The flow of money up to Q2 2016-17: what do the numbers tell us?

Deposits continue to grow, but credit growth remains weak.

Deposits and Credit

Money Supply

Reserve Money

Has RBI lowered its guard on fighting inflation? It is still early days but the initial evidence suggests that the answer is ‘‘yes’’

Fourth Bi-Monthly Monetary Policy Statement, October 4, 2016

Monetary Policy                                                                                                     2016-17

The Monetary Policy Committee chose to reduce the key policy rate – the repo rate – to 6.25% from 6.5%. All six members voted in favour of a rate cut.

A key factor that plays a role in such a decision is RBI’s projected path of inflation. Here there was no change, if anything it was to the upside: 5.3% by March 2017. So then why was the change necessary?

Please see my preview to RBI’s Fourth Bi-monthly MonetaryPolicy Statement.

I appear to have been wrong on two key counts. One, I felt that Governor Patel carried the same zeal to fight inflation as his predecessor. I am not sure; perhaps time will prove me wrong.

What emerged from the statement and the media conference call is that RBI has shelved the target to hit the 4% inflation level by March 2018. On August 5, 2016, Government chose to set the 4% target – with a range of +/-2% - for the period up to March 2021. While it is the government that sets the target and the time frame, it is primarily up to the RBI to determine how to achieve it, and how soon within the time frame.

The RBI did not articulate by when it plans to hit the 4% level. The RBI’s forecast for inflation is 4.5% in 2017-18.

Two, I felt that Patel would continue with Rajan’s policy of keeping the real interest rate in the region of 1.5 to 2%; I sensed this might change but I felt the change would not happen immediately. I was wrong.

RBI has now moved to a real interest rate regime below 1.5%. The argument in favour of it by the Executive Director of RBI (Patel preferred to pass on this issue to his Executive Director to answer when asked by the media) was perhaps not convincing. In fact, for economists to whom even 0.10% is significant in macro numbers, by the RBI’s own monetary policy report calculations the real interest rate before the repo rate cut on October  was already 1.25% i.e. 6.5% one year treasury bill rate less 5.3% projected inflation by March 2017.

I believe there is now a question mark on the RBI’s credibility to fight inflation. This is certainly a more growth oriented RBI, but is there really a trade-off between growth and inflation in the long run? Rajan’s RBI did not feel so.

What does this mean for the equity market? This requires more analysis, but there might be something in this fact: post October 4, the Sensex is down, while the S&P 500 is up.

The value of the Rupee: update as of September 2016

Rupee in real terms continues to rise against a basket of currencies - at highest level since August 2011


RBI Watch                                                                                                    Rupee FX

Please also read my April 25, 2014 blog titled "Is the Rupee fairly valued?", and my blog of April 21,2016.

Will margin funded investors get it right on Suzlon this time? An update as of Spetember 30, 2016

Indian Stock Market Watch

Please see my earlier blogs on Suzlon ( April 12, 2016 and October 19, 2015). Suzlon continues to rank among the top five stocks for margin funded investors.

Indian Stock Market Watch: Margin funding of investors by brokers continues to rise in Q2 of 2016-17

Margin funding on a month-end basis of Rs 111 crores is the highest level since July 2012.

India Market Map: September 2016

A bird’s eye view of the performance of India’s financial markets.

We publish the Market Map on a monthly basis. See tables below.

Current financial Year

All mainstream asset classes have given positive returns, with stocks leading the way. Outside traditional assets, foreign exchange  - the pound sterling against the rupee - gave the highest return.

On a one-year basis

Gold was the best performer, even after including foreign exchange - the pound against the rupee.

Real Estate 

Data up to June 2016 suggests real estate to be the weakest among all assets.

Bank Deposit Rates

Both SBI  and ICICI Bank reduced their one year deposit rate.

Foreign Exchange

Stock Market

Government Bond Market

Gold Price

Money Market

Policy Rates

Bank Deposit Rates

Public Provident Fund Rate

Post Office Deposit Rates

Lending Rates

Real Estate Market

As expected RBI keeps rates on hold – but is this the calm before the storm? - II

Fourth Bi-Monthly Monetary Policy Statement due on October 4, 2016

Monetary Policy                                                                                                     2016-17

Please see my August 11, 2016 blog titled “As expected RBI keeps rates on hold – but is this the calm before the storm?”

One element of uncertainty appears to have been removed when a month ago government appointed Dr. Urjit Patel, then Deputy Governor of the Reserve Bank of India, as the replacement for Governor Rajan. Dr. Patel has been closely associated with the RBI’s move towards inflation targeting. While only time will tell whether he carries the same zeal for controlling inflation as Rajan, I would suspect that at least initially he will follow the same course.

The key policy rate – the repo rate – will now be set by the Monetary Policy Committee (MPC) by a cast of votes. The uncertainty regarding how rate setting by the Monetary Policy Committee will influence the course of the current monetary policy remains. Three outside members have been announced: Pami Dua, Chetan Ghate and Ravindra Dholakia, all academics. The other three members are from the RBI, with Governor Patel having a casting vote.

My own sense is that all three RBI members will vote in line with each other – RBI careerists typically don’t rock the boat. That being so and with Governor Patel having the casting vote in the MPC, I see the will of the RBI prevailing. 

Yet, it will be interesting and significant to see the voting pattern of the outside members of the MPC - we have no clue as to their thinking, and it will take some time before a steady pattern emerges about their stance on monetary issues. 

What is the course the RBI members prefer? One, they would like to keep the real interest rate in the region of 1.5%- 2%. Could Governor Patel change the stance on this? This is a possibility, but to my mind possibly not for now. Two, if there is no drastic change for the better (the last monetary policy statement suggested some worsening) in the course of inflation for the rest of the financial year – 5% by March 2017 – keep rates on hold.

If RBI members vote straightaway for a reduction in the repo rate, based on my current reading of the data, my view is that the RBI would lose some credibility on its recently gained inflation fighting credentials.

Monitoring the NaMo Bull Market in Stocks: Update as of September 2016

Indian Stock Market Watch

Please see last month's update, and also my blog of July 9, 2014 for the original note on using TMV/GNP ratio to gauge whether the market is cheap or expensive.