The Bullish Bear is back with a few delectable insights into yesterday’s rate cut by the Reserve Bank of India, a relatively unexpected one, albeit a sixth cut in just under 2 years. A basic survey of newspapers after yesterday’s events will reveal that many analysts seem convinced that Government has now sidelined its CPI target in coming years of 4%. Two quick deductions: (1) Interest rates are decidedly headed in one direction only: and that’s down. For now. And (2) Monetary Policy Committee (MPC) or not, Urjit Patel is there to command the ship as per the directions of the BJP-led government. I present my case here in support of such a growing belief that Urjit Patel is a dove trapped in hawk’s clothing under the previous governor’s regime.
#1 Recent data releases were mixed and technically, did not merit a reaction
Consumer sentiment was robust and ahead of forecasts (A: 113, F: 110, P: 112), likewise the August PMI manufacturing forecasts (A: 54.7, F: 52.3, P: 51.9). July’s industrial production index (IIP) missed wildly (A: -2.4%, F: 4.0%, P: 2.0%), though these are known to be volatile, but August’s inflation (A: 5.1%, F: 5.8%, P: 6.1%) and current account deficit in Q2 remained under control (A: -$0.3 B, F: $0.4 B, P: -$0.3 B). [All statistics sourced from tradingeconomics.com/india]
A cut in interest rates seems to be the obvious course of action from the statistic of Bank Credit growth FYTD of 0.8% significantly lagging Bank Deposits growth of 5.0%. However, sound economics will deduce, infact, a necessity to raise interest rates based on this data point! More money growth in the system is a warning sign of excess money creation, and a cut in interest rates will only add fuel to the fire. In any case, even if we were to analyze the conventional view of cutting interest rates, rate hike transmission was the key intermediate step to resolve: Over the last 150 bp of rate cuts, only 70bp have been passed on.
Comparing India’s positioning to BRICS nations, for the large part, India has favorable growth statistic (9th highest in the world), but is at risk from rising prices. Upside risks to CPI include (1) rising crude prices, (2) upcoming strong quarter for Gold, which may strain deficits & the Rupee and (3) government largess in wages and compensation fueling consumption demand. And although RBI’s release cited moderating food prices as a relief, it should be noted that the food price inflation index is first of all, volatile, and second of all, at a level of 8.23% in July, still very high!
#2 Ex-ante polls were markedly more dovish under the new governor
Since Urjit Patel’s appointment as governor on August 20th, analyst polls on rate cut swung significantly to a more dovish stance (From under 12% expecting a rate cut in deposed governor Raghuram Rajan’s last meeting on August 9th to over 40% ahead of October 4th meeting chaired for the first time by Mr Patel). Reuters on 30th September stated that “Several analysts in the poll said they expect him and the newly-formed Reserve Bank of India Monetary Policy Committee to follow a more dovish path than his predecessor.” If analysts are to be considered “informed,” then this large movement in the informed consensus on what’s coming held valuable information for the market.
#3 Urjit Patel was installed by a government crying out for lower interest rates
Numerous instances have been reported documenting politicians criticizing Raghuram Rajan’s monetary policies. Dovish Government stalwarts such as Rajya Sabha MP Subramianian Swamy openly backed the instalment of Urjit Patel, who thought it was “idiotic” to believe that Patel will be as hawkish as deposed RBI Governor Raghuram Rajan. Mr Patel may have some wrongful history as well: it was reported that Patel was involved at the highest levels with scamster Jignesh Shah, according to a report by India Samvad.
And lest we forget the basics of how the central bank operates in India. Per the Reserve Bank of India Act, 1934 (Updated January, 2013): (1) Its governors are appointed or nominated by the central government, (2) the Government of India also dictates the appointment/ nomination of all directors to RBI’s board of directors, (3) the RBI was nationalized on 1 January, 1949, and is fully owned by the Government of India.
And best of all: the RBI does not even get audited!
Independence.. what independence?!