Had RBI not brought in the Urjit Patel committee report with its CPI-based inflation targeting approach, there is little doubt interest rates would have been cut by now. At 3.46%, WPI inflation is at a 5-year low and, even if you go by the CPI which is now in vogue, core inflation hasn’t been lower since January 2012—so it’s not just the food prices we’re talking about. The reasons for the slowing in inflation are equally obvious. While economic growth continues to remain anaemic for the third year in a row—that’s why, with no takers for loans, SBI has just cut its deposit rates, and other banks will follow—the game changers as far as inflation is concerned is the dampening of the MSP-rate hikes and the government finally deciding to start offloading FCI’s huge stock of grain. Along with an overall softening of global commodity prices—partly the result of the US cutting back on liquidity which was flowing into, among others, commodity markets—this has resulted in CPI cereals inflation falling to 7.4% in August 2014 versus an average of 14.9% in 2013 and 8.9% in the first 8 months of 2014; CPI fuel and light has fallen to 4.15% in August versus 7.9% in 2013 and 5.4% in 2014. It also helps that, as the Budget reinforced, the days of unbridled government spending, especially in rural areas, are also over for now.
Given this, it is difficult to see why RBI Governor Raghuram Rajan is so hawkish on inflation—a few days ago, he said rates could not be cut till there was more evidence on inflation slowing. While the likelihood of US interest rates rising raises fears that FII debt flows—at $18.7 billion till September, these are the highest in a decade—could start flowing out, more so if the rupee collapses, this has to be juxtaposed against higher FII equity flows as well as increased FDI prospects. At $14.1 billion till September, FII equity is likely to be the second- or third-highest in the last decade. And if even a fraction of the promised Japanese/Chinese promised investment comes in, this is a significant addition to FDI flows which averaged $28 billion per year over the last five years.>> Read More
The global economy faces a growing risk from big financial market bets that could quickly unravel if investors get spooked by geopolitical tensions or a shift in US interest rate policy, the International Monetary Fund has said.
The IMF said in a report it still expects economic growth to pick up in the second half of 2014 after a rough start to the year.
But it also warned that financial market indicators suggested investor bets funded with borrowed money looked “excessive” and that markets could quickly deflate if there were surprises in US monetary policy or the conflicts in Ukraine and the Middle East.
As the IMF put it in its technical language: “New downside risks associated with geopolitical tensions and increasing risk taking are arising.”
India’s economy is on the way to recovery but the road ahead may be bumpy, Reserve Bank of India Gov. Raghuram Rajan said Monday.
Mr. Rajan said strong export data and accelerating car sale growth suggest the economy could be gaining momentum even though investment data remain disappointing.
“Recovery is still uneven,” Mr. Rajan told an audience of bankers gathered at a conference in Mumbai. “We need investment to pick up.”
Mr. Rajan’s words came only a few days after data showed industrial production in Asia’s third-largest economy expanded less than expected in July, tempering recent optimism about an upswing in the economy.
Inflation data released Friday showed consumer prices rose 7.8% in August from a year earlier compared with a 7.96% inflation rate in July. It is the latest proof of a slowdown inflation, which may allow the RBI to cut interest rates.>> Read More
Loose monetary policies have created an “illusion of permanent liquidity” that is spurring investors to make risky bets and push up asset prices, the Bank for International Settlements said Sunday.
“The longer the music plays and the louder it gets, the more deafening is the silence that follows,” Claudio Borio, who heads the BIS’s monetary and economic unit, told reporters.
“Markets will not be liquid when that liquidity is needed most,” he warned, urging “sound prudential policies (and) extra prudence on the part of market participants themselves”.
Many central banks have kept their rates at record lows and pumped their economies full of liquidity first to stave off recession during the financial crisis and then to boost recent anaemic economic growth.>> Read More
Stocks finished the day mixed Thursday as a weaker-than-expected report on jobless claims, concerns about interest rate hikes and geopolitical threats weighed on investor sentiment.
The Dow Jones industrial average closed down 19.71 points, 0.1%, to 17,049.00.
The Standard & Poor’s 500 index ended up 1.76 points, 0.1%, to 1997.45, while the tech-laden Nasdaq composite index finished up 5.28 points, 0.1%, to 4591.81.
Concerns facing the markets:
• Interest rates. Stocks have come under pressure lately as speculation grows that the Federal Reserve will begin raising interest rates sooner than expected. Fed policymakers meet next week to discuss interest rate policy.>> Read More
Interesting piece in the World Economics Association’s Real World Economic Review on some of the difficulties the Fed faces when it begins tightening monetary policy. They point out the policy contradiction that paying interest on excess reserves is an injection of liquidity as they are trying to tighten.
…the payment of higher interest rates on excess reserves promises to be very expensive. It is also expansionary, which runs counter to the purpose of raising interest rates. The expense is very clear. Given banks hold $2.6 trillion in total reserves, every one hundred basis point increase in interest rates costs the Federal Reserve $26 billion. If the Fed’s policy interest rate returns to 3 percent, that would cost $78 billion. That is an effective tax cut for banks because the Fed would pay banks interest, which would reduce the profits it pays to the Treasury. The banks, which were so responsible for the financial crisis, would therefore emerge winners yet again. Taxpayers, who bailed out the banks, would once again bear the cost.
Paying interest to banks would also run counter to macroeconomic policy purpose since it would be pumping liquidity into the banks when policy is explicitly trying to deactivate liquidity. That smacks of policy contradiction.
Eurozone banks are set to take advantage of a new flood of central bank liquidity in a bid to boost lending to the region’s credit-starved businesses.
Faced with a stagnating economy eurozone banks are expected to borrow about €250bn in cheap four-year money from the European Central Bank in September and December, according to projections by Morgan Stanley, under the ECB’s ‘targeted long-term financing operations’. Periphery banks are expected to account for the heaviest borrowing.
“There’s huge interest in the TLTRO funds,” said Huw van Steenis, banks analyst at Morgan Stanley. “We forecast that the peripheral banks will take almost all of their loan allocation as it would lower their cost of funding significantly and, hopefully, be passed on to the real economy in the form of lower interest rates.”
Mario Draghi, the ECB president, recently said that lending could eventually rise to as much as €850bn inclusive of TLTRO monies available periodically after the opening loan splurge this year.>> Read More
Acceding to pressure to cut interest rates to spur growth, Korea’s central bank slashed its benchmark interest rate by 25 basis points to 2.25 per cent on Thursday.
The cut marks the first move in rates in 15 months. It’s also the first significant decision under Lee Ju-Yeo, a 35-year veteran of the bank who became governor in April.
The move comes less than a month after Choi Kyung-hwan was confirmed as finance minister, promising an economic revival and possibly putting pressure on the central bank to cut rates.
Recent data has also suggested the Korean economy is faltering, while inflation been moderating. In light of this, HSBC economist Ronald Man said on Monday that “space for a policy rate cut is certainly there.”
The new rate isn’t a record low. The BoK pushed rates to 2 per cent in 2009 after the global financial crisis.
The won danced around after the release, then fell 0.15 per cent to 1,07.90 per dollar.