The story of India, its banks and five interest-rate cuts in a year

by Shaun Richards

This morning has brought us a reminder of what has become one of the certainties of life. Oh for the time when we thought they were simply death and taxes whereas now we can add interest-rate cuts to this list. So without further ado let me look to thw sub-continent and had you over to the Reserve Bank of India,

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (October 4, 2019) decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 5.15 per cent from 5.40 per cent with immediate effect.
Consequently, the reverse repo rate under the LAF stands reduced to 4.90 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 5.40 per cent.
The MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

As you can see the 0.25% interest-rate cut has been accompanied by some Forward Guidance of more being on the way. This is another reminder of my point earlier this week that central bankers are pack animals as to any impartial observer the whole concept of Forward Guidance has not worked or we would not be where we are. Still it does flatter central banking egos and make them feel important. After all it was only on the 4th of April I was pointing out they were telling us this.

The MPC also decided to maintain the neutral monetary policy stance.

Now I do not know about you but five interest-rate cuts in a year only three-quarters finished does not especially look neutral to me. So they were certainly not singing along with the Who.

I can see for miles and miles
I can see for miles and miles
I can see for miles and miles and miles and miles and miles
Oh yeah

Indeed there was dissent back then about the rate cut.

This time around the vote was again 4-2 so there is a reasonable amount of dissent about this at the RBI.

Furthermore it is worse than this because when I have contact with central bankers and point this out I do get the reply that it does not matter if Forward Guidance is wrong. This proves that the thin air up in top of their Ivory Towers does affect the brain.

What has caused this?

We have another reminder of central bankers being pack animals. What is Indian for Johnny Foreigner anyway?

Since the MPC’s last meeting in August 2019, global economic activity has weakened further……..The macroeconomic performance of major emerging market economies (EMEs) was weighed down by a deteriorating global environment in Q3…….worsening global growth prospects.

You could circle the world via central bankers doing this but would then be reminded of the wisdom of Maxine Nightingale.

Ooh, and it’s alright and it’s coming along
We gotta get right back to where we started from

In terms of the domestic economy there was this.

On the domestic front, growth in gross domestic product (GDP) slumped to 5.0 per cent in Q1:2019-20, extending a sequential deceleration to the fifth consecutive quarter.

So we are reminded of a couple of things. In addition to the slowing growth we have the fact that 5% GDP growth is considered slow in India. Oh and they mean second quarter as it is slightly unusual to present the numbers in a fiscal year style.

Now the central banking Johnny Foreigner facade crumbles away.

Of its constituents, private final consumption expenditure (PFCE) slowed down to an 18-quarter low.

So the weakness was mostly domestic after all. Perhaps they were hoping no-one would read this far down the report.

You will not be surprised to learn that there was also an issue here.

Industrial activity, measured by the index of industrial production (IIP), weakened in July 2019 (y-o-y), weighed down mainly by moderation in manufacturing. In terms of uses, the production of capital goods and consumer durables contracted……… The Reserve Bank’s business assessment index (BAI) fell in Q2:2019-20 due to a decline in new orders, contraction in production, lower capacity utilisation and fall in profit margins of the surveyed firms.

Also this is hardly hopeful.

The sales of commercial vehicles, a key indicator for the transportation sector, contracted by double digits in July-August.

Meanwhile as this is India there is also a reflection on the Monsoon season.

Abundant rains in August and September have led to improved soil moisture conditions in most parts of the country, particularly central India, compared to the corresponding period of the last year. Overall, the prospects of agriculture have brightened considerably, positioning it favourably for regenerating employment and income, and the revival of domestic demand.

Some Perspective

The Statistics Times has crunched some numbers so let us start with a perspective on what the growth rate was only recently.

Real GDP or Gross Domestic Product (GDP) at constant (2011-12) prices in the year 2018-19 is estimated at ₹140.78 lakh crore showing a growth rate of 6.81 percent over First Revised Estimates of GDP for the year 2017-18 of ₹131.80 lakh crore.

I often get asked about GNP, well as GNI is the new GNP.

GNI (Gross National Income)  ₹139.32 lakh crore

If we look further back.

In new series, figures are available since 2004-05. GDP of India has expanded by 2.57 times from 2004-05 to 2018-19.

According to IMF World Economic Outlook (April-2019), GDP (nominal ) of India in 2019 at current prices is projected at $2,972 billion. India contributes 3.36% of total world’s GDP in exchange rate basis. India shares 17.5 percent of the total world population and 2.4 percent of the world surface area. This projection would make India as 5th largest economy of the world.

Trouble,Trouble Trouble

One of my earliest themes as a blogger was that central banks have lost control of real world interest-rates.

Monetary transmission has remained staggered and incomplete. As against the cumulative policy repo rate reduction of 110 bps during February-August 2019, the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by 29 bps. However, the WALR on outstanding rupee loans increased by 7 bps during the same period.

In terms of economic theory this is along the lines of what was called Liquidity Preference Theory at least in terms of principles. It is why I think interest-rate cuts below around 1.5% are ineffective and at times can make things worse and not better. We now have a new nuance that due to its unique circumstances India has some features of this at interest-rates of around 5%.

Comment

If we start with an international perspective then we have another week where Australia and India have cut interest-rates. This means that the number of interest-rate cuts in the credit crunch era must be pushing past 750 confirming my view of them being one of the new certainties of life.

Next comes the issue of “The Precious! The Precious!” which I have avoided so far explicitly although of course regular readers of my work will have spotted the implicit reference via the transmission of interest-rate cuts. Let me make me point with this from the RBI on the 26th of September.

Rumours are being circulated in sections of social media about operations of banks to create panic among the public. All are advised not to fall prey to such baseless and false rumours.

And Tuesday.

There are rumours in some locations about certain banks including cooperative banks, resulting in anxiety among the depositors. RBI would like to assure the general public that Indian banking system is safe and stable and there is no need to panic on the basis of such rumours.

The trigger for this is described by @fayedsouza

The RBI must communicate with depositors 1. When will they get access to their money? 2. How did the bank fraud go unnoticed for a decade? 3. Which other bank fraud have you missed while napping over the last 10 years? #PMCBankScam

 

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