RBI Hikes Rates: Monetary Reasoning

RBI monetary policy committee (MPC) unanimously decided to increase the benchmark repo rate for the first time in more than four years, in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 % within a band of +/- 2 %.

The rate changes after the MPC meet will be:

1.      Under Liquidity adjustment Facility(LAF) decided to raise Repo rate by 25 bps to 6.25%,
2.      The reverse repo rate under the LAF stands adjusted to 6.0 %, and
3.      The marginal standing facility (MSF) rate and the Bank Rate to 6.50 %.

Stance: Neutral

A neutral stance provides the Reserve Bank of India enough leeway to change rates in either direction in the next MPC. RBI Governor Urjit Patel said, “The MPC felt there was enough uncertainty to stick to neutral stance and yet respond to the risks to inflation target that have emerged in the recent months.”

A Rate hike was expected, but many experts felt that RBI might wait till the next MPC meet to hike Rates. This rate hike is being treated by some as a pre-emptive strike to insulate from the event risk on inflation in the future.

The major factors taken into account by the committee on deciding for a Rate hike were:

1.      Rising inflation concerns: The committee expects retail inflation at 4.8-4.9% in the first half of the year and at 4.7% in the second half of the year. Retail inflation, which is targeted was 4.58 % in the month of April, driven by a significant increase in inflation excluding food and fuel.                                                                                                                                (source: RBI)

2.      Global Factors: Global trade growth has continued to strengthen, though geo-political tensions contributed recently to declining export orders.  In Advanced Economies the Global economic activity has expanded albeit some momentum has been lost; Emerging Market Economies have generally been resilient. Oil prices increased for some period and the due to supply glut more or less stabilized.

3.      US Rate Cuts: This has increased the pressure on the Indian Rupee. Also, bond yields have risen on reduced foreign appetite for Emerging Markets debt due to growing dollar shortage in the global market and on prospects of higher interest rates in Advanced Economies. Stocks in major EMEs have faced sell offs on a rising dollar.

4.      Liquidity Surplus: During April, the Reserve Bank absorbed surplus liquidity of ₹496 billion on a daily net average basis due to increased government spending, especially in the second half of the month.

5.      Rural Demand: Improved rural demand on the back of a bumper harvest and the government’s thrust on rural housing and infrastructure. The monsoon forecast augurs well for the agricultural sector. According to RBI, October seems more likely by which better information about the impact of the MSPs on food prices can be gauged. As forecast by the IMD, if the monsoon is normal and well-distributed temporally and spatially, it may help keep food inflation in check.

Ripples: Demonetisation, Trump and OPEC Part-3

This is the third part of ripples series. For the previous parts click on :-
PART 1
PART 2

The oil prices have been under pressure for quite some time due to the supply glut. This has diminished the profit margins of many oil exporting countries. 

The organization finally attempted its first production cut since 2008. Despite many political difficulties, a September 2016 decision to trim approximately 1 million barrels per day was codified by a new quota agreement at the November OPEC conference. The agreement (which exempted disruption-ridden members Libya and Nigeria) will be in effect for the first half of 2017 – alongside promised reductions from Russia and ten other non-members, offset by expected recoveries in the US shale sector, Libya, Nigeria, and spare capacity.

International oil prices rose to an 18-month high of more than $58 a barrel after the Organization of Petroleum Exporting Countries and several non-members agreed on Dec. 10, 2016  to end two years of unfettered production and instead cut output to increase price in the market. 

Despite this agreement to cut oil production and thereby reducing supply Crude still slipped about 5% from that peak as traders await proof that OPEC will follow through on the deal. Producers have already removed 1.5 million barrels a day of supply from the market, Saudi Minister of Energy and Industry said in Vienna. 

Representatives of OPEC and several other major oil producers met in Vienna for their first meeting to monitor compliance with an agreement to cut output. It remains to be seen as to how effective this agreement is in bringing down the supply and increasing prices of crude oil. 

With the prices slipping again it will become imperative for the OPEC to prove  that the group is serious about finally eliminating a three-year crude oversupply and dispel skepticism stemming from previous unfulfilled promises. The outcome will depend on the degree of compliance.

Whatever be the out come on the compliance front, this decision by OPEC is bound to create Ripples in the global markets.