Wednesday, August 2, 2017

much ado about almost nothing

Bi-monthly credit policy by RBI is just over.  A 25 bps repo rate cut, in line with expectation, no change in stance which is a disappointment for the market (read equity market) participants and barely any mention of strong rupee. Verdict out.

There have been so many factors to consider - encouraging inflation numbers but the vegetable prices were rotting the basket. Internal consumption and capex needed a push making a case for a deeper cut while most other central banks are talking of going north. If Rupee strength warranted lower interest rate (to help exporters), nothing much could be done about Dollar weakness in global scenario. Add to it the impact of GST, hike in HRA, farm loan waiver, monsoon, Current Account Deficit and global financial markets. There is a whole big maze out there.

Is there a black box that takes into consideration all the factors and pushes out a recommendation after complex computation? or do they put all the factors in a jar, give it a good shake and do a lucky draw? Do MPC members give an explanation as to why do they think 25 is better than a 50 or zero?

On a serious note, RBI decides what it decides with the aid of it's think tanks and ear to the ground. They have cut 25 bps and said that they maintain neutral policy stance with focus on inflation. No doves and no hawks. Slam, clank, done!

Who were waiting with bird feed in their palms to feed the doves?

Banks - who hardly ever pass on the benefit to those who will contribute to consumption and growth

Equity market (players) - sentiment sentiment sentiment! Low interest rate is good for corporates and consumers and that "sentiment" is good for index. AND healthy index is good for my investment portfolio.  We need to see a bit of euphoria - here and now! The actual impact on corporate profits and real economy - Let that wait, please! For now, we are busy counting our chickens before they are hatched.

Sometimes what we (market) expect is a dose of steroid. All that our economy maybe suffering is a common cold.
"You want steroid to be administered, why?"
"I want the patient to sing and dance in tomorrow's party."
"Ok, but I am the doctor here" said RBI.