This morning has brought another interest-rate rise as the season continues. On a strategic level that poses more than a few questions. One clear one is that those raising interest-rates are invariably contradicting their own forward guidance as we noted with Australia yesterday. I am not sure at what level we can stand up and say that we have escaped the ZIRP ( Zero Interest-Rate Policy ) world? Mostly we have escaped NIRP where N represents Negative as the bond world changed but there is still Japan. Anyway India was always above such levels and is now a bit further away. Here is the statement from Reserve Bank of India Governor Das.
Based on an assessment of the macroeconomic situation and its outlook, the MPC decided by a majority of 4 members out of 6 to increase the policy repo rate by 25 basis points to 6.50 per cent, with immediate effect. Consequently, the standing deposit facility (SDF) rate will stand revised to 6.25 per cent; and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.
As to the rationale things get a little confused.
Consumer price inflation in India moved below the upper tolerance level during November-December 2022, driven by a strong decline in prices of vegetables. Core inflation, however, remains sticky.
Cheaper vegetables will be very welcome in India especially to the poor. We get some more detail on this later.
Headline CPI inflation moderated by 105 basis points during November-December 2022 from its level of 6.8 per cent in October 2022. This was due to a softening in food inflation on the back of a sharp deflation in vegetable prices, which more than offset the inflationary pressures from cereals, protein-based food items and spices. As a result of this earlier than anticipated and steeper seasonal decline in vegetable prices, inflation for Q3:2022-23 has turned out to be lower than our projections.
It is a little awkward to be raising interest-rates due to inflation doing better than you thought as it has the clear implication you had the wrong policies. Of course harvests ebb and flow by their very nature but we are also told that things look bright on that front suggesting a continuation of lower prices.
Going ahead, the food inflation outlook will benefit from a likely bumper rabi harvest led by wheat and oilseeds. Mandi arrivals and kharif paddy procurement have been robust, resulting in improvement in buffer stocks of rice. All these developments augur favourably for the food inflation outlook in 2023-24.
Diverting slightly the fertiliser point is interesting due to the fears of shortages. Were they overplayed or is India benefiting from its imports of energy from Russia?
Unlike many other countries they have their interest-rate above the inflation rate.
Inflation is expected to average 5.6 per cent in Q4:2023-24 while the policy repo rate is 6.50 per cent.
Even before today it was above. Plus the outlook is better.
Looking ahead, while inflation is expected to moderate in 2023-24, it is likely to rule above the 4 per cent target.
There is a not entirely convincing effort to deploy core inflation as a rationale.
Core inflation, however, remains sticky.
Economic Growth
Unlike many other places the outlook in India is pretty good according to the RBI.
Urban consumption demand has been firming up, driven by sustained recovery in discretionary spending, especially on services such as travel, tourism and hospitality. Passenger vehicle sales and domestic air passenger traffic posted robust year-on-year (y-o-y) growth. Domestic air passenger traffic crossed pre-pandemic levels for the first time in December 2022
It seems as though Indians are catching up on missed holidays. The positive news from agriculture is also feeding into other sectors.
Rural demand continues to show signs of improvement as tractor sales and two-wheeler sales expanded in December.
The good news continues.
Investment activity continues to gain traction………Indicators of fixed investment – cement output; steel consumption; and production and import of capital goods – registered robust growth in November and December. In several sectors such as cement, steel, mining and chemicals, there are signs that additional capacity is being created in the private sector.
The surveys are strong too.
PMI manufacturing and PMI services remained in expansion at 55.4 and 57.2 respectively, in January 2023…….According to our surveys, manufacturing, services and infrastructure sector firms are optimistic about the business outlook.
Leading to growth forecasts nearly everyone else will envy.
Taking all these factors into consideration, real GDP growth for 2023-24 is projected at 6.4 per cent with Q1 at 7.8 per cent; Q2 at 6.2 per cent; Q3 at 6.0 per cent; and Q4 at 5.8 per cent.
Although there is some slowing in the pattern
Financial Conditions
We can start with the Adani Group scandal.
The ports-to-energy conglomerate, one of the country’s largest, has lost more than $100bn in value following a scathing research report from short seller Hindenburg Research last month that accused it of stock price manipulation and accounting fraud. ( Financial Times )
What has been going on here?
Those criticisms were given renewed impetus by the Hindenburg report, the result of a two-year investigation, which accused the Indian group of operating a network of offshore entities to conceal the extent of the Adani family’s control, skirt rules on holdings of listed companies and boost stock prices. ( FT)
The holding company Adani Enterprises Linited saw a 23% rise today to 2220 Rupees but it was 4152 on my chart at the peak pre Christmas. So as we stand there are both large market losses and a very volatile situation. The fact that there seems to be more than a few companies in this group adds to the fears because that is usually to obscure rather than enlighten. But for our purposes it is a sign of this.
It’s gettin’ hot in here (So hot) ( Nelly)
Which is reinforced by this.
Non-food bank credit expanded by 16.7 per cent (y-o-y) as on January 27, 2023.
It is not reassuring that the RBI needed to issue this over the weekend.
As per the RBI’s current assessment, the banking sector remains resilient and stable. Various parameters relating to capital adequacy, asset quality, liquidity, provision coverage and profitability are healthy. Banks are also in compliance with the Large Exposure Framework (LEF) guidelines issued by the RBI.
The RBI remains vigilant and continues to monitor the stability of the Indian banking sector.
The fact you feel the need to issue a statement is the most revealing bit. Followed by the weasel words “resilient” and “vigilant” which so often precede trouble.
The overall liquidity remains in surplus, with average daily absorption under the LAF increasing to ₹1.6 lakh crore during December-January from an average of ₹1.4 lakh crore in October-November. ( RBI)
Comment
Whilst India has been able to reduce the problem of fuel imports via cheaper oil from Russia it has still been an issue.
The current account deficit (CAD) for the first half of 2022-23 stood at 3.3 per cent of GDP. The situation has shown improvement in Q3:2022-23 as imports moderated in the wake of lower commodity prices, resulting in narrowing of the merchandise trade deficit.
Although higher prices have helped one form of export.
Remittance growth for India in H1 of 2022-23 was around 26 per cent – more than twice the World Bank’s projection for the year. This is likely to remain robust owing to better growth prospects of the Gulf countries.
The deflection below shows us that the Rupee remains under pressure.
The Indian Rupee has remained one of the least volatile currencies among its Asian peers in calendar year 2022 and continues to be so this year also.
At 82.5 it is near all time lows versus the US Dollar and this has been in spite of RBI intervention.
So whilst the RBI is presenting its move as anti-inflationary the real plan here is to try and take some steam out of financilal market conditions and to support the Rupee. There will of course be an implicit effect on inflation but it is not the real name of the game. The risk is that the bubble bursts as we know that invariably sees interest-rates being slashed. But the RBI has a real balancing act here because whilst some monetary conditions are loose the money supply is not unless growth plunges.
On a y-o-y basis, money supply (M3) expanded by 9.8 per cent as on January 27, 2023,