RBI - it is time to ease, ease aggressively

RBI in its last monetary policy statement highlighted four key items to track for continuation of the easing stance:

1. RBI will await the transmission by banks of its front-loaded rate reductions in January and February into their lending rates This seems to be a debatable issue as some banks argue that in the rate hiking cycle starting from the middle of 2013, they have not passed on the repo rate hikes into base rates, and hence their not easing base rates when repo rate has been cut is not entirely unreasonable. This link provides the recent history of SBI base rates, it is noteworthy that the base rate was 9.70% in 2013 when repo rate was at 7.25%, and now the base rate is 9.80% while the repo rate is at 7.50%. It can be argued that the banks absorbed the repo rate shocks and kept managed the lending rates In the banks' defense, they have passed on 15-20 bps since the April policy. It is for RBI to think why their monetary transmission is not working to the extent they expect. In my opinion, this item of RBI Governor is very debatable and can be overlooked depending on how the other factors are panning out.
2. Developments in sectoral prices, especially those of food, will be monitored, as will the effects of recent weather disturbances and the likely strength of the monsoon, as the Reserve Bank stays vigilant to any threats to the disinflation that is underway. The Reserve Bank will look through both seasonal as well as base effects. CPI and food inflation have not misbehaved in the latest print of Apr 2015, and it seems the Government has managed to keep the inflation, food inflation in particular, under check. RBI's fear in this regard has not materialized.  Regarding the likely strength of monsoons, there have been mixed research reports: There is enough differences among the professional weather forecasters, some of whom call for a normal monsoon and while others call for a deficient one. Weighing in the two sub-items: nonseasonal rains have not impacted inflation, while the monsoon status remains unknown - this is no case for not easing rates.
3. RBI will look to a continuation and even acceleration of policy efforts to unclog the supply response so as to make available key inputs such as power and land. Further progress on repurposing of public spending from poorly targeted subsidies towards public investment and on reducing the pipeline of stalled investment will also be helpful in containing supply constraints and creating room for monetary accommodation. This is yet another area where the Government has pushed ahead with some items while showing full intent in the stuck areas as well. Coal auctions have been a silent success while delays in land reforms are a loud failures, though the Government is working hard for resolution.  RBI should have no doubts with respect to the intent of the Government in this regard. 
4. Finally, the Reserve Bank will watch for signs of normalisation of the US monetary policy, though it anticipates India is better buffered against likely volatility than in the past. The markets have always been getting closer to a normalization of US monetary policy, though it seems to be an asymptotic curve. In 2013, this would have been an issue, but in 2015, though not insignificant, India is much more buffered in terms of reserves and ammunition to handle any sudden exodus of funds. RBI in stating this point itself seemed comfortable but highlighted the same (for due diligence sake?). 

Notwithstanding the growth as implied by the new GDP prints, the real economy seems to be tottering along at an abysmal rate and inflation is under control, with WPI staying in negative zone for 3 months in a row. Corporate results have been subdued, Passenger car and two-wheeler sales growth are close to zero, and Indian stock markets have been a laggard to regional peers despite improving fundamentals.  There is enough case for RBI to cut rates: repo by 25 bps and CRR by 50 bps in the policy today (though the market consensus is for a 25 bps repo cut and no cut in CRR).

It is time for monetary push to the economy, I say!

RBI: Money market rates and Rupee Defence

Having the benefit of a late response: RBI followed up the Jul 15 measure with further tightening this week: restricting the LAF borrowing by banks to 0.5% of the banks' individual NDTL - this does two things:

(1) Restrict overall LAF borrowing max at 35k Crs
(2) Making funding of excess SLR by banks and Primary dealers expensive and/or uncertain.

The excess SLR holding of banks is close to INR 4 lac Crores and that entire portfolio's funding cost can now swing between 7.25-10.25 which effectively means banks with excess SLR will not venture into adding to their portfolios at this point: good illustration is yesterday's and today's Tbill cutoffs of >11%, last week's devolvement og G-Sec auctionand likely devolvement this week as well. The yield curve could remain inverted till the measures are reversed and markets clearly perceive that inflation & currency risks are addressed and that the focus of RBI will shift towards growth. With the impact of the fresh reporting fortnight kicking in from next week, the movement in overnight rates could be interesting - one solace would the Govt's month end spending.

To see the impact of the RBI measures to FX market: the Forward premia and MIFOR levels have shot up in line with other rates curves effectively making it prohibitively expensive for anyone to buy forward dollars. This means different things for different players:
(1) If FII flows do come into debt, these would have to be unhedged by the sheer unattractiveness of the hedge - meaning RBI is directly signaling the long term players amidst FIIs like Pension funds, Sovereign wealth funds are welcome and not the arbitrageurs (aka hot money) playing the interest rate differentials.
(2) With an explicit support to INR spot, exporters still can forward sell their dollars at almost the same levels as in the 2nd/3rd weeks of July (despite the 90p downmove since Jul 15). This effectively encourages exporters to hedge and importers not to hedge.

From behavioural front, the sheer pain of most banks in their bond books would make them speculate much less in FX. After all, quarterly results and NIMs matter. 

Going forward, I would be keenly tracking how much redemption pressures come to Debt mutual funds. If that turns out to be material, along with the relentless supply till end August and queasy funding costs, yields can head higher even from these levels - we are already in uncharted zone in this currency cycle. On my personal HTM portfolio, I would put more money in debt funds than in equity funds at this point.

At the risk of being an hyperbole, money markets have got a step-motherly treatment to bring some stability to the favoured FX spot. All said and done, INR Spot will remain the cynosure of the central bank in the near term

Know your money

Buddy! This is cool, that too coming from Reserve Bank of India. A nice little game on the Indian currency notes and a decent description of the security features of the notes

This is a must-have link for many for whom stickcricket, orkut, gmail, cricinfo etc. are blocked. The best part is that Rs.10 note is at a difficulty level of a novice while Rs.1000 note at 'insane' level.