RBI quarterly policy review july 2013

Extracts of Review• Management of Rupee – Top Priority; 60?• Monetary policy alone?• Blame it on Rio (oops!)…external sect risks.• Reservations about Sovereign Bond Issuance.• Plunge of 0.2 to 5.5%.• Moderating WSPI + Prospect of softening of Food

Inflation + Decelerating Growth = Free K Movmt

Stable ER Indep MP

Time Travel…..• Monetary Policy Statement

2013-14/07May’13:-A. CAD related risk.B. Sudden stop and reversal of

capital flows.C. Negative I sentiments.D. Supply constraints.

• Appearance of Chairman, Fed in front of Congress/22 May’13:-– Tapering and QE.– 0 hour over.

…..Time Travel

US Treasury Note Yield = 2.4%Indian Yield = 7.3%

…..Time Travel….• Mid Qtr Policy Review/17June’13:-

– Capital reversal still on.– Rupee still under pressure.– Macroeconomics week.– Good Monsoons but crucial over next three months.– WPI down to 4.7% but Food Index still close to 10%.– Need to have conducive environment for investments.– Fiscal deficit brought down to 4.8%.

• Actions Taken:-– Gold import restrictions and duty raised.– Liquidity reduced – CRR, Bonds, Raised margins of

currency derivatives , Marginal Standing Facility & Liquidity Adjustment Facility restrictions.

…..Time Travel: RBI Acts• June 5 - Import of gold restricted; customs duty raised . • July 08 - Banks to trade only on behalf of their clients in currency

futures/options markets, tightening of exposure norms, and raising margins on currency derivatives to check speculative activities.

• July 15-MSF rate raised to 10.25%, restricting the overall access by way of repos under the LAF to 750 billion.

• July 18 - Open market sales of government securities of 25 billion. • July 22- At least one fifth of imported gold has to be exclusively

made available for the purpose of exports.• July 23- Regulating access to LAF by way of repos at each individual

bank level and restricting it to 0.5 per cent of the bank’s own NDTL.

• July 24- CRR which banks have to maintain on a fortnightly average basis subject to a daily minimum requirement of 70 per cent, was modified to require banks to maintain a daily minimum of 99 per cent of the requirement.

Back to July Review• Management of Rupee – Top Priority.• Monetary policy alone?• Blame it on Rio (oops!).• Reservations about Sovereign Bond Issuance.• Plunge of 0.2 to 5.5%.• Moderating WSPI + Prospect of softening of Food

Inflation + Decelerating Growth = Free K Movmt

Stable ER Indep MP

• Blame domestic scene rather than Fed:-– Largest CAD among peer group; $ 0.5b/day need to flow.– Preferred inflow of FDI – soured by –ve sentiments.– FIIs – huge outflow; now a fickle (ok, Fed did it!).– Bottom may fall out to 65 or 70.– Only 1/5th liquidity sucked out.– Backtracking from Bond auction – lack of confidence.– Political uncertainty.– Unrealistic export targets.

Options Ahead• External Correction:-

– Lower CAD – weaker Rupee + faster exports.– Minimal cost in terms of lost economic output and jobs.

• Internal Correction:-– Stabilise currency.– Lower CAD – slower domestic growth + slower imports.– Increased human misery.– Dependent on fiscal consolidation

• Possibly a way out :-– RBI may have to let currency follow its natural course.– Fiscal consolidation + Supply side reforms by govt + LT

funding to bring in dollars.

• Flirting with 61.• PSUs and PSBs to raise $ through

ECB….. CRR?

• Sovereign Bonds not trashed yet.• Oops….$ 1tn tag in danger.• T-bill yield touches 11.26%.• Fiscal deficit already at half way mark;

export interest subsidy (2-3)= 2000cr.• FOREX Res touched $279b

Hopefully !

• But the catch lies in putting house in orderand the responsibility for that lies with FM.• RBI may focus on inflation.• Rupee may then stabilise automatically.

-Fiscal Deficit.-Forex Res.-Gold Imports.-Non-essential Imports.-FDI Mxs.-NRI – LT.

Any Questions?

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