Sixth Bi-monthly Monetary Policy Statement: MPC does the right thing by holding the repo rate steady

Monetary conditions have already tightened

Looking at FY 18-19, RBI expects inflation to end the year at about 4.5%.  This year, FY 17-18, RBI expects inflation to be 5%, about 0.5% higher than its original estimate.

Growth is expected to pick up in 2018-19 to 7.2% from 6.6% this year.

Capacity utilisation continues to be low – in the low 70’s.

Credit growth is still running low – just 6.5% during FY 17-18 up to March 2, the last data point available. Now deposit growth has also slowed - just 4% for the same period.

In fact, monetary conditions have tightened – one year treasury bills yield about 6.7%, 0.4% more than when the RBI last reduced the repo rate in early August 2017. The same has been the case with the 10 year treasury bond – yields are up by more than 1%. In recent days some banks have raised both deposit rates and lending rates. SBI, India’s largest bank, is in this list. The rupee on real effective rate basis has continued to get overvalued over the last year.

RBI perversely has had a significant role to play in the response by the bond market: in February last year the RBI inexplicably shifted its stance from accommodative to neutral, and to make matters worse followed this up in August with a reduction the repo rate! The worsening fiscal situation of the government has also played a role.

With the one year rate at 6.7%, and the one year inflation forecast at about 4.5%, real rates are solidly high about 2%.

Please read my earlier blogs on this topic, inluding my  last July's blog.

The value of the Rupee: update as of February 2018

Please also read my April 25, 2014 blog titled "Is the Rupee fairly valued?" and my monthly blogs.

Monitoring the Bull Market in Indian Stocks: Update as of February 2018

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 my nonthly blogs on this subject.

The value of the Rupee: update as of January 2018

Please also read my April 25, 2014 blog titled "Is the Rupee fairly valued?" and my monthly blogs.

India Market Map: February 2018

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

Foreign Exchange

 Stocks

  Government Bonds

 Gold

 Money Market

  Policy Rates

 Bank Deposits

 Public Provident Fund 

 Post Office

 Home Loans

The flow of money up to Q3 2017-18 : the fuel that runs the economy is still running low

Deposit and credit growth

There is a pick up in credit growth. Is this just a bounce back after the effect of demonenetisation last year. It is difficult to say, but it would well be just a return to normalcy: on a YoY basis credit growth in 2015-16 upto Q3 was10.6% just the same as the 10.7% reported this year after last year's sharp fall; then on financial year so far basis, credit growth in 2015-16 upto Q3 was 6.9% well above this year's 3.3% which recovered from the paltry 0.9% increase last year.

Deposit growth, on the other hand, has decelerated. Is this also a return to normalcy? It does not look like so: on a YoY basis deposit growth in 2015-16 upto Q3 was 10%, but the fall this year to 4% after the jump during the demonetisation year to 15% seems excessive; then on a financial year so far basis, deposit growth in 2015-16 upto Q3 was 7%, which then expectedly rose last year to 12%, but has now fallen to 1%.

It seems that the effects of demonetisation last year and GST  this year have affected incomes and profits, and the economy has not fully recovered as yet.

Money Supply and Reserve Money

Since two years ago - the week ending Dec 25, 2015 - aggregate money supply has grown by 17%, well short of the nominal growth of the economy over these two years.This could again suggest that the ecnomy continues to be weak.

Has the RBI erred in not attempting to increase money supply in line with the growth of the economy? Has its sole focus on the key policy rate, the repo rate, been inappropriate at a time of severe disruption in the monetary system and a mammoth structural change in the tax system with the introduction of GST this year? I don't know for sure but there are some questions that need to be investigated and answered.

Reserve Money growth has been anaemic - just 9% of the last two years. The RBI'S stated policy is to grow this parameter in line with the nominal growth of the economy. So, reserve money growth is well short of this target.

Please read last quarter's blog, and my earlier blogs on this subject.

Monitoring the Bull Market in Indian Stocks: Update as of January 2018

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 my nonthly blogs on this subject.