Tag: Monetary Policy

RBI cuts interest rates by 25 bps to 5-year low

RBI cuts interest rates by 25 bps to 5-year low

05/04/2016 11:31

As expected, the Reserve Bank of India (RBI) on Tuesday delivered an interest rate cut, its first in six months while signaling a continued accommodative monetary policy stance to help power growth in Asia’s third biggest economy.

The central bank lowered the repo rate by 25 basis points to the lowest level since March 2011 at 6.5 per cent from 6.75 per cent. The RBI increased the reverse repo rate by 25 basis points to 6 per cent.

Raghuram Rajan, the RBI governor indicated that further interest rate cuts will hinge upon macroeconomic developments including the monsoon rains which could dictate the near-term inflation outlook and financial developments.

“The stance of monetary policy will remain accommodative,” Rajan said in the statement.

“The Reserve Bank will continue to watch macroeconomic and financial developments in the months ahead with a view to responding with further policy action as space opens up”, he added.

The government’s vow to stick to its budget deficit goals, easing inflation and a recent reduction in the interest rates on small savings instruments have given the apex bank additional room to bolster monetary easing in a bid to buoy demand and revive investments in the country’s economy.

The RBI kept unchanged its gross-value added growth projection for FY 2017 at 7.6 per cent while inflation is expected to decelerate at a modest rate to hover around the 5 per cent mark through March 2017.

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RBI policy review: Rajan faces calls to pull the trigger

RBI policy review: Rajan faces calls to pull the trigger

05/04/2016 00:10

The Reserve Bank will unveil its first bi-monthly policy review for this fiscal today amid expectations of a 0.25-0.50 per cent cut in interest rates to boost industrial growth and economy, said the PTI report.

Finance Minister Arun Jaitley had pitched for policy easing, saying high rates could lead to a sluggish economy.

Bankers and experts too are expecting lower borrowing costs as the inflation trajectory is down and the government has pledged to stay on the fiscal consolidation path.

Keen to show that it means business, the government has pared the small savings interest rate by up to 1.3 per cent, providing cushion to the Reserve Bank for lowering the policy rate and for banks to pass on its benefits to consumers.

Bank of Maharashtra CMD Sushil Muhnot said: “There is possibility of RBI reducing rate by 0.25 per cent as inflation has eased.”

According to a senior official from a state-owned bank, although a 0.25 per cent rate cut has been factored in by the market, there is also a high possibility of RBI slashing it by 0.50 per cent.

Jaitley said: “The government has stuck to fiscal deficit commitments and inflation has been under control. I do hope that this movement will continue in order to make our economy more competitive with more competitive interest rates.”

Industry chambers on their part are pitching for 0.5 per cent reduction in the key interest rate.

“A 0.25 per cent cut in the policy rate is almost given, but the real impact of falling lending cost can be felt only if the central bank goes in for a bold reduction of at least 0.50 per cent,” industry body Assocham said.

Retail inflation as measured by the consumer price index eased to 5.18 per cent in February as food prices rose at a slower pace while the wholesale price index stayed in the negative territory for the 16th month in a row.

RBI Governor Raghuram Rajan had last month said the government sticking to the fiscal consolidation road map in Budget was comforting, a statement which raised hopes for a rate cut in April 5 monetary policy.

RBI, in 2015, had lowered interest rates by 1.25 per cent.

RBI expected to cut rates by 25 bps: BofA-ML

RBI expected to cut rates by 25 bps: BofA-ML

29/03/2016 14:31

A report has said that India’s retail inflation for March is expected to be around 5 per cent and the Reserve Bank is likely to cut its key rate by 25 basis points each at its policy reviews on April 5 as well as in August.

According to Bank of America Merrill Lynch (BofA-ML), its inflation indicator is tracking March CPI inflation at 5 per cent, slightly lower than February’s 5.2 per cent.

Commenting on the issue, a BofA-ML Official told the media, “We continue to expect the RBI to cut rates 25 bps on April 5 and in August.”

The declining inflation and negative industrial outlook have strengthened the case for RBI cutting interest rate in its first bi-monthly monetary policy for 2016-17 on April 5.

RBI Governor Raghuram Rajan on February 2, left the key interest rate unchanged citing inflation risks and growth concerns.

The Reason Global Banks are Selling Off

The Reason Global Banks are Selling Off

With another trading session comes another bloodbath for the banks. In the month of January, global share markets seemed to be at the mercy of the change in the oil price. In fact, the markets were closely monitoring the course followed by oil prices. In the month of February, the financials have gained more importance.

A rough session with the European investors showed that Deutsche Bank is yielding 9.5%. This in turn is dragging the German DAX index down by almost 3.3%. Wall Street took its hint from Europe and eventually the American bank stocks crumbled down. Goldman Sach suffered a fall of 7.5 percent and Morgan Stanley toppling over 6%. Thereby, the four big banks of America collapsed by 3% in the morning trade with the investors bracing up to sell off the banks.

Profitability of Banks in Europe

20% of the bank stocks have been shed this year. However, this is much more than bad debts, emerging market jitters and tumbling energy prices. Exceptional low interest rates in Europe are the cause behind the serious profitability crisis of the banks. The profit that they make on the loans is also slashed when the interest rate falls down to 0%. It seems that this monetary policy is going to stick around for some time. Investors are worried that these banks might not even be able to repay back their loans. The realtors have come to terms with the reality that negative are not going to help the profitability of the bank.

Oil Residue

Most of the banks have invested heavily in the large projects of oil. As the prices of oil slumped down, several companies that were behind the project crashed. As per the list complied by Hanes and Boone, the Houston law firm, about 42 companies of the United States have been bankrupted in the beginning of the year 2015. It is more likely that others will follow.

With oil price being the lowest in the last 12 years, banks like JPMorgan Chase, Citigroup and Well Fargo are stuck with huge loans in the energy sector and are hoarding money to cover up for the potential loss in their gas and oil loans.

The Absence of Liquidity

With US Federal Reserve putting an end to the quantitative easing program in the year 2014 and particularly after it began lifting the interest rate in December 2015; the liquidity in the financial market has been drying up. The new regulatory and the capital requirements that had been carried out restricted the bank trading activity and also cut down the number of rooms the banks appeared to have in their balance sheet to offer to the liquidity market. All of this was due to the fall in the commodity prices that led to the severe sell-offs in the potential market and also high-yield debt. This consecutively caused the shift of the liquidity risk to the buy-side from the bank.

Sovereign Funds

The sovereign wealth funds of the nations that produce oils are dragging out money from the market to fill the shortfalls in their budget that have been created by cheap oil. The fiercely selling asset is setting off the oil prices.

Dec IIP indicates industrial recovery is still fragile: Ind-Ra

16/02/2016 12:04

The Index of Industrial Production (IIP) grew negative 1.3 per cent in December 2015, as against India Ratings and Research’s (Ind-Ra) forecast of 0.8 per cent. A second consecutive month of negative growth in factory output once again demonstrates that the industrial recovery is still uneven and fragile, said the rating agency.

“A part of the negative growth in December 2015 is an outcome of floods inundating Chennai, a major manufacturing hub for electronics and automotive,” Ind-Ra said in a report.

Of the USD 38 billion annual production of auto components in India, almost 25 per cent (USD9.5bn) comes from Chennai and its surrounding automotive belt. However, cumulatively during April-December 2015, at 3.1 per cent factory output growth is still higher than the 2.6 per cent growth recorded during the same period in 2014. Ind-Ra expects industrial gross value added to grow at 7.3 per cent in FY16.

Manufacturing growth came in at negative 2.4 per cent in December 2015, lowest since October 2014. After a relatively robust performance till October this fiscal, the manufacturing sector growth has dwindled. Although the government is trying to accelerate the manufacturing sector growth with emphasis on ‘Make in India’ and stepped up spending on infrastructure, it is still besieged with a number of challenges. A number of manufacturing sectors are still saddled with excess capacity due to lack of demand while few others are facing the brunt of cheap Chinese imports. A depreciating yuan and growth slowdown have resulted in an uptick of imports from China.

10 of the 22 industry groups in the manufacturing sector showed a contraction in December 2015. The capital goods sector contracted by 19.7 per cent in December 2015. This is the second consecutive month of negative growth in capital goods. However, cumulatively for April-December 2015, capital good is still showing growth of 1.7 per cent albeit lower than the 5.1 per cent recorded during the same period in 2014.

The Reserve Bank of India had earlier noted that the buoyancy witnessed in the capital goods sector till October 2015 is primarily from the demand generated from the projects stalled earlier, but have been revived lately. Clearly so long as greenfield investments do not pick up, sustaining capital goods growth will remain a challenge. Yet, Ind-Ra believes with government focus on increased capex in the sectors vital for growth – roads, railways, ports, rural roads etc, we may have to wait for more data to discern a trend.

Sensex, Nifty in red; oil stocks drag

02/02/2016 14:35

The key domestic benchmark indices pared all the gains and slipped into negative territory during the late noon trading session amid weakness in the oil shares on account of declining crude oil prices coupled with losses in Index heavyweights.

At 14:17 hours, the 30-share benchmark index, Sensex was trading at 24706.04 down by 118.79 points or by 0.48 per cent, while the NSE Nifty was at 7497.9 down by 58.05 points or by 0.77 per cent.

Investors turned cautious on Moody’s Investors Service report which says that RBI’s target to bring down retail inflation at 5 per cent by March 2017 will face some risks from monsoon uncertainty and execution of 7th Pay Panel recommendations, while macro-economic factors will be critical for sustaining growth.

The Reserve Bank of India (RBI) has today kept the policy repo rate unchanged at 6.75 per cent due to inflation concerns. RBI governor Raghuram Rajan expects inflation to be around 5 per cent by the end of 2016-17.

In the choppy trade so-far, Sensex touched intraday high of 24928.75 and intraday low of 24661.09 The NSE Nifty touched intraday high of 7576.3 and intraday low of 7496.75. Major laggards on the D-street included Tata Steel Ltd. (Rs. 237.25,-4.87%), Cipla Ltd. (Rs. 580.50,-2.89%), Sun Pharmaceutical Industries Ltd. (Rs. 847.30,-2.63%), NTPC Ltd. (Rs. 136.70,-2.53%), Bharat Heavy Electricals Ltd. (Rs. 137.00,-2.46%), among others.

Meanwhile, some buying interest was seen in index heavyweights including Bharti Airtel Ltd. (Rs. 302.05,+1.87%), Bajaj Auto Ltd. (Rs. 2356.25,+1.21%), Infosys Ltd. (Rs. 1183.85,+1.07%), Tata Consultancy Services Ltd. (Rs. 2422.95,+0.86%), Housing Development Finance Corporation Ltd. (Rs. 1188.90,+0.80%), among others.

Among the sectors, metal and Oil & gas indices remained under pressure, declining by 3.21 per cent and 1.85 per cent respectively.

The Market breadth, indicating the overall strength of the market, was weak. On BSE out of total shares 2696 traded, 1141 shares advanced, 1417 shares declined while 138 were unchanged.

On the global front, Asian peers ended the day on mixed note as oil rout resumed coupled with persistent concerns over the health of Chinese economy. Meanwhile, European counters were also reeling under pressure with all CAX, DAX and FTSE trading down 1.5 per cent each.

Market Outlook for February 01, 2016.

01/02/2016

  • Indian equity market is poised to open on a positive note today tracking firm Asian markets after the Bank of Japan (BOJ) unexpectedly decided to implement a negative interest rate policy.
  • Japan’s Nikkei extends gains on Monday up around 1.8% after the BOJ’s unexpected policy easing Friday that saw global equities claw back some gains. However, China’s Shanghai fell after the Country’s official factory activity eases to a three-year low point in January. The official Purchasing Managers’ Index (PMI) stood at 49.4 in January, compared to the previous month’s reading of 49.7.
  • Back home, the major trigger for the domestic equity market this week will be the outcome of policy meet of Reserve Bank of India scheduled on 2 February 2016 wherein the Central bank will take a view on interest rate.
  • Shares of automobile companies will remain in focus this week as the companies will start announcing January month sales volume data from today.
  • Among major corporate results scheduled today include Tech Mahindra and Adani Enterprises, scheduled to announce third quarter results.
  • Further, investors’ focus will be on Nikkei India Manufacturing Purchasing Managers’ Index (PMI) data for January 2016, which is due today.
  • On the stock specific front, IDFC Ltd has reported a fall of 58.2% in its consolidated net profit after taxes (PAT) at Rs 176.18 crore for the third quarter ended December 31, 2015.
What Lies In Store for the Global Economy In 2016

What Lies In Store for the Global Economy In 2016

Every New Year brings with it various economic events which tend to catch people by surprise. No matter how carefully you consider the data presented, it is not always possible to make an accurate prediction. For example, there weren’t many people who foresaw the slump in oil prices that began in the 2014 summer. Neither were they able to predict the sharp fall of the Chinese economic growth.

 

However, there are still other events that you can make a reasonable prediction based on careful consideration of economic data. As such, here are a few economic trends that might come to the fore in 2016 and thereby shape global economy.

 

The State of the Chinese Economy

For the last few years, China kept stunning the world with its economic growth rates. Sometimes, they were three times more than what the United States enjoyed. Of course, the capital investment directed by the government had a major role to play in this matter. When the global financial crisis stuck, China remained more or less unfazed thanks to the huge boost provided by the government

Unfortunately, most of this investment was made possible by growing the debt instead of profits. Now, China will have to shift the wealth from the powerful to the common Chinese household. Suffice to say, that will neither be politically easy nor fast. This trend is likely to be a recurring theme in 2016 and more.

 

The American Economy will affect the Global Economy

It may come as a surprise to many but it is a fact that the performance of the US economy is currently the best in its class. After all, the rest of the developed world is experiencing a slower growth compared to America, especially with the decline that China is experiencing.

More importantly, the largest trade deficit in the world currently belongs to the United States. In other words, the other major economies in the world such as China, Japan and Germany are depending on the demand in the United States in order for their economies to experience growth. This situation is likely to continue through 2016 where the global economy leans on the consumer in America.

 

The Indian Economy Can Experience Major Growth

The International Monetary Fund believes that the Indian economy is poised to grow at a rate of 7.3% in 2016. That will be faster than even what the Chinese can muster up with the inflated numbers produced by its government. It is likely that 2016 will become a turning point. India may not be as technologically advanced as China but it may turn out to become the fastest growing economic in the large sector.

India has also been affected by the same issues that have slowed down economies in other emerging markets. However, demographics have proven to be India’s advantage. In the coming decade, the Indian workforce may grow up to be bigger than even the Chinese.

 

Of course, nothing can be said to be certain about the future of the global economy. Europe might end up on the edge of an economic crisis, for example. One can only hope for the best.

The European Crisis Can Worsen Further Into a Global Phenomenon

The European Crisis Can Worsen Further Into a Global Phenomenon

There have been innumerable debates on the effectiveness of QE or rather the lack of effectiveness. What is QE? Quantitative easing (QE) is a type of monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective. However, these debates have not brought about any decisions that can be said to be better, especially in the European region. A glance at the stock market is more than enough to understand the economic crisis that has got all investors scared.

One national leader from Europe had recently made a proposal, which seems a bit unique at first glance, to deal with the debt bubble and the financial crisis. On the surface, the proposal does seem to be sound even though it looks rather unorthodox. The problems begin to appear when you dig a little deeper. Once you do so, you will realize that the proposal will end up doing the exact opposite of what it wants to do.

Developed economies need to consider the actual economic state of Iceland as an example of recovery before a bigger catastrophe strikes the market and the future becomes black with debt.

Iceland has a total population of less than 320,000. The economy of this country is by no means diverse. The dominant economic sectors are energy, fishing and aluminum. Iceland is also home to the oldest functioning legislative assembly in the world called the Alþingi which was founded in the year of 930. Unfortunately, their experience was not enough to save the economy of Iceland. Instead, Iceland has ended up becoming another Greece. The parallels are too similar to ignore.

In the last 7 years, Greek households have lost around $215 billion as per estimates. Even today, the unemployment percentage in the country is 27%. 44% of the incomes fall below the poverty line. The current debt of Greece to GDP is 175% which is the highest in the European Union and the annual deficit is 12.7%. The International Monetary Fund and the European Union have already given $332 billion as loans to rescue the economy of Greece. This has caused the national debt of Greece to rise to $470 billion. This is unimaginable for a country whose economy is only 1.4% of the entire European Union.  Majority of this money has gone as payments to French and German banks which had high investments in the debt of Greece. In just six years, the output of Greece has decreased by 25%.

What Happened to Iceland?

In Iceland, the situation was almost a reversal of the scenario in Greece. Overextended Icelandic banks began to collapse due to their mortgage assets which had inflated greatly. In just a short period of time, the financial sector decreased by four-fifths of its size. Iceland let the banks fail and began to impose capital controls instead. Bank debt held by foreigners was sacrificed. Iceland could do what it wanted as it was not a part of the European Union. It could default and devalue to restore its problem as it had its own currency – the krona.

This scenario had been used by Greece in the past. However, it is no longer an option.