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It is the last month of the year and most of us are counting days when we can finally pop the bubbly to usher in a new year along with some much-deserved fireworks. For the Reserve Bank of India (RBI) though, year-end fireworks (a rate cut would be one) look inappropriate, especially when the two most important measurements of success are not going your way. Gross domestic product (GDP) growth is at a seven-quarter low and retail inflation is beyond the 2-6 percent mandated band.
When fireworks won’t work, confetti are a good and reasonable option. Governor Shaktikanta Das seems to have chosen the confetti option, by cutting the cash reserve ratio (CRR) to pour enough liquidity for investors to see their glass as half full. At the same time, adding liquidity instead of the optically potent rate cut was the safer bet when inflation is yet to behave. As Dinesh Unnikrishnan puts it in our analysis of the policy today, “cutting the repo rate at a time when the retail inflation rate has breached the 6 per cent upper band would have been an embarrassment for the embattled MPC which has highlighted inflation targeting for so long as the key priority.”
The CRR cut will infuse Rs 1.16 lakh crore into the banking sector and drag down borrowings costs a bit in the markets. As such, the government’s cost of borrowing has declined remarkably so far this year despite the inflation discomfort. When the benchmark 10-year government bond yield is below 7 percent, and Indian firms are having one of the best deleveraged balance sheets, is there any reason for their borrowing costs to go up? Read our other analysis of the policy by Neha Dave, where liquidity’s impact on rates is also explained.
The liquidity infusion also softens the blow from the RBI’s forex interventions that have been sucking out rupees from the markets. Hence, it gives Das more room to continue defending the exchange rate. The pressure on the Indian rupee is palpable and the duress on the RBI to maintain stability in the forex market is also evident. A December 2 Reuters story highlights the growing position of the RBI in the non-deliverable forward market, a sign that the central bank wants to maintain its leash on the rupee but at the same time does not want to dip too much into the forex reserves. NDF gives this flexibility, but it also shows the extent of dollar outflows that the RBI has to contend with.
Indeed, this FT piece, free to read for Moneycontrol subscribers, shows how dollars are flying back to the US in anticipation that President-elect Donald Trump will deliver on his promise of pro-growth measures that could include cutting taxes. Foreign investors may have begun to turn buyers over the past few sessions, but India’s equity investors are relying on domestic heft to keep the market afloat which masks an undercurrent of unease on potential dollar outflows.
There is no way the RBI would leave the rupee completely at the market’s mercy. More importantly, the central bank wouldn’t add to the problem by bringing down the interest rate differential between India and the US and giving investors another good reason to pack their dollars and leave.
That does not mean fireworks are far away. The fact that the RBI brought down GDP growth by a sharp 60 basis points to 6.6 percent for FY25 shows that the pump is primed for a rate cut, perhaps in February. For now, it is proper to raise a glass for the Governor and see it half full.
Investing Insights
Sagility: A steady play on US healthcare efficiency initiatives
Weekly Tactical Pick – why this insurer looks good post correction
JSW Energy: Renewable growth and strategic acquisitions to drive stock
What else are we reading
Chart of the Day: Is India’s swap market under-pricing potential RBI rate cuts?
Near-term risks to investing in Indian equities remain
What next for MapmyIndia after consumer business fiasco?
A deep dive to generate maritime momentum
Europe’s string of setbacks could result in a knock-on effect on Indian equities
If not Indian equities, then where?
MapmyIndia’s process to spin-off its B2C operations raise a host governance issues
RSS concerned about India's changing religious demography
Tech and Startups
India will account for 20-30% of the next billion Web3 users: Soneium’s Sota Watanabe
Technical Picks: Tata Motors, Jyoti Structures, BEML, Kalyan Jewelers.
Aparna Iyer Moneycontrol Pro
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