Inflation or Deflation? And why does it matter?

Posted by: Deepa Vasudevan on Mon, Jun 22nd, 2015

Retail inflation is around 5%, but wholesale inflation is negative 2%. Such a wide divergence between inflation measures sends conflicting signals about the state of the economy and makes the task of monetary policy much harder. We explain why this divergence matters. Read more

Why bankers prefer a CRR cut to a repo rate cut

Posted by: Deepa Vasudevan on Fri, May 29th, 2015

In the build-up to the June 2 monetary review, bankers are keen that RBI reduces the CRR with or without a reduction in the policy repo rate. We explain why a CRR cut may enable banks to reduce lending rates more effectively than a cut in the policy repo rate.  Read more

Market Madness in May: A Preview of the Future?

Posted by: Deepa Vasudevan on Wed, May 13th, 2015

Financial markets experienced sudden volatility last week. It was a response to global uncertainties as well as domestic demand weakness. The episode should serve as a warning for the bigger turmoil that might occur if and when the US Fed decides to normalize interest rates. Read more

Exchange Rate: A Nominal Depreciation, but not a Real one

Posted by: Deepa Vasudevan on Thu, Apr 23rd, 2015

India is currently facing an appreciation of the real exchange rate, which is a sign of declining export competitiveness. Lower cost advantages and depreciation in the currencies of trading partners have contributed to this situation. The only consolation is that RBI intervention has prevented the rupee from rising against the dollar. Read more

Who won? Who lost?

Posted by: Deepa Vasudevan on Tue, Mar 10th, 2015

The RBI and the Government often appear to be at odds with each other in matters of monetary and fiscal policy. This imaginary conversation draws on their perceived different views on managing the economy. Read more

The Fourteenth Finance Commission: FAQs

Posted by: Deepa Vasudevan on Sat, Feb 28th, 2015

The Fourteenth Finance Commission has recommended a radical increase in the share of taxes to be allocated to states. This blog tells you about the function of the finance commission, and the basis on which union taxes are allocated to various states.   Read more

Yoga, Yoni and the Union Budget

Posted by: Deepa Vasudevan on Tue, Feb 24th, 2015

Great powers are attributed to the ancient Indian system of Yoga, including that of controlling crimes. We take a tongue-in-cheek look at how we can harness the power of yoga to manage the Union Budget! Read more

Interpreting Negative WPI Inflation

Posted by: Deepa Vasudevan on Thu, Feb 19th, 2015

WPI inflation has turned negative as a result of the sharp decline in international crude prices. But rising food prices and the possibility of a reversal in crude prices suggest that RBI must remain watchful about price trends.   Read more

One Swallow does not make a Summer: Comparing India and China

Posted by: Deepa Vasudevan on Fri, Jan 23rd, 2015

The IMF announcement that India's growth would overtake that of China in 2015-16 set off a market rally. But a meaningful comparison between India and China is possible only if one uses the right economic indicators and an appropriate reference period. Conclusions cannot be drawn on the basis of a single data point. Read more

How Vulnerable is India to an Economic Crisis?

Posted by: Deepa Vasudevan on Wed, Jan 21st, 2015

The Mid-Year Economic Review introduced the concept of a Macroeconomic Vulnerability Index, or MVI, which indicates the potential for the occurrence of an economic crisis by combining three key economic indicators. MVI is a simple and effective early warning indicator, but must be used with caution. Read more

The RBI rate cut: A Signal of Support

Posted by: Deepa Vasudevan on Fri, Jan 16th, 2015

The RBI cut the policy rate by 25 basis points on 15 January 2015, signaling the end of the interest rate tightening cycle. This action reflects the need to stimulate demand given that inflation pressures have subsided with falling crude prices. Read more

Decoding the Yen Depreciation

Posted by: Deepa Vasudevan on Wed, Nov 19th, 2014

The yen has depreciated by over 35% since the Abe government took over two years ago. The policies of Abenomics aimed to pull Japan out of decades of low growth and deflation. This timeline highlights key milestones in the yen-dollar exchange rate since the implementation of Abenomics strategies.  Read more

The Rate Liftoff: Why Markets Don't Like it

Posted by: Deepa Vasudevan on Sat, Oct 11th, 2014

As the US Fed ends its QE program, a phase of easy money is about to end. Nervousness about the expected US rate tightening has led to widespread volatility and sell offs in equity markets. In this context, the recent Fed stance of holding rates has bought a temporary calm. Read more

The Much Discussed Slowdown in Bank Credit

Posted by: Deepa Vasudevan on Wed, Oct 8th, 2014

The sudden decline in bank credit growth has led to a view that investment will pick up only if interest rates are cut to stimulate the demand for bank loans. This blog dissects the possible reasons for the credit slowdown, ad explores the link between credit and growth. Read more

The Importance of the September 2014 Monetary Policy

Posted by: Deepa Vasudevan on Wed, Oct 1st, 2014

The September 2014 monetary policy clearly signals that RBI will focus on controlling inflation. Its willingness and ability to reduce interest rates will depend on government actions towards supply side reforms, fiscal consolidation and measures to revive the investment cycle. Read more

The Statistical Truths in GDP growth

Posted by: Deepa Vasudevan on Fri, Sep 12th, 2014

Real GDP grew by 5.7% during the quarter April-June 2014, at the highest quarterly growth rate since 2012. However, as the economy emerges from several quarters of poor growth, it is important to recognize the impact of a low base in giving a statistical boost to GDP growth. Read more

Can Bank Credit Provide Enough Impulse to Investment?

Posted by: Deepa Vasudevan on Wed, Sep 3rd, 2014

The change in the flow of bank credit, or credit impulse, is better able to predict recoveries from a recession as compared to other credit variables. Data shows that though bank credit growth is poor, the credit impulse is rising. This suggests a strong possibility of a revival in investment. Read more

The Fiscal Deficit: How Achievable is it?

Posted by: Deepa Vasudevan on Fri, Jul 18th, 2014

The Government has targeted a fiscal deficit of 4.1% of GDP for this year. The achievability of this target depends on key assumptions about growth, exchange rate, fuel prices and overall investment climate. Any deviation of actual conditions from assumed ones will result in a much higher deficit. Read more

ECB: Easing into negative territory

Posted by: Deepa Vasudevan on Mon, Jun 9th, 2014

The European Central Bank made monetary policy history by switching to a negative rate for a key bank deposit rate. Shorn of the novelty, this is a simple strategy to boost bank credit and to control depreciation of the Euro, both with the aim of restoring economic growth. Read more

Finding Jobs for the Demographic Dividend

Posted by: Deepa Vasudevan on Thu, May 15th, 2014

More than 100 million persons are expected to enter the workforce between 2010 and 2020. There are few jobs in agriculture and manufacturing now, and services are not labour intensive. The challenge is to productively harness the demographic dividend by creating enough jobs in an economy with declining employment elasticity. Read more

A New Year. A New Monetary Policy Framework?

Posted by: Deepa Vasudevan on Sat, Jan 25th, 2014

The Patel Committee has recommended far-reaching reforms to monetary policy. The key idea in the report is that RBI should move to targeting CPI-based inflation and it should be both independent and accountable for achieving its targets. However, monetary policy is effective only if backed by sound fiscal policy Read more

A More Stable External Account

Posted by: Deepa Vasudevan on Thu, Dec 12th, 2013

The RBI's strategy of compressing imports and attracting NRI funds through the FCNR(B) scheme has greatly eased the BoP situation. If FII inflows also pick up in the remaining months, India should be able to finance its current account deficit with foreign capital inflows without dipping into its reserves. Read more

CPI and WPI: Tough to choose one over the other

Posted by: Deepa Vasudevan on Tue, Nov 19th, 2013

The new CPI index captures retail prices changes better than WPI. The two indices occasionally diverge, but since producers eventually pass on price hikes to consumers, a rising WPI is likely to pull up CPI too. Both indices need to be tracked to understand inflation patterns and monetary policy actions. Read more

Economic Slowdown and Corporate Profitability

Posted by: Deepa Vasudevan on Mon, Oct 21st, 2013

The private corporate sector has been hit by declining margins and high interest costs over the last four years. A recent RBI study shows that small and medium sized companies were the worst affected by rising interest rates.  If RBI increases rates in its October 29 policy, it may increase debt default or bad loans further.  Read more

Why did RBI increase the Repo Rate?

Posted by: Deepa Vasudevan on Mon, Sep 23rd, 2013

The RBI increased the repo rate by 25 basis points and simultaneously eased liquidity at the short end in its September monetary policy. The purpose was to swiftly suppress inflationary expectations and align monetary conditions with other emerging markets while lowering the cost of short term funds Read more

Tracking Every Dollar

Posted by: Deepa Vasudevan on Wed, Aug 7th, 2013

India is expected to face a current account deficit of $85 billion this year. Capital inflows and import compression are likely to finance only a part of it. A deficit of $25 billion will remain, and may need special financing such as through a sovereign bond issue. Read more

India's Impossible Trinity

Posted by: Deepa Vasudevan on Thu, Aug 1st, 2013

India's high current account deficit and vulnerability to reversal of foreign inflows have pushed down the rupee dollar exchange rate. In its efforts to maintain the value of the rupee and ensure capital inflows, the RBI faces the Impossible Trinity that prevents it from cutting interest rates. Read more

Monetary Policy: Why Doing Nothing Was Good Policy

Posted by: Deepa Vasudevan on Thu, Jun 20th, 2013

Monetary policy actions cannot be viewed exclusively as a growth-inflation tradeoff. Exchange rate depreciation has inflationary consequences, and interest rate cuts can worsen depreciation by pushing out capital flows. In managing the forces of exchange rate, growth and inflation, the RBI chose to maintain status quo in the June 17 review. Read more

Volatility in the Japanese Government Bond Market

Posted by: Deepa Vasudevan on Mon, May 27th, 2013

The Abenomics policy aims to pull Japan out of deflation through strong monetary and fiscal stimuli, and structural reform.  Though GDP and stock markets have reacted positively, bond yields are high and rising. A combination of inflationary expectations, high government debt, and large bank holdings of debt are creating uncertainty in bond markets. Read more

Asset Purchases

Posted by: Deepa Vasudevan on Thu, May 23rd, 2013

Ambiguity in Fed statements about exiting the asset purchase program set up a volatile up and down day in stock markets around the world. Financial markets have come to rely on easy money through QE, any reversal could cause a sharp downturn in markets of emerging economies. Read more

Issues in Monetary Policy

Posted by: Deepa Vasudevan on Mon, Apr 29th, 2013

The market is expecting RBI to reduce rates and ease liquidity in its May 2013 policy. The premise is that declining core inflation has given RBI the ability to stimulate growth without fear of overheating. But the final policy decision would depend also on future expectations of inflation and current account deficit. Read more

BUDGET 2013-14: The Good News, The Bad News, and The Worry

Posted by: Deepa Vasudevan on Wed, Feb 27th, 2013

As the country readies for the Union Budget 2013-14, macro economic indicators show both positive and negative trends. Conflicting indications in current account deficit, fiscal deficit, inflation, bank lending and interest rates have to be balanced carefully in the budget provisions. Read more

The Current Account Deficit

Posted by: Deepa Vasudevan on Thu, Jan 31st, 2013

The rising current account deficit (CAD) raises concerns about India’s ability to attract foreign capital to fund the deficit. Recent policy reforms have improved sentiment, but the greater share of volatile and debt-creating foreign inflows in the capital account increases the risk of a BoP crisis. Read more

The Widening Credit-Deposit Wedge

Posted by: Deepa Vasudevan on Wed, Nov 14th, 2012

The wedge between bank deposits and its loans and investments has widened significantly in recent years due to declining deposit mobilization. As a result bank balance sheets show an increase in borrowings and high cost CDs. The impact of monetary easing on the changing liabilities structure needs to debated. Read more

The Inflation Growth Balance

Posted by: Deepa Vasudevan on Thu, Nov 1st, 2012

Monetary policy often has to choose between managing inflation and growth. However, interest rate is only one of the many determinants of GDP growth. Both domestic and global downsides to growth are strong and out of RBI control. Focusing on inflation management appears to be the only option. Read more

The Prudent Reserve Bank of India

Posted by: Deepa Vasudevan on Mon, Aug 6th, 2012

RBI has cut SLR rate by one percent and left other rates unchanged. This is a prudent measure, meant to ensure that banks have enough liquidity to tackle busy season credit pressures as well as potential liquidity shortages.   Read more

The India Consumption Story: Roti, Kapda and Cellphones

Posted by: Deepa Vasudevan on Mon, Jul 30th, 2012

Private consumption has been the most consistently growing component of GDP. Recently, however, there are signs of a slowdown. The Indian consumer has evolved to spending larger amounts on non-food items such as consumer durables, services and communication. The poor monsoon, inflation and falling real incomes  may derail this trend. Read more

Pause the Party: Uncertainties Ahead

Posted by: Deepa Vasudevan on Wed, Jun 13th, 2012

RBI is expected to cut rates and/or reduce CRR soon in order to spur economic growth.  Monetary easing tends to improve investment and consumption. But presently India faces external and domestic risks that may negate the beneficial impact of a rate cut. Read more

The Risk-Averse Indian Investor

Posted by: Deepa Vasudevan on Tue, May 29th, 2012

Indian households tend to hold most of their financial savings in safe low-return avenues such as bank deposits, insurance and small savings. This is largely due to inadequate information and fear of capital safety. Educating households could change their preferences and unlock significant savings for our capital markets.Indian households tend to hold most of their financial savings in safe low-return avenues such as bank deposits, insurance and small savings. This is largely due to inadequate information and fear of capital safety. Educating households could change their preferences and unlock significant savings for our capital markets. Read more

Accounting for the Rupee

Posted by: Deepa Vasudevan on Wed, May 23rd, 2012

The recent depreciation of the rupee against the dollar is attributed to India’s widening current account deficit and reduced capital inflows. It is critical to implement policies that reduce the twin deficits. That will boost investor confidence and bring in capital inflows. Read more

Why RBI may not aggressively cut rates in H1 FY2013

Posted by: Deepa Vasudevan on Mon, Apr 9th, 2012

FY12 ended with (a) a market already crowded with government paper and (b) a structural liquidity deficit that was partly eased with an end-of-fiscal year CRR cut.  FY13 has begun with an ambitious borrowing program. The Union budget announced a fiscal deficit target of 5.1% of GDP for 2012-13. The deficit is to be financed through gross market borrowings of Rs.513590 crore. Read more