India expands QE bond buying as Wholesale inflation rises

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by Shaun Richards

Today we can look East and catch-up on the state of play in India. The crucial message from the Reserve Bank of India or RBI earlier was this.

Taking these factors into consideration, real GDP growth is now projected at 9.5 per cent in 2021-22, consisting of 18.5 per cent in Q1; 7.9 per cent in Q2; 7.2 per cent in Q3; and 6.6 per cent in Q4:2021-22

This is a 1% downgrade as previously it was guiding towards 10.5% as the economic growth rate for the year. The rationale for this is the problems with the pandemic.

Turning to the growth outlook, rural demand remains strong and the expected normal monsoon bodes well for sustaining its buoyancy, going forward. The increased spread of COVID-19 infections in rural areas, however, poses downside risks. Urban demand has been dented by the second wave, but adoption of new COVID-compatible occupational models by businesses for an appropriate working environment may cushion the hit to economic activity, especially in manufacturing and services sectors that are not contact intensive.

This means that India is slowing down as other economies expect to pick-up. Also for once the weather is not taking the blame.

 On June 1, the India Meteorological Department (IMD) has forecast a normal south-west monsoon, with rainfall at 101 per cent of the long period average (LPA). This augurs well for agriculture.

Policy Response

For now interest-rate cuts seem to be out of favour.

keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 per cent.

The RBI is not restricted by 0% in the way that many other central banks now are but we find that policy action is now seen what we used to call the unconventional sector.

Taking these developments into account, it has now been decided that another operation under G-SAP 1.0 for purchase of G-Secs of ₹40,000 crore will be conducted on June 17, 2021. Of this, ₹10,000 crore would constitute purchase of state development loans (SDLs). It has also been decided to undertake G-SAP 2.0 in Q2:2021-22 and conduct secondary market purchase operations of ₹1.20 lakh crore to support the market. The specific dates and securities under G-SAP 2.0 operations will be indicated separately.

So we will see another 1.2 trillion Rupees of QE which is a 20% increase on the first quarter of the financial year. Looking at the number below we see that if this continues it looks set to be around a fifth of issuance.

It has facilitated the successful completion of central and state government borrowing programmes of close to ₹22.0 lakh crore at record low costs with elongated maturity during 2020-21.

Also the RBI is indulging in some credit easing.

In order to mitigate the adverse impact of the second wave of the pandemic on certain contact-intensive sectors, a separate liquidity window of ₹15,000 crores is being opened till March 31, 2022 with tenors of up to three years at the repo rate.

Although it is for a particular and in central banking terms unusual sector.

Under the scheme, banks can provide fresh lending support to hotels and restaurants; tourism – travel agents, tour operators and adventure/heritage facilities; aviation ancillary services – ground handling and supply chain; and other services that include private bus operators, car repair services, rent-a-car service providers, event/conference organizers, spa clinics, and beauty parlours/saloons.

So we have interest-rates kept at a record low, more QE and credit easing.

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This is a more difficult area for the RBI which must have heaved a sigh of relief when it saw the monsoon forecast. There are the generic issues we have been looking at elsewhere such as higher oil and commodity prices which will also impact on India. So they will have welcomed this news.

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Headline inflation registered a moderation to 4.3 per cent in April from 5.5 per cent in March, largely on favourable base effects. Food inflation fell to 2.7 per cent in April from 5.2 per cent in March, with prices of cereals, vegetables and sugar continuing to decline on a y-o-y basis. While fuel inflation surged, core (CPI excluding food and fuel) inflation moderated in April across most sub-groups barring housing and health, mainly due to base effects.

But the problem is whether this is credible?

Taking into consideration all these factors, CPI inflation is projected at 5.1 per cent during 2021-22: 5.2 per cent in Q1; 5.4 per cent in Q2; 4.7 per cent in Q3; and 5.3 per cent in Q4:2021-22; with risks broadly balanced.

For example if we look further along the inflation chain we see this.

In April, 2021 (over April, 2020) , the annual rate of inflation (YoY), based on monthly WPI,
stood at 10.49% (Provisional) . The annual rate of inflation in April 2021 is high primarily because of
rise in prices of crude petroleum, mineral oils viz petrol, diesel etc, and manufactured products as
compared the corresponding month of the previous year.

There was quite a push on a monthly basis.

The monthly rate of inflation, based on month over month movement of WPI index, in April
2021 stood at 1.86% (Provisional) as compared to March 2021

I am sure that some in India will also be thinking of this from the United Nations yesterday.

The FAO Food Price Index (FFPI) averaged 127.1 points in May 2021, 5.8 points (4.8 percent) higher than in April and as much as 36.1 points (39.7 percent) above the same period last year.

As you can see there has been quite a surge in food inflation which will be a really big deal for India’s many poor.

The May increase represented the biggest month-on-month gain since October 2010. It also marked the twelfth consecutive monthly rise in the value of the FFPI to its highest value since September 2011, bringing the Index only 7.6 percent below its peak value of 137.6 points registered in February 2011. The sharp increase in May reflected a surge in prices for oils, sugar and cereals along with firmer meat and dairy prices.

It does not do an onion index to give us a specifically Indian flavour but as Glenn Frey pointed out the heat is on.

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The Rupee has been mostly quiet compared to other periods we have looked at and is at 73 versus the US Dollar. Perhaps it is being boosted by this from Shortpedia.

According to #RBI data, India’s foreign exchange reserves surged by $2.865 billion to a record high of $592.894 billion for the week ended May 21.


There are various contexts here. If we look at the traditional store of value for Indians which is Gold it has seemingly found the air too thin above US $1900 and has fallen to $1873 as I type this. So one Rupee alternative has disappointed over the past year as you might reasonably have expected more than an 8% return. More recently Bitcoin has also struggled so these may be factors helping the Rupee.

Looking at QE we see the RBI expanding its programme as others are talking about reductions, Indeed it mat have been minor but this from the US Federal Reserve on Wednesday was a type of QT.

The Federal Reserve Bank of New York today announced that the Secondary Market Corporate Credit Facility (SMCCF) will begin gradual sales of its holdings of corporate bond exchange-traded funds (ETFs) on June 7, consistent with plans announced by the Board of Governors to begin winding down the SMCCF portfolio.

This means that should inflation persist the RBI will be left looking like it has missed the boat deliberately like so many of its central banking fraternity.



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