government went on pumping more fiscal stimulus into the economy.
With every passing month as the data unerringly surprised expectations on the upside and as the authorities kept raising inflation forecasts and exhausting one ad hoc explanation after another, these assurances sounded just a little less convincing and just a little more unreal. Instead, tolerating high inflation for this long only hardened expectations, pushing the economy into a generalized inflation spiral as it inevitably does.
More ominously, core inflation appears poised to accelerate further with inflationary expectations hardening by the month, crude prices remaining elevated and leading indicators such as the purchasing managers’ output price index underscoring that even the past rise in input prices have not been fully passed into manufacturing inflation.
Yet, some are still arguing that monetary tightening could cripple growth. Nothing could be more disingenuous. We know at least since 1972 (Bob Lucas’ paper) that the growth-inflation trade-off exists only when expectations are stable, not when they are rising as now, or falling as in Japan in the 1990s. Empirically, we know at least since the late 1980s (Stan Fisher’s paper) that such trade-offs exist only when inflation is low, not when the quarterly rate of core inflation is over 11%. Instead, at these levels, bringing down inflation is essential to safeguard future growth by sacrificing near-term growth.
It is against this context that the central bank came good in its credit policy today. It shrugged off its institutional inertia of moving in predictable 25 basis points (bps) steps, raising rates 50 bps. One basis point is one-hundredth of a percentage point.
The central bank acknowledged that inflation was now driven by demand factors and inflationary expectations were coming unhinged, and laid to rest the growth-inflation trade-off by making inflation control and safeguarding medium-term growth its primary objectives rather than worrying about near-term growth. These are the clearest signals yet that RBI is not afraid of turning on the heat to curb inflation and that we should expect similar aggressive tightening, which most likely will be needed, in the coming months.
Also important was the introduction of the marginal standing facility, which would allow banks to repurchase at any time 1% of deposits at 100 bps above the repo rate. With this change, the banking regulator has now a much better chance of keeping the overnight call rate within 100 bps of the policy rate—the repo rate, something the central bank has struggled to do in the absence of conducting daily open market operations.
That apart, raising the savings rate hopefully is a harbinger of deregulating interest rates on savings accounts. I am sure that there are many good reasons for continuing with our paternalistic attitude to protect the less sophisticated investors such as pensioners and the poor, but presuming them to be naïve is both untrue and disrespectful.
Tuesday, May 3, 2011
RBI increased interest rates by 50 basis points
Today, RBI increased interest rates by 50 basis points, a 9th consecutive move by Indian central banker to curb the inflation.
Before jumping to the internals of the interest rates, lets look at the important changes in the operating procedure...
* The weighted average overnight call money rate will be the operating target of monetary policy of the Reserve Bank.
* There will henceforth be only one independently varying policy rate, and that will be the repo rate.
* The reverse repo rate will continue to be operative, but it will be pegged at a fixed 100 basis points below the repo rate. Hence, the reverse repo rate will no longer be an independent variable.
* There will be a new Marginal Standing Facility (MSF). Banks can borrow overnight from the MSF up to one per cent of their respective net demand and time liabilities or NDTL. The rate of interest on amounts accessed from this facility will be 100 basis points above the repo rate.
* The revised corridor will have a fixed width of 200 basis points. The repo rate will be in the middle. The reverse repo rate will be 100 basis points below it, and the MSF rate 100 basis points above it.
So according to above changes, RBI made increased the interest rates as follows...
* Repo rate increased by 50 basis points from 6.75% to 7.25%
* Due to pegging, reverse repo also increased to 6.25% from 5.75%
* MSF is fixed to 8.25% again due to pegging
* CRR is unchanged at 6%
* Savings bank deposit interest rate increased from 3.5% to 4.0%
Before jumping to the internals of the interest rates, lets look at the important changes in the operating procedure...
* The weighted average overnight call money rate will be the operating target of monetary policy of the Reserve Bank.
* There will henceforth be only one independently varying policy rate, and that will be the repo rate.
* The reverse repo rate will continue to be operative, but it will be pegged at a fixed 100 basis points below the repo rate. Hence, the reverse repo rate will no longer be an independent variable.
* There will be a new Marginal Standing Facility (MSF). Banks can borrow overnight from the MSF up to one per cent of their respective net demand and time liabilities or NDTL. The rate of interest on amounts accessed from this facility will be 100 basis points above the repo rate.
* The revised corridor will have a fixed width of 200 basis points. The repo rate will be in the middle. The reverse repo rate will be 100 basis points below it, and the MSF rate 100 basis points above it.
So according to above changes, RBI made increased the interest rates as follows...
* Repo rate increased by 50 basis points from 6.75% to 7.25%
* Due to pegging, reverse repo also increased to 6.25% from 5.75%
* MSF is fixed to 8.25% again due to pegging
* CRR is unchanged at 6%
* Savings bank deposit interest rate increased from 3.5% to 4.0%
Monday, May 2, 2011
Updates...
Markets...
Posting from home, Belgaum, market still looks to be in a symmetrical triangle as tops and bottoms are still tapering out. Nifty has handsome support at 5700, i.e. 50 EMA (Exponential Moving Average) and 5600 i.e. 200 EMA. Maintaining my previous view of break below these above mentioned levels should be short or book profit and break above 5900 i.e. present supply zone, should fresh buying.
RBI...
Today, a day before RBI's meeting on Monetary policy review for 2011, RBI has released Macroeconomic and Monetary Developments in 2010-11, and highlights are as follows...
Growth in 2011-12 is expected to stay close to the trend. Growth risks emanate from high oil prices and some moderation in investment. Business expectations surveys exhibit moderation. Survey of professional forecasters also predicts weaker growth and firmer inflation.
Inflation may remain elevated for some more time despite the current anti-inflationary bias in the monetary stance. Upside risks to inflation arise from high oil and other commodity prices, incomplete pass through and its likely impact on fiscal deficit, elevated inflation expectations and price stickiness.
Global recovery has advanced, but downside risk to global growth arises from oil prices and significant sovereign and banking sector default risks.
GDP growth during 2010-11 reverted to its recent trend, aided by a rebound in agricultural growth. Non-agricultural growth, however, was slightly below trend.
Industrial growth decelerated in the second half on account of high base effect and moderation in investment demand. Manufacturing activity was spread more evenly and the recent slowdown in IIP was exacerbated by volatility in output of a few industries.
Headline inflation exhibited strong persistence in 2010-11 due to supply-side shocks and gradual generalisation of price pressures.
Inflation drivers have changed over three distinct phases. Headline inflation during 2010-11 was impacted primarily by food inflation during April-July, by primary non-food articles during August-November and in a more generalised manner by non-food manufacturing articles since December 2010.
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