3. Extracts of Review
• Management of Rupee – Top Priority; 60?
• Monetary policy alone?
• Blame it on Rio (oops!)…external sect risks.
• Reservations about Sovereign Bond Issuance.
• Plunge of 0.2 to 5.5%.
• Moderating WSPI + Prospect of softening of Food
Inflation + Decelerating Growth = Free K Movmt
Stable ER Indep MP
4. Time Travel…..
• Monetary Policy Statement
2013-14/07May’13:-
A. CAD related risk.
B. Sudden stop and reversal of
capital flows.
C. Negative I sentiments.
D. Supply constraints.
• Appearance of Chairman,
Fed in front of
Congress/22 May’13:-
– Tapering and QE.
– 0 hour over.
9. …..Time Travel….
• Mid Qtr Policy Review/17June’13:-
– Capital reversal still on.
– Rupee still under pressure.
– Macroeconomics week.
– Good Monsoons but crucial over next three months.
– WPI down to 4.7% but Food Index still close to 10%.
– Need to have conducive environment for investments.
– Fiscal deficit brought down to 4.8%.
• Actions Taken:-
– Gold import restrictions and duty raised.
– Liquidity reduced – CRR, Bonds, Raised margins of
currency derivatives , Marginal Standing Facility &
Liquidity Adjustment Facility restrictions.
10. …..Time Travel: RBI Acts
• June 5 - Import of gold restricted; customs duty raised .
• July 08 - Banks to trade only on behalf of their clients in currency
futures/options markets, tightening of exposure norms, and raising
margins on currency derivatives to check speculative activities.
• July 15-MSF rate raised to 10.25%, restricting the overall access by
way of repos under the LAF to 750 billion.
• July 18 - Open market sales of government securities of 25 billion.
• July 22- At least one fifth of imported gold has to be exclusively
made available for the purpose of exports.
• July 23- Regulating access to LAF by way of repos at each individual
bank level and restricting it to 0.5 per cent of the bank’s own
NDTL.
• July 24- CRR which banks have to maintain on a fortnightly average
basis subject to a daily minimum requirement of 70 per cent, was
modified to require banks to maintain a daily minimum of 99 per
cent of the requirement.
11. Back to July Review
• Management of Rupee – Top Priority.
• Monetary policy alone?
• Blame it on Rio (oops!).
• Reservations about Sovereign Bond Issuance.
• Plunge of 0.2 to 5.5%.
• Moderating WSPI + Prospect of softening of Food
Inflation + Decelerating Growth = Free K Movmt
Stable ER Indep MP
12. • Blame domestic scene rather than Fed:-
– Largest CAD among peer group; $ 0.5b/day need to flow.
– Preferred inflow of FDI – soured by –ve sentiments.
– FIIs – huge outflow; now a fickle (ok, Fed did it!).
– Bottom may fall out to 65 or 70.
– Only 1/5th liquidity sucked out.
– Backtracking from Bond auction – lack of confidence.
– Political uncertainty.
– Unrealistic export targets.
13. Options Ahead
• External Correction:-
– Lower CAD – weaker Rupee + faster exports.
– Minimal cost in terms of lost economic output and jobs.
• Internal Correction:-
– Stabilise currency.
– Lower CAD – slower domestic growth + slower imports.
– Increased human misery.
– Dependent on fiscal consolidation
• Possibly a way out :-
– RBI may have to let currency follow its natural course.
– Fiscal consolidation + Supply side reforms by govt + LT
funding to bring in dollars.
14. • Flirting with 61.
• PSUs and PSBs to raise $ through
ECB….. CRR?
• Sovereign Bonds not trashed yet.
• Oops….$ 1tn tag in danger.
• T-bill yield touches 11.26%.
• Fiscal deficit already at half way mark;
export interest subsidy (2-3)= 2000cr.
• FOREX Res touched $279b
15. Hopefully !
• But the catch lies in putting house in order
and the responsibility for that lies with FM.
• RBI may focus on inflation.
• Rupee may then stabilise automatically.
-Fiscal Deficit.
-Forex Res.
-Gold Imports.
-Non-essential
Imports.
-FDI Mxs.
-NRI – LT.