Monetary Policy 04 Mar 2015 by Tojo Jose

RBI’s rate cut: ‘Thank you dear government; take this gesture from us.’

RBI’s rate cut: ‘Thank you dear government; take this gesture from us.’

Last few days are witnessing the government and the RBI exchanging pleasantries. First, the government has made a budget announcement for ratifying the RBI’s dream project of inflation targeting. Now, in return the central bank has cut the short term interest rate by 25 basis points. Unscheduled meeting of the RBI has decided to cut the repo rate to 7.5 per cent. The RBI has strategically hint that fiscal deficit is a factor for introducing the rate cut, though many economists have warned the 3.9 per cent fiscal deficit target as an unrealistic one. “The true quantum of fiscal consolidation may be higher than in the headline numbers.” Dr Raghuram Rajan has made

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Monetary Policy 03 Mar 2015 by Tojo Jose

Inflation targeting regime needs Government -RBI coordination

Inflation targeting regime needs Government -RBI coordination

The most sound reform measure of the budget was the agreement between the government and the RBI to facilitate the proposed inflation targeting monetary policy regime in India. Details of the agreement will be finalized only in stages as inflation targeting requires the government to follow a disciplinary fiscal policy and giving more power to the RBI. Besides, the proposed RBI dominated Monetary Policy Committee is also government’s ratification. The agreement announced through the budget is a very important one given the history of central bank-government relationship in the past. During the pre-reform period, the RBI had not freedom, rather was just giving the loans req

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Monetary Policy 15 Jan 2015 by Tojo Jose

Why this late rate cut is not surprising?

Why this late rate cut is not surprising?

At last, the RBI has came out with a rate cut; though it is a paltry 25 basis point which will not compel a price leader like the SBI to make an interest rate cut. RBI’s reversal of its policy is late but not surprising. Most of the central banks have already launched easy monetary policy through rate cuts for the last one year. Despite the decline in inflation to the acceptable low levels, the RBI’s adamant stand has made people lost interest in the activities of the central bank. On the other, that of the government was watched with expectations. Government led administrative and economic reforms have travelled much distance with the new government. Many insti

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Monetary Policy 14 Dec 2014 by Tojo Jose

Good and bad about the strengthening disinflation.

Good and bad about the strengthening disinflation.

Inflation in the economy is coming down at a quicker rate. The current price fall is because of declining food and fuel prices. A lower food inflation compared to the entire CPI was recorded during November 2014 data. Inflation came down to 4.38 percent while food inflation was 3.6 percent for that month. Notable trend is that during the last seven months starting from May, inflation increased only in July. That also was very slight. This is an indication that the economy is on noticeable level of disinflation mode. Disinflation is decline in the inflation rate.   Conventionally, a decline in food and fuel are the sectors where price rise appears first. So is the case wit

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Monetary Policy 02 Dec 2014 by Ancy Joseph

RBI keeps interest rate unchanged

RBI keeps interest rate unchanged

The RBI has kept the policy rate unchanged in the new bimonthly monetary policy revision. This means that is no change in the current monetary policy stance.  To facilitate the liquidity situation, the overnight repo support and term repo support will be continued at 0.25 % and 0.75% respectively. Expectation about a rate cut was thin though favorable conditions were prevailing in the economy. Indications from the present policy stance are that the RBI is strictly adhering to the enforcement of hard inflation targeting regime. Justifying the decision for keeping the rate unchanged the RBI has observed that “Some easing of monetary conditions has already taken place.

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Monetary Policy 01 Dec 2014 by Tojo Jose

Giving an Yes to rate cut

Giving an Yes to rate cut

Debate about the bi-monthly monetary policy stance of the RBI, which is to be made on December 2, is heating up. Despite many economists and bankers expressing that the rate cut is not going to happen, there are strong logics for the RBI to cut its policy rate. The first and the important one is that central banks in most countries have already launched monetary stimulus type policies during the last couple of months. People Bank of China (PCB) made a surprising rate cut last week, joining advanced country central banks like the US Fed, Bank of Japan and the ECB. Now, monetary policy is implemented in a synchronized manner globally and rate cut and growth stimulus made by the em

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Monetary Policy 21 Sep 2013 by Kiran Raj

CPI gets the stardom under new RBI MP Revision

CPI gets the stardom under new RBI MP Revision

The Consumer Price Index so far was in the shades of Wholesale Price Index (WPI) in the RBI’s official policy declarations. But everything changed with Dr Raghuram Rajan. In the new monetary policy revision, the new Governor referred CPI in scaling inflation. The government is mostly relying on WPI version in inflation measurement. It often tries to make retail inflation unimportant while mentioning price scenario fearing the higher inflation rate usually recorded under the CPI scale. Interestingly, the RBI’s deviation is an interesting one given as it tries to depart from the government approach.  Now days the RBI shows increasing tendency to deviate from the g

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Monetary Policy 20 Sep 2013 by Tojo Jose

Raghuram Rajan goes hard on inflation and soft on liquidity

Raghuram Rajan goes hard on inflation and soft on liquidity

The RBI today increased the repo rate to contain inflation while softening some instruments- Marginal Standing Facility Rate and daily CRR holdings to facilitate liquidity in the system. The repo rate hike is intended to fight inflation. At the same time, the financial system is running on liquidity shortages. During many weeks in the past couple of months, the call rate has gone beyond 10 percent level. So liquidity enhancement was necessary. Reduction in Marginal Facility enables the banks to get more funds. This will help banks to get some extra funds by paying less interest rate to tide over liquidity. MSF is the rate at which the banks can get loans from the RBI by surren

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Monetary Policy 17 Sep 2013 by Tojo Jose

RBI may cut GDP growth estimate and may come out with strong provisioning to reduce NPAs

RBI may cut GDP growth estimate and may come out with strong provisioning to reduce NPAs

The next monetary policy revision of the RBI is scheduled on 20th of this month and it will be the first one after Rahuram Rajan assumed office. The new Governor has enough reasons to make his first policy declaration an important one.  Amidst the present environment, he has to make few important steps including that one on growing NPAs with the banks. NPAs of banks crossed 12 percent, which is alarming and it may go further given the present weak economic growth prospects. Rising NPAs is always against the RBI’s financial stability objective. At present, the central bank has sound provisioning norms to minimize the impact of NPAs on the banking system’s finan

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Monetary Policy 07 Sep 2013 by Tojo Jose

Markets should shed super expectations on Rajan

Markets should shed super expectations on Rajan

The Reghuram Rajan effect has produced two days of continuous upswing on both stock market and Rupee. Amidst a crisis produced negative sentiments, the market was searching to find something to cheer and they rightly found an energetic Rajan. It seems that more than the entry of Prof Rajan, markets were celebrating the exit of Subbarao. Financial markets have big trust in the new Governor than in P Chidambaram. The support measures suggested by Prof Rajan are more realistic than those made by Sri Chidambaram. It is to be remembered that the stocks and rupee tumbled when the Finance Minister declared his support measures couple of weeks back.  So far the story is going fine.

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