Tuesday, April 1, 2014




RBI has again released its Monetary Policy statement and the Back Ground Justification for it TODAY. As always, the Micro and macro developments statement of RBI is impressive.

But, the Monetary policy comes separately as below :-  

RBI says - 

“On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:

      keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent; 

      keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL); and

      increase the liquidity provided under 7-day and 14-day term repos from 0.5 per cent of NDTL of the banking system to 0.75 per cent, and decrease the liquidity provided under overnight repos under the LAF from 0.5 per cent of bank-wise NDTL to 0.25 per cent with immediate effect. 

Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent.

If RBI had again increased Repo rates, I would have said OH MY GOD – but given that the rates have not increased, I say THANK GOD.

I didn’t say, THANK RBI. I would say that, if RBI had decreased the REPO RATES  by some percentage points.

By now, in India, at least, I, for one, am damn certain that RBI hiking rates never ever threatened Inflation a wee bit. Inflation went up, come rate hike or no rate hike.  In Indian conditions, only supply increases brought down Inflation, not repo rate hikes. UPA Government at centre and most state Governments never ever seem inclined to take tight steps to control Inflation. So, it always depended on the Farmer and the RAIN GOD , not RBI and not Governments to control Inflation.

Hopefully, things may change if Modi comes to Government and allows people to produce more (not more people, but more of other things). The only thing that UPA Government allowed people to produce  more without any restriction was – more people.  That should change.

I respect RBI for all its analysis. But, its final Policy statement looks absolutely reasonless. Forget all your Micro and macro analysis, Sir, but look at the real, honest effect of your Repo rate hikes in the last 3 years. They never mattered a wee bit in controlling Inflation. They didn’t.  That was my honest observation. But, your repo hikes have mattered in controlling – and not permitting GROWTH.

Growth is suffering  very badly. This means, employment is coming down, production is coming down, but not demand. And, this is the precise cause of Inflation. Repo Rates at this level are fueling Inflation and not bringing down Inflation.

So, RBI’s not Hiking Rates does not gladden me at all. But, had they hiked repo rates even now, I would have said, OMG !

That said, market reaction in beating down bank stocks is meaningless. Banks will perform well. Their liquidity is increased; not reduced. Their margins are not under pressure at all. Only their NPAs under pressure. For NPAs also, part of the blame lies on High repo Rates. They should come down. That is my honest opinion.

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