The Reserve Bank of India, in its first monetary policy review of financial year 2017-18, kept the repurchase (repo) rate unchanged at 6.25%, citing upward risks to inflation and global uncertainty.
The Monetary Policy Committee, however, raised the reverse repo rate by 0.25 basis points to 6%, and cut the marginal standing facility (MSF) rate to 6.5%.
“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth,” said RBI in its policy statement.
“RBI hiked reverse repo rate by 25 bps to 6.00% thereby reducing the corridor between repo and reverse repo to 25 bps from the existing 50 bps. The essential aim seems to be ensuring a sharper focus on the keeping overnight rates (especially the overnight call money rate) aligned to the repo rate,” said Bekxy Kuriakose, Head – Fixed Income, Principal Mutual Fund.
Here are five key takeaways from the RBI’s policy statement:
Banks can invest in REITs
While reviewing the monetary policy, the central bank has proposed that banks be allowed to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). This follows an earlier proposal by market regulator Securities and Exchange Board of India (Sebi).
The RBI proposed to allow banks to participate in Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (InvITs) following a proposal by market regulator Securities and Exchange Board of India (SEBI). Banks would be allowed to invest in these instruments within the stipulated limit of 20 percent of net-owned funds.
“One of the highlights of today’s policy was the decision to allow banks to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs) within the 20% umbrella limit. It will allow banks to invest in an important asset class thereby providing much needed boost to this segment. Owing to better liquidity, the cost of capital for developers in the commercial segment will come down in the future,” said Surendra Hiranandani, chairman & managing director, House of Hiranandani in an emailed note.
During the last 129 months, the Fed has held 86 meetings. On 83 of those occasions it either cut rates or left them unchanged.
So you can perhaps understand why Wednesday’s completely expected (for the last three weeks!) 25 bips left the day traders nonplussed. The Dow rallied over 100 points that day.
Traders understandably believe that this monetary farce can continue indefinitely, and that our Keynesian school marm’s post-meeting presser was evidence that the Fed is still their friend.
No it isn’t!
Our monetary politburo has expanded its balance sheet by a lunatic 22X during the last three decades and in the process has systematically falsified financial asset prices and birthed a mutant debt-fueled of simulacrum of prosperity.
But once it begins to withdraw substantial amounts of cash from the canyons of Wall Street as per its newly reaffirmed “normalization” policy, the whole house of cards is destined to collapse.
There will be a stock market implosion soon, and that will in turn generate panic in the C-suites as the value of stock options vanish. Like in the fall of 2008 — except on an even more sweeping and long-lasting scale — corporate America will desperately unload inventories, workers and assets to appease the robo-machines of Wall Street.
But there is nothing left to brake the casino’s fall.
With a rate rise in the books investors get to hear from a handful of Federal Reserve speakers next week. On the geo-political front a hearing on Russia’s interference in the US presidential election and a meeting on combatting Isis take the spotlight.
Here’s what to watch in the coming days.
While the Federal Reserve decided to raise interest rates for the third time since the financial crisis, chair Janet Yellen reiterated that the pace of rate rises would be gradual and the so-called dot plot continued to signal just two additional rate rises this year. The move was interpreted by some as a dovish hike and Fed speakers could get the chance to refute that next week.
“Moreover, we’d also look for clarification on the addition of ‘symmetric’ in the press statement when it came to defining the inflation reaction function,” strategists at RBC Capital Markets said. “Our sense is that this was in an effort to put an end to inflation level targeting—also not a dovish development.”
Ms Yellen will deliver the opening keynote at the Federal Reserve System Community Development Research Conference in Washington on Thursday. Through the week, investors also get to hear from voting members of the monetary policy setting Federal Open Market Committee, including Chicago Fed president Charles Evans, Dallas Fed president Robert Kaplan and Minneapolis Fed president Neel Kashkari — the only voting FOMC member to dissent at the March meeting and who has explained his rationale for the move on Friday.
On the economic data front, the calendar is fairly light but investors will keep an eye on fourth quarter current account deficit figures due Tuesday and durable goods orders slated for Friday.
The fed hike case is built on a strong consumer led recovery. That’s good when people have money to spend, and when wages give them that money to spend. The wages (average hourly earnings) in the jobs reports report showed pay running at a decent 2.8% y/y. Today we get the inflation adjusted wage numbers in the CPI report and they don’t look as hot.
Last month, year on year real average weekly wages dropped for the first time since the start of 2014.
US real average weekly wages y/y
That’s not good news for the supposedly strong consumer and rate hikes won’t make the situation any better.
I’m quite surprised that the Fed will be raising so quickly after the Dec hike instead of letting that hike filter through, and monitoring the effects. To me that suggests that behind the scenes there’s something they are worried about. If they’re willing to hike in a moment when their whole basis for hikes (the consumer) might start finding things tougher, there’s something amiss.
It’s a straw clutch to try and find anything that could derail the hike tonight but there’s plenty of evidence in why they might throw in some additional caution about future hikes, and the wages numbers today may aid that sentiment.
Jeffrey Gundlach, chief executive officer at DoubleLine Capital, said on Tuesday he expects the Federal Reserve to begin a campaign this month of “old school” sequential interest rate hikes until “something breaks,” such as a U.S. recession.
Gundlach, who oversees more than $101 billion at Los Angeles-based DoubleLine, said U.S. economic data support a rate increase as soon as the next Fed policy meeting on March 14-15, and further rises this year, after a series of false starts in 2015 and 2016.
“Confidence in the Fed has really changed a lot,” Gundlach said on an investor webcast. “The Fed has gotten a lot of respect with the bond market listening to the Fed” now that economic data support the tough rhetoric from Fed officials.
New York Fed President William Dudley, whose branch of the U.S. central bank serves as its eyes and ears on Wall Street and who generally spends a couple of hours a week planning policy with Fed Chair Janet Yellen, played a key role in orchestrating the messaging of a March rate hike.