RBI remains caught in India’s macro woes…(Q2 Macro report released by RBI)

It is always useful to read this RBI’s quarterly macro report released just a day before the mon pol day. Though I wish the document is timed a little better. It could be released on the weekend before the policy. This will atleast make some people read the doc over the weekend. However, by releasing it a day before, no one really cares as people await to read the policy doc which itself is a significant reading for most people in the markets.

This review has pretty much said what RBI has been saying for a long time…we are in a fix and not sure what is the way out:

1. With improved stability in the foreign exchange market, the marginal standing facility (MSF) rate, which had become the effective anchor for money market rates, was reduced by 75 bps in the Mid-Quarter Review on September 20 and further by 50 bps on October 7 to 9.0 per cent. The Reserve Bank further introduced 7-day and 14-day variable rate term repos to provide additional liquidity up to 0.25 per cent of net demand and time liabilities (NDTL) of banks.

2. Given the tight liquidity conditions in line with the policy intent, the MSF rate had served as the effective policy rate in the short-run. So the effective cost of funds in the money market was reduced by lowering the MSF rate. However, keeping in view the concerns emanating from high and persistent consumer price index (CPI) inflation and some rise in the wholesale price index (WPI) inflation, as also the impact of low real interest rates on saving behaviour, the Reserve Bank hiked the repo rate by 25 bps on October 7. This signalled that the policy rate needed to respond to inflation risks so as to secure macroeconomic stability, even as the process of normalisation of monetary policy with a rollback of exceptional measures proceeds.

3. The Reserve Bank has been adopting a judicious mix of policy under a difficult macroeconomic scenario of high inflation, low growth and financial fragilities. Unlike countries which could go for quantitative easing to support growth on the back of deflation or very low inflation, India has faced markedly higher inflation even when compared to its emerging market peers in recent years. This makes it important to keep liquidity under check and the policy rate at a reasonable level to anchor inflation expectations, with a view to ensuring stable macro-financial conditions and positive real returns to savers. As the exceptional measures are rolled back with the improvement in exchange market conditions, it is important to keep this balance in view.

Some other interesting features from the report:

growth: There is this nice growth projections table which shows how we have gone wrong yet again:


Table VII.3: Growth projections revised downwards

Agencies’ projections for 2013-14


Latest Projection

Earlier Projection

Real GDP Growth (Per cent)

Month/ Year

Real GDP Growth (Per cent)

Month/ Year






Finance Ministry

5.0 to 5.5

Sept. 2013

6.1 to 6.7

Feb. 2013



Sept. 2013


Apr. 2013



Oct. 2013


Jul. 2013

World Bank


Oct. 2013


Jun. 2013



May 2013


Dec. 2012



Oct. 2013


Jul. 2013



Aug. 2013


May 2013

*: IMF’s projection in factor cost corresponding to 3.8 per cent in market prices.
**: GDP at market prices.

Interestingly, India’s key policymakers reacted to the recent growth outlook by international agencies as needless pessimistic. Well the reality is India’s policymakers have also slashed their growth projections by 1% and above just like international agencies. It is just that India’s policymakers started from a much higher growth projection of 6.4% to 6.7% and have slashed it to 5%-5.5%.  The international agencies started at 5.5% levels and have slashed it to 4.3% – 4.7%.

RBI thankfully started with 5.7% in Apr-13 policy and lowered it to 5.5% in Jul-13 policy. Dr Rajan and this quarterly report expect a recovery in H2 but is highly unlikely.

Growth has slackened to a 17-quarter low of 4.4 per cent during Q1 of 2013-14. On current reckoning, growth in 2013-14 is likely to stay at about the level of last year. After a slower H1, a modest recovery is likely in H2 of 2013-14. This is expected to come from a rebound in agricultural growth backed by a better than normal south-west monsoon and a pick-up in exports.

So will  be interesting if RBI lowers its growth projections as well.

Inflation: RBI also released its inflation expectations survey for Sep-13 period. This chart on inflation expectations is scary:


It is quite a sharp rise from Jun-13 levels thanks to rising food prices in the period. Those who say RBI should not care about inflation as mush of it is driven by food prices, this is what the main problem is. Inflation expectations start to go up. But then given the state of ignorance over inflation in India, we could say central bank should stop focusing on inflation expectations too..Who knows..we could see that too…

RBI pegged inflation for 2013-14 at 5.5% and is likely to be raised as well.

Overall, the last lines from the report sum up the ever continuing dilemma:

At the present juncture, monetary policy faces an unenviable task of anchoring inflation expectations, even while growth remains tepid. It is, therefore, important to craft policy responses so that growth concerns are addressed in an environment of stable prices without endangering macroeconomic stability. For supporting growth, complementary action will be necessary aiming at productivity-enhancing structural reforms, addressing supply constraints and ensuring quick project implementation.

Markets expect the following tomorrow.

  • Repo rate hiked by 25 bps to 7.75%
  • MSF rate lowered by 25 bps to 8.75%. This will bring it to earlier level of Repo +100 bps
  • Increasing the current cap on LAF repo borrowing from 0.5% of NDTL

I also expect the above. RBI also releases several measures on In banking and regulation.

  • there could be something on foreign banks,
  • yet another attempt to revive interest rate futures market and so on..

These would be stock price boosting measures….(ah it is raining reforms..)…After all something has to be done to keep the stock market party going….

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