The value of the Rupee: update as of April 2017

First Bi-monthly Monetary Policy Statement, 2017-18

RBI’s neutral policy is in hold mode for now. So there is no change in the repo rate.

Monetary Policy                                                                           2017-18

RBI expects growth to pick up from 6.7% (down from the previous government est. of 7%) to 7.4% in 2017-18. Inflation is expected to pick up also from 4.5% in H1 to 5% in H2 of 2017-18. According to the MPC, risks are evenly balanced around this inflation trajectory.

Please see my blog onFebruary 28, 2017. Under these circumstances, I see no change in the repo rate, at least for the next six months.

Looking over the financial year 2016-17, CPI inflation in March came in just below 4% - well below RBI’s target of 5%. Growth at 6.7% also came well below the RBI’s initial projection of 7.6% made in April last year.

The MPC announced changes in the liquidity management policy of the RBI.  To keep the operating target of monetary policy, the weighted average call money rate, closely aligned to the repo rate, the RBI announced a further reduction in the policy rate corridor – the difference between the marginal standing facility rate and the reverse repo rate – to 0.50%. Consequently, the new reverse repo rate is 6.0% and the new marginal standing facility rate is 6.5%. In April 2016, the RBI had announced that the liquidity deficit in the system would gradually move ex-ante to a neutral position. This the RBI, despite the demonetisation event and consequent surge in liquidity, has accomplished.

Monitoring the Bull Market in Indian Stocks: Update as of April 2017

Indian Stock Market Watch

Please see my blog of July 9, 2014 for the original note on using TMV/GNP ratio to gauge whether the market is cheap or expensive, and the blog for the month of February, 2017.

India Market Map: April 2017

A bird’s eye view of the performance of India’s financial markets on a monthly basis.

Foreign Exchange

 Stock Market 

 Government Bond Market 

Gold 

 Money Market 

Policy Rates

Bank Deposit Rates

Public Provident Fund

 Post Office Deposits

Lending Rate  

  Real Estate Market 

The value of the Rupee: a quick review of 2016-17

Rupee has reached the highest level on a real effective exchange rate basis since RBI started its new data series in April 2004 - India's currency is significantly overvalued 

In 2015-16, the rupee saw a fall in nominal and real terms, but this year that has been reversed.

The table below gives the picture for the rupee against the four major currencies. The rupee strengthened against each of these currencies, including a 18% gain against the pound sterling thanks to BREXIT!

Please also read my review of the rupee for the previous year.

The flow of money in 2016-17: what do the numbers tell us?

Official GDP projections are in the 7% region for 2016-17. Credit growth during the same period is well below this number. 

Below are the numbers covering growth of bank deposits and credit, money supply and reserve money for the last financial year, 2016-17. 

Deposits and Credit Growth

I have taken fortnightly data ending March 17, 2017 as the last data point for FY16-17, even though the last data point available is March 31, 2017. The reason is that this creates an additonal data point for FY16-17 (27 fortnights as against 26 in 2015-16), making the data strictly not comparable.

Credit grew by just 4.4% - less than half the rate in 2015-16. On November 11, 2016, three days after demonetisation came into effect, total bank credit stood at Rs 73532 bill. ; on March 17, 2017, the number was Rs 75656 bill. - an increase of just 3%.

Credit can be broken up into food credit and non-food credit. Although there was some fall in food credit going into demonetisation, the trend accelerated post-demonetisation. Food credit fell from Rs 1052 bill. on March 18, 2017 to Rs 870 bill. on November 11, 2017; then rose to cross the Rs 1000 bill. mark but fell sharply after mid-February down to the Rs 558 bill. mark on March 17, 2017! This picture was not seen in 2015-16.

Money Supply and Reserve Money Growth

Here again the cut-off fortnight for FY16-17 is March 17, 2017.

After demonetisation, money supply fell up to the Dec 23, 2017 reporting period and then rose, to end the year 7.7% higher, but siginficantly below the growth rate of 2015-16. From a peak of 

Rs 17000 bill. on October 28,2016 - the last reporting period before demonetisation on November 8, 2016 - currency in circulation has come down to Rs 12,135 bill. on March 17, 2017. Demand and time deposits put together have more than comensated for the fall in currency in circulation.

Reserve money has actually fallen in 2016-17 by 13%! The fall in currency in circulation predominantly accounts for the fall in reserve money by Rs 3300 bill.

However, the fall could be a technicality. Let's look at the sources of reserve money growth (the flip side of the components of reserve money) . One of the sources is RBI's credit to banks and the commercial sector. This shows a decrease of Rs 6000 bill. - from Rs 3000 bill it became a negative Rs 3000 bill.by the end of the financial year, implying that instead of giving credit, banks and the commercial sector were putting money with the reserve bank, given their surplus liquidity post-demonetisation. So a rise in liabilities - bank deposits with RBI, a component of reserve money - is apparently instead being shown as a fall in assets on the sources side of reserve money. If this were accounted for then perhaps reserve money could have grown in 2016-17.

Please also see my earlier blog on this subject.

Will margin funded investors get it right on Suzlon this time? An update as of March 31, 2017

Indian Stock Market Watch