RBI MAINTAINS STATUS QUO

By Ruma Dubey

It came as no surprise at all! RBI kept the repo rate and CRR unchanged. It made more money available for exporters; they can borrow more but rates will remain same at 8% thus does not make much of a seminal difference; it is more of a token change and showing that RBI feels exports need a push.  It is not much of a relief item but just a small tinkering.  May inflation numbers did not give any relief and thus this ‘status quo’ was expected.  If most others had ridden on the wrong horse, without reading the indicators, surely they were driving up the wrong path.

Whatever the market might feel, disappointed or let down, one should salute the RBI Governor, Mr.Duvvuri Subbarao. He is one of the few Govt bureaucrats we have today who has not bowed down to pressure from the Govt and the market and decided to stick to his guns, to his hawk eyed view on inflation. He comes forth as a person who is idealistic and we should be happy that we have today one person in India who stood by his conviction. Today most of the people in power that we have are people who stand up for nothing and hence fall for everything.

RBI has done the perfect thing and going for a rate cut at this stage would have been foolish and impetuous. We had mentioned in our Cover Feature of 14th June that RBI will not tinker with anything if it is purely guided by prudence.

RBI has done its bit but when will the Govt get to work? All fiscal issues and policy paralysis cannot be corrected by RBI. Infact at every juncture, RBI has done everything what was best but there has been no action from the Govt.

There is worry that this would send the wrong message to the FIIs. But is that really so? RBI did not sway, did not give in to pressures and did what was best for the country and not what was best for the markets. If FIIs cannot see and respect this, then well, the market is surely made up of gamblers and opportunists and that is not good for the country. We managed to come through virtually unscathed during the Lehman collapse because of this hawkish stance of RBI. Today if India is in a bind, it is due to Govt inaction and that is a terrible message being sent across. Infact RBI’s caution sends the right message that at least someone in the country has his head screwed on right and doing what is right.

RBI has seen the writing on the wall. Currently, globally commodity prices have come down. Global oil prices, over the last month have come down around 12%; but it has been not even a month since India hiked its petrol prices.  There is more – globally, corn, copper, lead, cocoa and coffee have dropped by more than 5% while price of oats, cotton, rubber, coffee, aluminum, silver, zinc and nickel are down 20% on a YoY. But no one is taking these lower prices seriously as many state that this current fall in select commodity prices has a lot of uncertainty built in. The current fall is more about the slump in Europe as everyone is waiting till Greece issue gets resolved and but demand has already slumped in Italy and Spain. Thus the fall in prices is more on account of a built in uncertainty and many feel that the selloff has been so sharp, like in an oversold market, that it is bound to spike up the moment there is even an inkling of some resolution to the Euro crisis. Infact Goldman Sachs has put out a report stating that oil and some other commodities were poised for a rebound very soon. RBI has taken all these factors into consideration and decided, rightly so, to remain status quo.

The market is disappointed now but life has to move on. All eyes will be on international events. There is expectation building in that QE3 could get announced in the coming Fed Reserve meet. For now the market is celebrating the Greek election results and the fact that it might not leave the Eurozone. But that does not solve the debt crisis. Italy and Spain are bigger worries and there are reports of a “Lehman” like collapse of European banks if they continue bailing out. For India, the next factors to look forward to are the Presidential elections and appointment of the new Finance Minister. The market has already built in expectation that the new FM will usher in reforms and policy actions.

So let us wait and watch but for today, let us bask in the feeling of security that we have someone like Subbarao as the RBI Governor. As suggested by some our readers, maybe we should have Subbarao as our FM with support from former Railway Minister, Dinesh Dwivedi.