Reserve Bank of India (RBI)
had announced its Second Quarter Review of Monetary Policy 2013-14 recently (i.e.
on 29th Oct 2013). In its
Policy RBI had said the following major stance
I am little surprised on reading the Second Quarter Review of Monetary Policy 2013-14 (to read second quarter review click here). The second quarter review says that "Strengthening export growth and signs of revival in some services, along with the expected pick-up in agriculture, could support an increase in growth in the second half of 2013-14 relative to the first half, raising real GDP growth from 4.4 per cent in Q1 to a central estimate of 5.0 per cent for the year as a whole (Chart 1). The revival of large stalled projects and the pipeline cleared by the Cabinet Committee on Investment may buoy investment and overall activity towards the close of the year." Not for the reason that RBI had estimated GDP growth of 5.0 per cent for whole year but for the statement - revival of large stalled projects!!! These large projects are stalled for past 2 to 3 years; they got to be revived because election is on card now.
I saw the full interview of RBI governor to NDTV (click here for Transcript), Where Dr. Rajan said that ".........Oh, these guys don't have manufacturing", that's really why they are in the dumps. No. No. That's not why we are in dumps. We are slowing down because we expanded too fast and we have these..." "Dr Prannoy Roy: Old Systems." and "Dr Raghuram Rajan said Yes"
When Dr Prannoy Roy asked that: So what you are saying is with these old systems, if these remain in place, our growth rate is going to be capped at 4 to 5 percent. If we change the system we can go back to our 9-10% on a long-term basis.
Dr Raghuram Rajan: See 7-8 is what is feasible. These are all numbers, guess work.
This surprised me because our manufacturing sector is widely affected and it is a fact that we have weak manufacturing sector. Even the IIP data replicates only 0.6 percent growth over last year. If we are not worried about our manufacturing sector now, then when!!! In his Monetary Policy statement as well as in his interview, RBI Governor, talked about changing financial systems. This is another alarming thing (at least from my perspective) because this statement means two things either we have a weak financial system (this includes inefficient structure, where financial system fails to absorb shocks) or outdated financial system (which also means the flow of money in the economy is not that smooth)!!!
Financial system is a engine for any economy; if that fails then economy will be in trouble. It is still too early to say where Indian Economy is heading to!!! We need to wait and watch!
- Reduction of marginal standing facility (MSF) rate by 25 basis points from 9.0 per cent to 8.75 per cent with immediate effect;
- Increase in policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.5 per cent to 7.75 per cent with immediate effect; and
- The liquidity provided through term repos of 7-day and 14-day tenor has been increased from 0.25 per cent of net demand and time liabilities (NDTL) of the banking system to 0.5 per cent with immediate effect.
In
its policy RBI had said that it is more concerned on Inflation along with the
growth rate – “Curbing mounting
inflationary pressures and managing inflation expectations will help strengthen
the environment for growth by fostering macroeconomic and financial stability.
The Reserve Bank will closely
monitor inflation risk while being mindful of the evolving growth dynamics.”
(for full policy click here)
Two days after policy announcement RBI
Governor Mr. Raghuram Rajan has said that tough measures like raising rates are
needed to tackle inflation in India (In an exclusive interview to NDTV’s Mr.
Prannoy Roy). Dr Rajan's said to India Inc is: Bear with us. If we don't fix
inflation now, the problem will get worse. (For Highlights and full Interview video click here)
My Perspective
I saw the full interview of RBI governor to NDTV (click here for Transcript), Where Dr. Rajan said that ".........Oh, these guys don't have manufacturing", that's really why they are in the dumps. No. No. That's not why we are in dumps. We are slowing down because we expanded too fast and we have these..." "Dr Prannoy Roy: Old Systems." and "Dr Raghuram Rajan said Yes"
When Dr Prannoy Roy asked that: So what you are saying is with these old systems, if these remain in place, our growth rate is going to be capped at 4 to 5 percent. If we change the system we can go back to our 9-10% on a long-term basis.
Dr Raghuram Rajan: See 7-8 is what is feasible. These are all numbers, guess work.
This surprised me because our manufacturing sector is widely affected and it is a fact that we have weak manufacturing sector. Even the IIP data replicates only 0.6 percent growth over last year. If we are not worried about our manufacturing sector now, then when!!! In his Monetary Policy statement as well as in his interview, RBI Governor, talked about changing financial systems. This is another alarming thing (at least from my perspective) because this statement means two things either we have a weak financial system (this includes inefficient structure, where financial system fails to absorb shocks) or outdated financial system (which also means the flow of money in the economy is not that smooth)!!!
Financial system is a engine for any economy; if that fails then economy will be in trouble. It is still too early to say where Indian Economy is heading to!!! We need to wait and watch!
