China Devalues the Renminbi. Why should all Currencies Fall?

Posted by: Deepa Vasudevan on Thu, Aug 13th, 2015

China has unexpectedly devalued its currency, thus providing its exporters with a clear competitive edge. This blog explains why currencies around the world fell in response to the renminbi devaluation. Read more

No reason for a rate cut

Posted by: Deepa Vasudevan on Wed, Aug 5th, 2015

Monetary policy was retained at status quo in the August 2015 policy review. We discuss why all reasons and circumstances pointed to the need for holding rates constant. Read more

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

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

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

Negative Yields in Europe: Does it Make Sense?

Posted by: Uma Shashikant and Deepa Vasudevan on Tue, Feb 17th, 2015

European government bond issues are being oversubscribed, even at negative yields to maturity. This blog describes the investors who would like to invest in such bonds, and the scenarios under which they can profit from their investment. Read more

Statistical Magic: How the Economic Slump Vanished with the new GDP series

Posted by: Uma Shashikant and Deepa Vasudevan on Wed, Feb 11th, 2015

The new GDP series released recently shows that India is among the fastest growing economies in the world. Press reports have questioned the reliability of this new data. This blog explains the revisions made in the new series, its impact on macro economic analysis. 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

How do banks respond to RBI's Rate Actions? Part 2: What are banks likely to do now, should RBI cut rates?

Posted by: Uma Shashikant and Deepa Vasudevan on Thu, Dec 18th, 2014

Monetary policy is effective only when RBI actions are transmitted to bank lending rates. Part 1 of this blog explains how the asymmetric nature of monetary transmission impacts base rates. In Part 2, we discuss how the way banks source funds impedes their ability to reduce base rates despite ample liquidity and strong deposit growth.  Read more

How do banks respond to RBI's Rate Actions? Part 1 : Banks respond faster to hikes, not cuts

Posted by: Uma Shashikant and Deepa Vasudevan on Wed, Dec 17th, 2014

Monetary policy is effective only when RBI actions are transmitted to bank lending rates. Part 1 of this blog explains how the asymmetric nature of monetary transmission impacts base rates. In Part 2, we discuss how the way banks source funds impedes their ability to reduce base rates despite ample liquidity and strong deposit growth.  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

Fiscal Deficit- How the Red Line was Honoured

Posted by: Deepa Vasudevan and Uma Shashikant on Tue, Feb 18th, 2014

The fiscal deficit for 2013-14 was restricted to 4.6% of GDP, well within the promised "Red Line". This blog analyses how the government managed to achieve its target despite falling economic growth, low revenue collection and poor disinvestment. 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

A Timeline of the Rupee's Slide

Posted by: Deepa Vasudevan & Uma Shashikant on Wed, Aug 28th, 2013

The Rupee-Dollar rate continues to decline. Measures to manage its slide have not succeeded in reversing the depreciation. A time line depicting the slide and the events around it in July-August 2013. 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

The Rupee Logjam

Posted by: Uma Shashikant and Deepa Vasudevan on Thu, Jul 18th, 2013

The rising current account deficit and India’s vulnerability to hot money flows has led to rupee depreciation. Given easy domestic rates, US growth revival, and a switch in China’s model to consumption led growth, this would be an ideal time to develop export capabilities, and fix the CAD problem for the long term. 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

IIBs: Making Sense of the Cut-off Yield and Traded Price

Posted by: Uma Shashikant and Deepa Vasudevan on Thu, Jun 6th, 2013

The nominal yield of a g-sec, expected inflation and the real yield of an IIB are linked through a simple relationship. Trading opportunities in IIBs arise when market perceptions of inflation differ from the breakeven level. Such trading will enable the discovery of real yields and inflation expectations in the market.  Read more

Inflation Indexed Bonds (IIBs): Why 2% Coupon is a Good Idea

Posted by: Uma Shashikant and Deepa Vasudevan on Fri, May 31st, 2013

The first issue of inflation indexed bonds will be launched next week. The bond structure adopted for the IIB ensures that both interest and principal payments are protected against inflation. This note explains the usefulness of index ratios in adjusting payouts for inflation.  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

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

State Development Loans

Posted by: Uma Shashikant / Deepa Vasudevan on Wed, Dec 19th, 2012

State Development Loans, or SDLs, are debt securities issued by states to fund their fiscal deficit. Their popularity has grown in recent months as they are considered low risk, yet provide higher returns than comparable central government securities.  Despite poor liquidity, they provide a yield advantage to institutional investors. 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

Distribution of Financial Products - Push vs Pull

Posted by: Uma Shashikant on Mon, Sep 6th, 2010

Even as we continue to debate the lack of incentives for selling mutual funds and the mis-selling nightmares in insurance products, the space I was watching was the National Pension Scheme (NPS).  Here was the product that was perfectly designed, after years of research and filled with the good intention of taking pension products to the population that needed it most. The product was a good one, offered choices, was available at low costs and should have taken off, if the belief, especially among regulators, that a good product would sell from “pull” rather than “push.” Read more

RBI Circular on HTM Categorisation

Posted by: Uma Shashikant on Wed, Aug 18th, 2010

RBI recently issued a circular clarifying the treatment of transactions in government securities in the 'held to maturity'(HTM) category.   Read more

Securities and Insurance Laws (Amendment) and Validation Bill, 2010

Posted by: Uma Shashikant on Mon, Aug 2nd, 2010

It is sad day for financial market regulation as the Lok Sabha passed the Securities and Insurance Laws (Amendment) and Validation Bill, 2010.  The ordinance validates the ruling the government made in the Ulip row between Sebi and Irda, even as Sebi's has petitioned the Supreme court. to have decided the case in favour of Irda, without as much as a hearing, and to have validated it as an ordinance, is a shame.  The backdrop to the formation of the new committee set up by the same Ordinance to resolve disputes between financial sector regulators could not have been worse. Read more

Inflation - Answers Still are on the Supply Side

Posted by: Uma Shashikant on Mon, Aug 2nd, 2010

A late evening flight from any city to Mumbai provides ample thinking time. Laptops have to be turned off for landing and about an hour of hovering above the city is to be expected. Perhaps there are clues to the inflation number in this mess, I thought.  The passenger rush has increased significantly and airports are like yesteryear state bus-stands, despite the expansions. Airlines announce new flights and destinations everyday as there is an increase in demand. But they are unable to convert the increased demand to increased profits, since they lose money in costs of providing the services, including the fuel wasted hovering over major cities. Read more

Deposit Rates

Posted by: Uma Shashikant on Wed, Jul 28th, 2010

The quarterly review of monetary policy released on July 27th is likely to have an immediate impact on the pricing of bank deposits.  There are three reasons why this could be so. First, deposits have been growing at about 14% and credit at around 20% and the gap is expected to persist even after adjusting for credit demand from the telecom sector for spectrum payments. Read more