RBI policy: What Rajan said on onions, elections and inflation

RBI not to go nuts on inflation

30 October 8:40 am: Actions taken by the Reserve Bank of India (RBI) should be helpful at this point while future action will depend on data, RBI governor Raghuram Rajan said at a media conference on Tuesday, adding that one should not assume that the next rate move will be upwards.

Yesterday, RBI raised interest rates for the second time in as many months, warning that inflation is likely to remain elevated despite sluggish growth, and rolled back an emergency measure put in place in July to support the rupee.

Rajan, however,ruled out a blind fight against inflation, saying a single-minded focus on price rises, regardless of its consequences on growth, is not the remit of any “reasonable central bank”.

“I don’t want to say in any way that RBI is going to become nutters on inflation,” said Rajan.Ruling out inflation targeting in the strict sense of the word, Rajan said the domestic context does not allow him to single-mindedly focus on inflation as growth is also a concern.

Rajan, however, said the immediate focus of the apex bank is to tame inflation, especially since core CPI inflation has been on the rise, which he described as really “worrisome”.

He also said core CPI inflation, or price rise stripped of food and fuel, is treading at 8.6 percent, which is not an acceptable level. This shows that consumer prices are driven more by services.

When asked about the core focus of the RBI in its fight against inflation, RBI Governor said that though traditionally the RBI has been using WPI as an indicator, it “cannot neglect CPI also”, as it has been rising faster for long.

“We haven’t changed the goalpost as far as WPI is concerned, but we also need to bring CPI under control for we can’t live with close to double-digit CPI for an extended period of time. So, our intention is also to bring the CPI within the boundary,” Rajan said.

Admitting that recent spike in WPI was partly due to food inflation and also on exchange rate depreciation besides due to fuel prices, he said, “We need to bring it within the 5 percent norm which we enunciated in the policy.”

Meanwhile, Rajan has something to say about onion prices too:

On being asked how hiking rates will would sort out the high onion prices issue, Rajan responded with a wry smile and said, “…clearly this hike was not to quell onion prices. We have no immediate capacity to bring down onion prices.”

“…clearly demand hasn’t shot up suddenly to cause a sudden spurt in onion prices. There clearly is an element of supply side effects here,” Rajan added.

Here are the highlights from the RBI Governor’s press conference:

Without the policy actions we would probably experience a higher inflation

If growth and inflation do not go according to Rajan’s estimates, then he will be forced to take further action

Retail inflation would be lower than 9 percent by March given RBI’s measures

Retail inflation has to be brought down,Cannot live with double-digit retail inflation

If we have low inflation, then the interest rates can also come down

Fight against inflation is not anti-growth

Bringing down inflation is the best medicine for sustainable growth

Both growth and inflation elements will feed into future policy action

Exports in India picking up, positive for growth

Going forward, normal monetary policy will take over as rate corridor down to 1%

Expect strong agricultural growth in the next few months

Election spend is peanuts, cannot boost economy

Repo rate hike not aimed at quelling high onion prices

Cannot focus on just one aspect of food inflation

By the time the US Federal Reserve’s bond buying tapering takes place, conditions of the economy would be such that India will be able to handle the tapering

Election spending peanuts, will not boost economy, says Rajan

3:15 pm RBI governor Raghuram Rajan today reiterated that without policy action, CPI inflation would have gone up but did not elaborate on the central bank’s FY14 target for retail inflation.

He also said that he hasn’t changed the ‘goalpost’ as far as WPI is concerned, but maintained that “we cannot live with double-digit CPI either.”

The central bank expects FY14 consumer price inflation to stay below 9 percent on the back of recent RBI measures.

“Without policy actions taken so far, India would perhaps witness a higher degree of inflation than RBI is comfortable with. RBI has taken a couple of steps over the last few months. If projections going forward and data do not match, then RBI will take more steps,” Rajan said in a conference call today.

Rajan also said that the central bank wants to go back to normal monetary policy but would take action on the growth front if it comes in weaker than estimates.

However, he maintained that both growth and inflation elements will feed into future policy action.

Rajan termed election spend as ‘peanuts, and said that the amount is too small to boost economy. He, however, expectsstrong farm growth likely to boost rural sentiment.

RBI wishes St Happy Diwali, promises inflation bonds by Dec

2:00 pmThe Reserve Bank of India plans to soon launch a 10-year savings instrument that will offer inflation-linked returns to small investors as an alternative to investing in gold.

“It is proposed to launch Inflation Indexed National Saving Securities (IINSSs) for retail investors in November/December 2013 in consultation with the government,” the RBI said on Tuesday in its second quarter review of Monetary Policy 2013-14.

The inflation-indexed securities for retail investors will be linked to the new (combined) consumer price index (CPI). The interest on these securities would comprise of a fixed rate plus inflation.

“Interest would be compounded half-yearly and paid cumulatively at redemption. These securities will be distributed through banks to reach out to the masses,” the RBI said.

Eligible investors would consist of individuals, Hindu undivided families, trusts and charitable institutions.

In another decision, the RBI allowed banks to pay interest on savings and term deposits at shorter-than-quarterly intervals. Banks are currently required to pay interest on such deposits at quarterly or longer intervals.

RBI today also reiterated its warning that both wholesale and consumer inflation would remain high for the rest of this financial year, and hinted at further rate hikes if the situation so warranted**.**

“The credit policy revision announced today was as per the market consensus. The balance between inflation and growth continues to be as challenging as ever with GDP estimated to be have grown by just 4.6% in August compared to same month last year while RBI not expecting inflationary pressures to taper anytime soon. More repo hikes in near term cannot be ruled out with the central bank viewing growth more as a function of prudent fiscal policy while continuing to target inflation,” said Debopam Chaudhuri (VP Research) at ZyFin.

1. 15 pm: Sensex gains 300 pts after RBI policy

Gains in Maruti, ICICI and SBI help Sensex gain more than 300 points.

The BSE Sensex is at 20860.45 , up 290.17 points while the Nifty is up 97 points at6198.70.

Ahead of the policy review there were speculation that the policy rate may be increased by 50 bps. The market is now relieved that this did not happen, Dhananjay Sinha, head of research, Emkay Global said. “It is the cut in MSF rate that has propped the market today,” he told Firstpost.

He said the MSF rate cut is likely to help banks such as YES Bank. However, the brokerage continues to prefer private sector banks to public sector ones.

11:50 am Experts are of the opinion that the Reserve Bank of India will be forced to increase the policy rates once more since the inflation is unlikely to subside in the coming months significantly.

Shilpa Kumar of ICICI Bank told CNBC TV18 that the probability of another increase is very much there.

Economist Haseeb Drabu also echoed this view. However, the panel on the channel was divided on the likely timing of the next increase. The next RBI policy review is scheduled for 18 December.

“The RBI expects a 5 percent GDP growth this year. This means it expects a meaningful pick-up in the economy in the second half of the financial year. In such a scenario expect another rate hike in January,” one of the experts said.

RBI expects inflation to remain elevated, cuts GDP forecast for FY14

11:22 am RBI has cut FY14 GDP growth to 5 percent from 5.5 percent.

Even if the food inflation edges down, RBI expects retail inflation to remain above 9 percent in the months ahead, absent policy action.This is the first time the RBI has given a CPI inflation forecast.

He expects both CPI and WPI to remain elevated in the months ahead.

Wishing investors a happy Diwali, Raghuram Rajan also promised the launch of inflation indexed bonds for retail investors by December.

Inflation indexed securities for retail investors of 10-year tenor would be linked to the new (combined) consumer price index. Eligible investors would consist of individuals, hindu undivided families (HUFs), trusts and charitable institutions. The rate of interest on these securities would comprise of a fixed rate plus inflation. Interest would be compounded half-yearly and paid cumulatively at redemption. These securities will be distributed through banks, the RBI said.

The RBI’s policy were in line with estimates and markets reacted positively to the policy action.

At 11:20 am, the BSE Sensex was up 101 points at 20672, while NSE Nifty was up 35 points at 6135.

Bank Nifty was up 1.6 percent at 12093.

Meanwhile, the next mid-quarter policy will be held on 18 December.

RBI steps up inflation battle, hikes rate by 25 bps

11:00 amThe Reserve Bank of India stepped up its fight against inflation by raising its policy rate by 25 basis points to 7.75 percent.

The central bank also cut its marginal standing facility rate by 25 bps to 8.75 percent, in its bid to reduce the short-term borrowing costs for corporates.

The Reserve Bank kept CRR unchanged at 4 percent.

The RBI, however, increased the liquidity provided through term repos of 7-day and 14-day tenor from 0.25 percent of bank deposits to 0.5 percent with immediate effect.

The increase in repo rate and the cut in MSF is part of the process of re-aligning interest rate coridoor, said RBI governor Raghuram Rajan today.

RBI will closely monitor inflation risk while being mindful of evolving growth dynamics, the central bank said in a statement.

" It is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth," the RBI said in a statement.

According to the Reserve Bank, “curbing mounting inflationary pressures and managing inflation expectations will help strengthen the environment for growth by fostering macroeconomic and financial stability.”

Chairman of the Prime Minister’s Economic Advisory Council, C Rangarajan said the RBI’s measures are aimed at normalisation of extra-ordinary steps taken recently.

Dalal St expects 25 basis point cut

1045 am A poll conducted by CNBC-TV18 shows that the street is unanimously expecting the RBI to hike the repo rate by 25 basis points in its October 29 monetary policy meeting. Around 90 percent of economists polled also believe that Rajan will roll back the Marginal Standing Facility to its earlier rate of 8.75 percent. Only 10 percent feel that the central bank will wait before cutting the MSF.

Rupee weak, Nifty below 6100 as market prepares for RBI rate hike

9:30 am Indian markets opened flat as investors remain cautious ahead ofRBI’s policy move.The RBI is expected to raise policy interest rates for the second time in as many months today to fight stubbornly high inflation, while rolling back further emergency measures put in place recently to support the slumping rupee.

The RBI on Monday released a hawkish macro-economic report saying inflation continues to be a big worry and growth will have to be addressed by fiscal and regulatory steps.

While BSE Sensex opened flat, up 0.11 percent at 20591, Nifty opened 0.01 percent at 6106.However, the Nifty soon slipped below 6100 as investors brace for a rate hike.

Rate sensitive sectors specially banks are in red ahead of RBI’s key decision on policy rates.

Even the Indian rupee opened weak at 61.59 against yesterday’s close of 61.52.

While the street is expecting a 25 basis points (bps) repo rate hike, most market experts believe this is already priced in and the policy may be a non-event today.

However, analysts told _CNBC-TV18 t_hat a 50 basis point rate hike cannot be ruled out and investors have turned cautious ahead of the credit policy as markets slide in late trade led by banking stocks.

KR Bharat of Advent Advisors believes the RBI’s focus will be on inflation and if there is repo-rate hike, the markets could be disappointed and sell off for 2-3 days, but the power of liquidity is so strong that the market will overcome the disappointment quickly, and the push towards making new highs.

Meanwhile, Indian indices started off the F&O expiry week on a negative note with the Sensex shedding more than 100 points on Monday.

Also, thethe Kirit S. Parikh Committee’s report on pricing diesel, domestic LPG, and PDS kerosene is likely to suggest an immediate increase in diesel prices by at least Rs 4 a litre and, thereafter, doubling the current pace of increase in diesel prices to Re1/month. This could be a big challenge for the government to implement.

Globally, markets are quiet ahead of the two day FOMC meet that begins today. US and European markets ended narrowly mixed yesterday, but Asian markets slipped in early trade today morning with the Nikkei down a percent.On Wall Street, Dow Jones dipped 1.35 points, or 0.01%, to end at 15,568.93, while Standard & Poor’s 500 Index gained 2.34 points, or 0.13 percent, to finish at a record 1,762.11. The S&P 500 also posted another lifetime intraday high at 1,764.99.

Stocks in news

Results today: Ranbaxy Labs, Shriram Transport Finance, Tata Communications, MRPL, JSW Steel, NTPC, Marico, Torrent Power to post quarterly results.

Maruti Suzuki is up 3.52 percent after it beat expectations with its second quarter earnings. Its profits were up six percent sequentially with its sales growing by over two percent. However, the auto major is cautious about the road ahead and expects operating margins to take a hit due to indirect imports.

Ranbaxy is down 0.30 percent ahead of the company’s Q2 results. All eyes are on whether the company shows a margin improvement in its base business. The topline could see a mild uptick but operational performance may continue to remain a worry and analysts are wildly divided on what the bottomline picture could look like.