What's Happening

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Monetary Policy Fine print

The October policy given out by RBI suggests that it is accommodative because the rise in inflation due to low supply, which means there can be rate cuts in the future if and when inflation rate also falls, but not in present.

The RBI has also decided to bring down the yield on government bonds by buying bonds of worth Rs.20,000 cr from the Open market every week

The RBI will also buy State govt loans, and by doing this the interest rate of State bonds would reduce and thus rate for corporate bonds would also be relatively reduced, so everyone would be able to buy the bonds at low rate of interest

Next, the RBi has suggested that if banks put upto 22% of their deposits in govt bonds, they would not have to incur losses even if the price of the bonds fell. This would actually incentivise the banks to buy more of the govt bonds and as more banks would buy the bonds, their yeild would fall, and this would make bonds affordable for corporates too.

This would help in kickstarting the economy.

The RBI has also encourage more home loans. If the borrower takes smaller loan, and brings more of his money, then the banks would have to keep less capital which is cheaper, since raising capital is expensive.

So if the borrower is bringing more of the cost of the house, the banks would be give them loans at a lower rate. This facility has been made available for all new home loans. This would help in pushing the Economic growth of the country by giving jobs in different industries like construction, home appliances etc.

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Chinese Central Bank buying into Indian Companies

Recent stock exchange disclosures revealed that People's Bank of China had made an investment of over 1% in HDFC.

2 years ago RBI had given permission to PBoC to invest in Indian market and it has done it in several companies as well. But these investments were below radar because each investment was less than 1% threshold limit of open disclosures by these companies.

It can be taken as a warning that several Chinese funding and investment agencies, influenced directly or indirectly by their govt. have been eyeing to invest in the Indian companies which seem important to the economy.

The developing investments made by Chinese bank not only to the major companies bt also in various sectors like fertilizers, cement, manufacturing of arms seems worrisome for the country's already plunging economy.

Seeing the current border issues of China and India, China may try to strong arm India by manipulating India's economy.

July 7th, 2020

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How RBI’s Foreign Exchange Intervention Impact Rupees

Recently RBI had bought 30 billion of dollars in April-June quarter which is the most in more than a decade, leading to a flood of rupees in the financial system.  RBI buys dollar from the banks, who receive dollar deposits from their exporters. This market stabilisation policy of RBI to intervene in foreign exchange market to buy dollars is to ensure  stable FOREX rate in the market.

Since the market is now flooded with rupee, the banks are now recycling the liquidity in the market by buying more government bonds.

This policy is achieving several objectives:

Augmenting reserves

Creating liquidity 

which in turn is helping in demand for bonds

the RBI’s 115 basis points of rate cuts(repo and reverse repo) this year, and different measures to facilitate the coronavirus-instigated credit crunch, have also contributed to the funds sitting in banks.

The RBI’s forex intervention has kept the rupee and bonds stable, and at the same time helped clear the humongous supply of bonds.

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Rising Petrol and Diesel Prices despite low crude oil prices

The reason petrol and diesel prices are rising is because the government revenue from other sources have plummeted due to coronavirus lockdown in recent months so the govt had to raise the excise duty on petrol and diesel.

The oil market has turned the tables in May gaining over 50 per cent from April's prices, hovering over $30 a barrel now and rising.

 If the rising trend continued, oil companies, which absorbed a big increase in excise duty on petrol and diesel early in May, would start making losses on sale of petrol and diesel. The sales volume of auto fuel is already down due to a demand squeeze caused by Covid-19 pandemic and lockdown.

Amid the unemployment crisis, when people are roaming around to get a job, fuel prices have become another problem for them.

 June 24th, 2020

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DEMAND INDICATORS

Consumer Price Index

The CPI measures the average change in prices over time that consumers pay for a basket of goods and services. This is basically how inflation is determined.  The CPI gives the government, and people an idea about prices changes in the economy.It can be used as a value of consumer’s purchasing power and can act as a guide in order to make informed decisions about the economy.

CPI is one of the most watched indicator as it's the best-known measure for determining cost of living changes.

Wholesale Price Index

WPI measures and tracks the changes in the price of goods before they reach consumers – that is, goods that are sold in bulk and traded between entities or businesses instead of consumers. The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction. The dip in WPI points out at the falling demand as the wholesale price would fall when the there is less demand in market, so the retailers would also buy less and an upward surge in the WPI indicates inflationary pressure in the economy.

Producer Price Index

PPI is a group of indices that calculates and represents the average movement in selling prices from domestic production over time ie. it measures price movements from the seller's point of view.

By measuring the trend in the PPI, one can be aware of overheating the economy, consumer spending, corporate profits, and most importantly, the movement in the stock market.

Consumer Confidence Index

CCI measures how optimistic or pessimistic consumers are regarding their expected financial situation. CCI is based on the premise that if consumers are optimistic, they will spend more and stimulate the economy but if they are pessimistic then their spending patterns could lead to a recession. 

Since consumer spending is so important to the nation's financial health, the Consumer Confidence Index is one of the most accurate and closely watched economic indicators.

Level of Employment

One of the main factors influencing the demand for consumer goods is the level of employment. The more people there are receiving a steady income and expecting to continue receiving one, the more people there are to make discretionary spending purchases. Therefore, the unemployment rate report is one economic leading indicator that gives clues to demand for consumer goods.

Rate of Interest

It is also one of the most important indicators for demand of consumer goods specially like jwellery, automobile and even personal loans. As the interest rate on loans increases, these commodities become more expensive and hence the demand falls, and vice a versa.

June 9th, 2020

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RBI stepping towards Digital Infrastructure

Over the years, payments ecosystem in the country has evolved with a wide range of options such as bank accounts, mobile phones, cards, etc. To provide further push to digitisation of payment systems, it is necessary to give impetus to acceptance infrastructure across the country, more so in underserved areas.

The RBI is setting up a Payment Infrastructure Development Fund (PIDF) with a corpus of Rs 500 crore, with an aim to give a push to digital payments nationwide.

This fund has been created to encourage acquirers to deploy Point of Sale (PoS) infrastructure, both physical and digital, in tier-3 to tier-6 centres and north eastern states. 

With infrastructure deployment, merchant onboarding and training will be a key challenge for enhancing the reach of digital payments in smaller town and cities, the special emphasis on tier-3 to tier-6 centers and north eastern states by the RBI, which would provide much needed push in expanding the reach and strengthening of the network.

The enhanced ability of PoS infrastructure will is supposed to reduce demand of cash over time.

Last year, the RBI had also proposed to set up an Acceptance Development Fund which will be used to develop card acceptance infrastructure across small towns and cities.

June 6th, 2020

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INDIA-SINO CURRENT TRADE SCENARIO

The Covid-19 pandemic has already earned China the ire of quite a few countries. India has not yet complained openly, but the deep-rooted mistrust towards the giant neighbour has been intensifying nonetheless.

Last month, India mandated govt. approval for FDI from countries with which it shares land borders. The curbs aimed to shield Indian companies from predatory investments, particularly those from China. This step was important, seeing that China had been taking advantage of the global economic shutdown to capture American and European markets when they are most vulnerable.

Recently China developed border tension in Ladakh with India, resulting in an Anti-China wave in Indian Market. Apart from this, Aatmanirbhar Bharat vision of PM Modi is generating awareness among people to not only avoid Chinese products but also own Indian manufactured goods. One can say that it may bring change in a long run in the Indian market because currently it is not easy to just boycott Chinese products

WHY SO?

Firstly according to norms of WTO, no country can impose full bans on imports from another country.

Secondly, a large number of raw materials required to manufacture goods from India are imported from China.

India is not yet a production or a manufacturing hub, and even so, Chinese products are sold at relatively lower rate than domestic goods and 47% of India’s population is still poor, so they may not afford domestic goods.

Be that as it may, India can certainly put bans on few Chinese products on basis of health and security issues, just like when China banned Indian milk Products on the basis of serious health issues.

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Why India needs to put cash in the hands of the poor

The Rs 21.7 lakh cr package declared so far consists in the extension of credit, or the moratorium of payments. And while this helps to building availability of immediate credit, it is estimated that less than 5% of the package may be in the form of real disbursements.

Also the govt. of India has refused or voided direct disbursement of cash to wage labourers, daily traders who are presently out of jobs and have no resources.

In the previous term, the govt. had taken a great initiative of Jan Dhan Yojna, where it encouraged rural population to open their bank accounts and which were also to be inked with their Adhar cards. 

It’s time to put that Yojna to some benefit. The govt should step forward and direct transfer cash to these accounts. This would not only help the poor survive these critical situation but also create demand. The poor does not just seek food grains, but mostly cash or money.

 The point here is that an economy is truly healthy only when the maximum number of citizens are constantly exchanging legal tender to purchase goods and services. To do this, they need to have mound of money today, and the security of knowing that they will have access to more tomorrow.

The stimulus package introduced by the govt. gives easement on loans for MSME and basically the supply side of the market. The govt must focus  on the millions of migrants, penniless and hungry, who are either trudging back to their village homes, or waiting, in desperation, for trains to take them there now.

May 31st, 2020

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What could be the fall from this level

Since only 7 days of lockdown overlapped with the last days of the quarter, the data is derived from the pre lockdown slowdown. But that does not hide the upcoming economic crisis India may face post lckdown.

It goes without saying that the number for Q1 of the current financial year will be much lower bordering on the negative as the lockdown had put all breaks to the economic activities.

The core sector output contracted by 38% in April is an indicator of the dent which the lockdown is likely to bring forth in economic activity and the resultant numbers. With the ongoing lockdown and flight of migrant workers, construction activity could further shrink.

Though the stimulus package released by the govt. may help soften the blow but sadly that would not be enough.

The focus of the govt’s. stimulus package should have been on to demand generating measures rather than easing loans for the business sector.

At this rate, India may face another recession which may be even bigger than the previous one. 

May29th, 2020

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The GDP numbers for both the fourth quarter of 2019-20 and also the full financial year,3.1 and 4.2 resp., signals that the economic situation is grim.

India’s growth was already low during the pre-lockdown period. This number fully reflects the slowdown which the economy was going through in the last two years, and it also amply highlights the importance of a demand-led recovery for sustainable future growth. 

This number is important to consider because it would be the base against which the impact of the lockdown and consequent demand destruction, loss of productivity and employment would be mapped. 

The only silver lining could be agricultural growth that's expected to remain stable on the back of expectations of a good monsoon, since pandemic induced lockdowns have mostly affected non agricultural sectors.

The construction and the manufacturing sectors have shown contraction in output. Since construction sector is the 2nd largest employment sector after agriculture, a significant decline is expected amid lockdown.  May 29th, 2020 

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RBI further cuts Repo Rate

Current Repo Rate-4%

Current reverse Repo Rate-3. 35%

It is a good news for borrowers as it reduce the EMI paid on loans by the borrowers, as interest rates are likely to be reduced.

Existing borrowers

Borrowers, whose loans are linked with external benchmark ie. Repo Rate or treasury bills etc. can be benefited by reduction in EMI in upcoming 3 months .

Loans linked with Marginal Cost based Lending Rate

Such borrowers can only be benefited by this when the banks reduces loan rates because it is dependent not only on external rate cuts but also on internal factors of the bank.

Impact on New borrowers

According to Atmanirbhar Bharat package recently announced,the 2 groups of middle income can avail subsidy on interest rates of loans. Therefore the recent rate cut will make nee loans cheaper.

May 24th,2020

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It is very much important for the world economy to have a proper flow of finance in the market therefore in each and every country there is a financial market which is known as the tool allowing people to trade financial securities e.g. stocks and bonds and the commodities.

Market basically works during which having many buyers as well as sellers at one place in order that they'll easily be  able to sell and buy their shares and that they can even find people easily who just want to shop for their shares.

Economic turmoil related to the COVID-19 pandemic has had wide-ranging and severe impacts upon financial markets.

Major events included a described Russia–Saudi Arabia oil price war after failing to succeed in an OPEC+ agreement that resulted in an exceedingly collapse of crude oil prices and a stock market crash in March 2020.

The sentiment in the stock markets across the world is gloomy. This is reflected in the frequent crashes in the share markets in all parts of the world. Financial markets in India are witnessing sharp volatility currently as a result of the fallout in global markets. 

Further, with overseas investors flying to the safety of dollar-backed assets from emerging markets has led to a sharp downfall in the Indian Stock Market.

Although bonds are generally considered safer than stocks, so confident investors will sell bonds to shop for stocks and cautious investors will sell stocks to shop for bonds. But during the 2020 securities market crash that began the week of 9 March, bond prices unexpectedly moved within the same direction as stock prices.

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Liquidity is that the latest elixir in town. Not surprisingly, a major portion of the package ( ₹20.97-trillion to be exact) served up liquidity—and not fiscal stimulus as businesses and investors were expecting.

The idea to restart the economy by fiscal measures is by putting more cash within the hands of individuals, so they'll spend it. Within the process, consumer demand and economic process will be revived.

 The thought behind liquidity, that the govt opted, is that people and businesses borrow more then spend. As they are doing this, consumer demand will get revived, and businesses and therefore the overall economy will benefit.

But unlike a fiscal stimulus which puts money within the hands of individuals, loans have to be repaid.

What are the probabilities of individuals going out during the lockdown for loan?

Also, the probabilities of individuals borrowing during these tough economic times, where they aren’t really confident about their economic future, are rather low, which may be true for little businesses which are in trouble and want help in uplifting demand instead of seeking loan.

The package provided to MSMEs could only help within the supply side of the market. But unless the demand isn't regenerated, the revival of the economy seems arduous.

May 20th, 2020

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Atmanirbhar Bharat: 1st tranche

The mega Economic Package “Atmanirbhar Bharat” which spoke about ₹ 20 lakh crore liquidity support for various sectors with special focus on MSME was revealed by the Finance Minister Nirmala Sitharaman on Wednesday.

MSMEs are getting the majority of the funding. The ₹3 lakh crore emergency credit line will make sure that 45 lakh units will have access to assets to resume endeavor and safeguard jobs. This can help MSMEs in kickstarting their business after the lock down.

The definition of an MSME is being expanded to permit for higher investment limits and therefore the introduction of turnover-based criteria. This means that businessmen who did not exceed their production value or expanded their business thinking of losing the benefits provided by the govt under MSME criteria, now have an opportunity to expand and still enjoy the MSME benefits. The disallowance of global tender upto 200cr in govt procurement gives the opportunity to the domestic business to avoid the unfair competition from foreign companies.

A clear feature of the 1st tranche is that almost all the steps are basically supply side measures, aimed toward activating businesses within the MSME, land, NBFC sectors.  Generally, stimulus measures are aimed toward boosting demand either by government spending on its own account or increasing disposable incomes of households through cash transfers or tax concessions. However, both demand and provide are in need of revival within the Indian economy today. Apart from MSMEs, other stressed business sectors which got attention were NBFCs, power distribution companies, contractors and therefore the land industry.

The 30,000 cr special liquidity facility to NBFC, MFI and HFC, those with low credit rating require liquidity to do fresh lending to MSME and indivisuals. So this step important. The liquidity injection to funds starved power distribution companies (DISCOM) would help them to clear backlog of pending power purchase bills. This would help generators to clear their bank dues and purchase coal to supply power, ensuring continuity of uninterrupted power supply. This step is extremely important for infrastructural sector.

The package announced isn't a stimulus package, it's in fact a survival package, in order that MSMEs can survive the lockdown and restart production.

Although there's still a priority that risk-averse bankers might not extend the loan benefits to any or all MSMEs despite the government’s 100% credit guarantee. Some pick and choose may happen now, and a few of these who need it and deserve might not apprehend. It might be better if the govt had made it mandatory across the board. Employee Provident Fund (EPF) support could be a welcome move which is able to increase liquidity for both distressed businesses and cash-starved workers. 

May 16th, 2020

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OIL PRICE WAR 2020

The Russia–Saudi Arabia oil price war of 2020 is a financial war activated in March 2020 by Saudi Arabia in light of Russia's refusal to decrease oil creation so as to save prices for oil at moderate level. This monetary clash brought about a sheer drop of oil price over the spring of 2020, with the price getting negative on 20 April 2020.

Russia left the understanding, prompting the fall of the OPEC+ partnership. Oil prices had just fallen 30% since the beginning of the year because of a drop popular. The price war is one of the significant circumstances and end results of the right now continuous global stock market crash.

 Instead of taking measures to temporarily slash supply to keep up with the demand drop, Saudi Arabia and Russia are going head to head to increase supplies. It is nigh impossible to model the current abnormal situation, as it is both temporary and unsustainable.

A new model of oil market can be seen through the perspective of the Game Theory.

Saudi Arabia being the Dominant Monopoly in this Game theory, needs to balance the conflicting price and market aspirations, US being the second player.

All of OPEC+ members’ fiscal balances depend on oil revenues. So this isn’t a matter of just economy, but of survival. 

On the other side, as long as US producers don’t run out of shale rocks to crack, they are neither incentivized nor can they formally enter into any sort of production agreements.

The only way for production cuts to materialize in the US would be for independent company action based on economic condition.

To attempt to balance global oil demand within the next three months is a fool’s errand, and the oil complex must assume that there will continue to be a massive oversupply of oil and oil products. With that in mind, the only focus for oil producers should be limiting supply and avoiding the disastrous scenario of global storage reaching its limit.

Demand, meanwhile, is not expected to turn around until July at the earliest. So, if OPEC+ wants to avoid a complete stoppage of oil flows due to full tanks, it has no choice but to cut. It is no longer a matter of prices, but a matter of oil evacuation. Saudi Arabia and Russia may hold leverage, but there is a physical limit to this leverage.

While the focus in Q2-Q3 should be simply to avoid flooding global oil storage, Saudi Arabia and Russia will be looking to draw a long-term commitment from the U.S.

Putting aside this abnormal oil demand crash, OPEC+ will be aiming to develop a strategy for the future and getting ready for life after coronavirus. In a stable market, even a 1 million bpd oversupply of crude can cause price havoc.

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COVID-19 Pandemic and the Middle East

The effect of COVID-19 and the oil value plunge in the Middle East has been substantial and could increase.

The pandemic is causing significant economic turmoil in the region through simultaneous shocks 

Drop in domestic and external demand

Reduction in trade

Disruption of production

Fall in consumer confidence and tightening of financial conditions.

Reduction in tourism revenue

Chinese buyers are involved in a significant portion of real estate transactions in Dubai. With China still recovering from the virus, those Chinese buyers may postpone making new purchases.

Given the bubble economy of Dubai with its glut of property, this city-state is confronting economic catastrophe.

The UAE also had to cancel its Expo 2020 and Saudi Arabia not allowing the annual haj pilgrimage to take place, hundreds of millions of dollars were lost for both states. 

Oil is the center commodity for most Gulf Cooperation Council (GCC) states for exports. Indeed, even before the pandemic, the cost of a barrel of oil was on its way down, generally as an outcome of U.S. shale oil creation and option sustainable power source assets going ahead line.

The impact of the pandemic will further depress the oil price as demand dries up. Lower export receipts will weaken external positions and reduce revenue, putting pressures on government budgets and spilling over to the rest of the economy.

If one considers the macro picture, there’s a potential huge slowdown of the world economy in the coming years.

For countries in this region, especially ones which are fragile and conflict-ridden, such as Iraq, Syria, Yemen, and Libya, the pandemic is a massive near-term challenge that is aggravating existing structural weakness like lack of health and welfare infrastructure like hospitals and sanitation facilities.

More than any other region the middle east as well as North Africa are facing 2 distinct but related shocks--the fall of oil price as well as the pandemic crisis.

When the immediate crisis from the corona virus has begun to dissipate, consideration could be given to more conventional fiscal measures to support the economy, such as restarting infrastructure spending, although fiscal space has been significantly eroded over the last decade.

Several countries—Kazakhstan, Qatar, Saudi Arabia, and the UAE —have announced large financial packages to support the private sector. These packages include targeted measures to defer taxes and government fees, defer loan payments, and increase concessional financing for MSMEs.

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Role of Govt amidst the crisis and the aftermath

The aftermath of the pandemic lockdown is going to bring a lot of tasks for the government. From lifting up the falling economy, saving livelihoods of millions of people to improving better healthcare and providing food and shelter.

During the lockdown the govt has taken several steps in an attempt to reduce the panic of pandemic among the people. One of the major and good decisions taken by the government was putting moratorium on debt payments.

 After the lockdown the government must consider resuming the work on infrastructure development. This will have the immediate effect of creating employment and ensure wages to laborers.

In short run steps towards increasing consumption is important so that anticipating that consumption investment would go up.

 Farmers are in deep distress after the lockdown caused disruptions in the food supply chain, scarcity of labour and resulted in a decline in demand.

It is largely recognised that farming is not a remunerative occupation, which is why the government planned to double farmers’ income in the next two years through various schemes. Finding markets – domestic and global – was central to the plan, but the pandemic has upset the applecart, as the economy has taken a beating and the recovery period is anybody’s guess.

The government has opened a few procurement centres for limited operations but since only limited number of farmers are allowed, it has become tardy progress and long queues for selling their production.

Since the whole world economy has been hit with the COVID-19 pandemic, many countries may avoid importing of goods to help and survive their economy. This means Indian exports are also going to be effected, apart from the supplying of pharma products and other essentials. The government should also focus on increasing exports by several steps like

Simplifying regulation. The government should simplify regulation related to exports; long bureaucracy procedures negatively affect especially new exporters.

Increasing the availability of credit. The availability of short and long-term credit is crucial to exporters. This is decisive for small and medium enterprises (SMEs), for which the credit constraints are more binding than for large firms. 

Currently the government has taken several steps, including tax refund scheme and enhanced credit to exporters, to boost outbound shipments. The Finance Minister has said that  Remission of Duties or Taxes on Export Product (RoDTEP) scheme will replace the existing Merchandise from India Scheme (MEIS), which is considered as non-compliant to global trade rules.

"I am making it plain that RoDTEP, which is now coming in, will more than adequately compensate and incentivise exporters than all the existing schemes put together," she had added.

Under the Foreign Trade Policy, MEIS was introduced in 2015. This incentivised merchandise/goods exports of over 8,000 items and it was the biggest scheme of its kind. Many more actions are required from the government in the coming years as this crisis may last more than a year but with effective and adequate policies, India may overcome it fast.