The global economic crisis has kept RBI busy throughout the last year in relaxing the liquidity situation in the Indian Economy. But, with the growth picking up faster than expected along with the supply side constraint in food sector due to the poor monsoon in last year, RBI started acting in reverse direction from the October 2009. The Inflation (WPI) figures for the economy swung like a see-saw, being in negative zone for two months upto August 2009 then it started heading towards northwards & became a problem to RBI & to everybody resulting in negative returns for the savings. The WPI touched as high as 11.2% in April as the inflation in Non food products (WPI excluding food products and food articles) touched to 7.3% in June 2010 i.e. along with the food sector, the inflation in non food items shows growth in demand for items of other sectors also.
Money supply (M3) growth on a year-on-year basis moderated from 16.8 per cent at end-March 2010 to 15.3 per cent as on July 2, 2010 reflecting a slowdown in the growth in bank deposits. The month June saw higher credit demand from the corporate sector because of BWA & 3G Auction & payment of advance tax deposits. Year-on-year non-food credit growth accelerated from 17.1 per cent in March 2010 to 22.3 per cent as on July 2, 2010, which was higher than the indicative trajectory of 20 per cent set out in the April 2010 Monetary Policy Statement. This has prompted RBI to increase repo rate & reverse repo rate to increase by 25 bps & 50 bps respectively to restrict growth because of higher credit offtake. Rough estimates show that the total flow of financial resources from banks, non-banks and external sources to the commercial sector during Q1 of 2010-11 was at Rs.2,50,000 crore as against Rs.61,000 crore during Q1 of 2009-10. This shows that the demand has picked up in the industrial sector to fulfill domestic consumption requirement. This means Indian manufacturing industry is on the growth trajectory.
From July 1, 2010 bank have shifted to base rate system. Most of the banks have kept their rates around 8%. This has resulted into industry issuing more CP’s to meet their short term demand as it comes at cheaper cost & also its time saving. But because of this, banks credit offtake may slow down to the small extent.
Barring some instances of positive growth in Euro zone countries (Germany Q2 growth at 2.2%), the trends in US are still not showing any signs of significant growth & unemployment claims are still rising. The developed countries are growing with meagre rate of around 1%. Also there are some signs of slowdown in China. Many analysts are of the view that the growth in the Global economy in the second half will be lesser compared to the first half. This may lead to commodities & crude oil prices trade between the same brackets as of now for a longer time. So, In India, where the petrol prices are decontrolled recently, the public may not have to bear rising prices for at least a few months. Since, diesel prices are not decontrolled; I do not expect changes in diesel prices with the change in petrol prices. Therefore, there will not be a significant impact on inflation because of change in fuel prices.
Now, RBI will be coming with its mid-quarter review on September 16, 2010 (first time). I do not expect that RBI will increase repo & reverse repo rate in this review, because of following reasons:
1) As can be seen in the following graph, the overall WPI & all its major components have started rising after the month of September 2009. Since WPI is calculated on Year-on-Year basis, the rate of inflation will smoothen in the future months to come.
2) The primary articles in WPI have weightage of 22.03% & it mainly consists of food articles weighing 15.40. With India receiving above average rainfall during this monsoon in almost every part of the country, the food inflation will come down to single digits.
3) The IIP index has shown a growth of 7.1% in the month of June. Also the sector has grown with 3.4% in July marginally up by 0.2 % from 3.2% in June 2010. The core sector contributes around 26% in IIP index. Therefore, IIP will index will be hovering around the same range for the month of July. This means the credit offtake by the industry will not be showing significant changes during this period.
4) In the month of September, Advance tax payment will be made & it is expected that it will suck around Rs. 55,000-60,000 Cr of money from the system. Since there is a tight situation in the market, banks may issue CD’s in the coming month to manage the liquidity situation.
5) RBI is going to come with the second-half calendar for government borrowing. The volume of issuances have come down substantially in the month of July from Rs. 3,42,362 Cr in the first fortnight of July to Rs. 3,27,720 Cr in the second fortnight of the same month. So, in September, the issuances of G-sec are supposed to be higher than in the month of August. Though the Government had received money in the form of 3G & BWA auction more than expectation, the Government has come with additional fiscal expenditure of Rs. 54,000 Cr.
6) The RBI has increased the repo rate in the month of March, April (25 bps each) & in July (50 bps), the reverse repo rate is increased in the month of March, April (25 bps each) & in July (75 bps). From last October 2009, the increase in CRR is 100 bps. As the monetary measures require some time lag to show their effect, RBI may not come up with revision in this mid quarter review.
Let’s see what’s there in the RBI basket for the public on the occasion of coming festivals.
No comments:
Post a Comment