RBI ups repo rate by 25 bps, cuts MSF rate by 75 bps - Moneycontrol.com

he Reserve Bank of India , in its mid-quarter policy review, raised repo rate by 25 bps to 7.5 percent. The policy, however, reduced the marginal standing facility (MSF) rate by 75 basis points from 10.25 per cent to 9.5 percent and lowered the minimum daily maintenance of the cash reserve ratio (CRR) from 99 percent to 95 percent of the requirement, effective from the fortnight beginning September 21, 2013. The reverse repo rate under the LAF stands adjusted to 6.5 per cent and the Bank Rate stands reduced to 9.5 per cent. Contrary to market expectations, the new governor Raghuram Rajan's maiden policy came in as hawkish, primarily because it maintained the apex banks views on controlling inflation. Reacting to the announcement, the rupee fell 1 percent, bond yield rose to 8.3 percent, and share prices of banking stocks witnessed a sharp decline.  Most of the economists polled by CNBC-TV18 were expecting the RBI to bring down the daily requirement to 90 percent of CRR, while a few expected it to come down below 90 percent. Jahangir Aziz of JPMorgan had opined that MSF should be brought back to its old level and instead repo rate should be hiked by about 50 bps. In a bid to control liquidity, the RBI had last month restricted banks from borrowing at 7.25 percent from the repo window. It had forced them to borrow at a higher rate of 10.25 percent from MSF.

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Source: www.moneycontrol.com

India increased the import duty on Gold

Import duty on gold jewellery to 15 percent from 10 percent on Tuesday, in a move aimed more at protecting the domestic jewellery industry rather than stemming overseas purchases to narrow its current account deficit.
India's imports of gold jewellery stood at $137.57 million between April and July, a fraction of total bullion imports, which in July alone were valued at $2.9 billion.

After the taper, what? - Anirudh Sethi

And so the day of reckoning has come. This week, the US Fed will show its hand on tapering quantitative easing (QE). Since late May, fears of tapering have already spiked both the US and global interest rates and played havoc with assets and currencies of emerging market (EM) economies with current account deficit. While the size of the first reduction in the Fed’s current monthly $85 billion of asset purchases will be the key decision to watch, equally important will be whether the central bank changes communications to anchor rate hike expectations and stop the market from conflating tapering with interest rate policy. The market is pricing that once tapering is over, a hike in Fed’s overnight rate won’t be far behind. The Fed has been trying hard to convince the market that the two are unconnected. Complicating all of this is last weekend’s withdrawal of Larry Summers as a candidate for the next Fed Chairman, making Janet Yellen, well known for her dovish views on policy, to be the leading contender.

Does any of this really matter?

Isn’t the end of QE already fully priced in global assets? Yes and no. Given the pace at which the US unemployment rate has been declining, no one really believes that the Fed’s asset purchase programme will extend too far beyond mid-2014. However, whether the tapering is front loaded or smoothed over the next 9 months will matter for capital flows in and out of EM assets. Much of the market believes that the Fed will begin with a $15 billion tapering in asset purchases; $10 billion in Treasuries and $5 billion in mortgaged-backed securities. Given that the Fed’s tapering announcement severely disrupted global markets in May, one doesn’t expect it to shock the market again. If anything, the Fed could start off with a smaller tapering of $10 billion. In that case, EM assets could benefit but only modestly as it would still mean that QE would be over by mid-2014. What would rally EM assets is prolonging QE significantly beyond mid-2014. This is unlikely. The underlying concern prompting the tapering was that risk was being severely underpriced because of QE. Nothing in the US data flow so far suggests that there is a need to subsidise risk any longer.

Related to the tapering is the Fed’s forward guidance for interest rates in 2016 and whether it changes its communications about the interest policy. The US labour market has improved substantially with employment gains averaging 180,000 per month. Tail risks to growth have abated as the euro area is exiting recession and the US has absorbed most of this year’s 2% of GDP fiscal drag. The rapid rise in long-term interest rates, including mortgage rates, is a concern but US financial conditions remain broadly healthy. Consequently, the Fed is likely to maintain a 2014 forecast of GDP growth above 3% and an unemployment rate fall to below 7%, bringing the economy close to full employment. Under normal circumstances, the Fed would be expected to set policy rates near its 4% estimate of neutral. Such guidance would disrupt the market. So, it is likely that the Fed will signal only a gradual normalisation path with a median rate forecast of about 2.25% for end-2016 with the first rate hike somewhere in 2015.

Here is where market expectations have differed from Fed guidance. There is a strong belief in the market that once tapering is over a rate hike will follow soon. The Fed has tried hard to stop the market from conflating the two by reiterating that the benchmark for considering a rate increase would be if unemployment fell to 6.5% or inflation rose to 2.5%, but that would still not trigger a hike. Thus, to anchor interest rate expectations, the Fed could recalibrate its communications. There are several options. It could lower the unemployment threshold to below 6.5% or qualify it with other indicators such as the labour participation rate, add an inflation lower bound, i.e. the Fed would not let inflation fall below, say, 1.5%, present a consensus or median interest rate forecast of the FOMC, or tie together the exit sequence (stop reinvestments on principal payments, followed by reserve draining, and then the first rate hike) with numerical thresholds. Among these options the only ones that really stand a chance are presenting a median forecast of the interest rate path and adding a lower bound to inflation outlook along with a strong reiteration that tapering is not tightening and that future tapering decisions would be data-dependent in both directions.

What does all this mean for India? Over the last two weeks things have definitely been on the mend. First the new Governor’s policy initiatives and then the passage of several Bills in the last days of the monsoon session of Parliament have helped to give a sense of policy resetting. This has been followed by better trade and IP data. And, as a result, the rupee has appreciated and capital inflows have started to trickle back. The restrictions on gold imports and the fall in non-oil/non-gold imports due to the economic slowdown have reduced the run rate of the current account deficit significantly. Indeed, it is likely that for this year the deficit could be much lower than even the government’s $70 billion estimate. The decision to fund imports of the three public sector oil companies directly through dollar loans by RBI has effectively changed the current account deficit to a modest surplus for this year, of course at the cost of losing about $80 billion in usable current reserves.

Yet there is still palpable investor nervousness about India. Why? Because it is unclear that the recent rupee appreciation has been purely because of better domestic policy. Currencies of other EM countries with current account deficits have actually appreciated much more because of improved global sentiment. How strongly these policies will support the rupee if global sentiment again turns sour is questionable. Taking out oil imports only opens up a temporary breathing space. And it is slowly sinking in that subsidising banks to market more NRI dollar deposits may not yield very much in net new inflows. The only long-term positive support has come from the proposed banking reforms. By itself, it is not sufficient to allay investor fears. Going back over and over again to the same pool of resources—NRIs and global equity funds—has run into limits. The authorities will have to find other sources of sustainable external financing. Longer they postpone this decision, longer will

India remain hostage to the whims of global sentiment.

http://www.anirudhsethireport.com

First Target Achieved..

Buy Nifty Fut @ 5868, SL 5855, Tgt 5898/5925/5955

Rangarajan cuts FY14 GDP growth estimate to 5.3 percent - Reuters

(Reuters) - India's economy is expected to grow 5.3 percent this fiscal year, the prime minister's economic advisory panel said on Friday, sharply lower than an earlier estimate of 6.4 percent but higher than last year.

The revised forecast is roughly in line with projections of the RBI and many private economists, who expect Asia's third-largest economy to grow at around 5 percent, the same level as in 2012/2013.

A pick-up in automobile production and exports in August indicated that the manufacturing sector would do better in the second half than the first, said C. Rangarajan, the chairman of the Prime Minister's Economic Advisory Council.

"Taking these factors into account, the forecast growth rate appears reasonable," Rangarajan said.

India's industrial production unexpectedly rebounded in July while consumer inflation cooled last month, offering some relief for policymakers who have been battling the country's worst economic crisis in more than 20 years.

The rupee has fallen nearly 14 percent against the dollar so far this year, hitting a record low last month, as the economy struggles with decade-low growth, a record current account deficit and a steep fiscal shortfall.

The advisory council also said that containing the fiscal deficit within the budgeted target of 4.8 percent of gross domestic product could be a challenge. Finance Minister P. Chidambaram has said the target will not be breached.

"My fiscal deficit estimate is now 5.5 percent, but it all depends on how Chidambaram manages it," said Anjali Verma, chief economist at PhillipCapital. "He can go back to slashing planned spending like last year."

Rangarajan also said the current account deficit could be lower than the $70 billion that the government is targeting if current trends in exports and imports continued, citing data showing the trade deficit had narrowed in August.

However, a large part of the smaller trade gap was due to a $2.25 billion fall in gold imports, which are expected to rebound over the next few months as India's wedding and festival seasons kick in.

India's economy grew 4.4 percent in the three months to June -- the slowest quarterly rate since the global financial crisis -- hurt by a contraction in mining and manufacturing.

The panel said inflation for the current fiscal year was expected to be 5.5 percent, lower than the 6 percent recorded in the last fiscal year.

(Reporting by Manoj Kumar, Rajesh Kumar Singh in New Delhi and Subhadip Sircar in Mumbai, writing by Krishna Das; Editing by Ross Colvin and Kim Coghill)

Growth, deficit problems not structural: RBI chief Rajan - Reuters

(Reuters) - India's slowing economy and its massive current account and fiscal deficits are not structural problems and can be fixed with modest reforms, newly appointed central bank Governor Raghuram Rajan said on Wednesday.
Rajan acknowledged the economy will expand at a pace that will be its slowest in a decade, with annual growth this year likely to be between 5 and 5.5 percent.
In commentary published on the Project Syndicate website, he also drew an analogy between the current bearishness on the country, whose currency has barely recovered from record lows last month, to the fickle loyalties of Indian cricket fans.
"A few years ago, India could do no wrong.... Today, India can do no right," Rajan wrote in the piece.
Referring to the record current account deficit and slowing growth, Rajan said those "can all be fixed by means of modest reforms."
"This is not to say that ambitious reform is not good, or is not warranted to sustain growth for the next decade. But India does not need to become a manufacturing giant overnight to fix its current problems," he wrote.
He said the slowdown in the economy was paradoxically the effect of substantial fiscal and monetary stimulus that its policymakers had injected into its economy in the aftermath of the 2008 financial crisis.
The resulting growth spurt led to inflation, especially because the world did not slide into a second Great Depression, as was originally feared, he said.
"So monetary policy has since remained tight, with high interest rates contributing to slowing investment and consumption."
Economic growth would slow to a 5 to 5.5 percent pace, he said, adding that was "not great, but certainly not bad for what is likely to be a low point in economic performance".
Project Syndicate is a website that brings together commentary from economists.
For the full commentary, see t.co/E57XWxveEq
(Reporting by Vidya Ranganathan; Editing by Kim Coghill)