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RBI talks about Geopolitical ripple effects on Indian economy
Business, Equities, Market News, Markets - January 10, 2025

RBIs financial stability review spots two risk from trump 2.0

RBIs financial stability review spots two risk from trump 2.0

The Reserve Bank of India (RBI) publishes its Financial Stability Review (FSR) semi-annually in a financial year. It generally evaluates the nature and magnitudes of risks affecting the Indian financial sector. It analyzes the strength of financial institutions to mitigate these risks with the help of stress tests. These risks consist of both international and domestic risks, with special focus on domestic risks. In the month of December 2024, the FSR realised signals of two prominent risks coming from the US elected-President Donald Trump’s administration.

The Financial Stability Unit (FSU) of RBI and its FSR publication came into existence to initiate crisis management and also to prevent crises such as the global financial crisis 2008. The FSU came into existence in August 2009 by global financial crisis 2008 and implementation of semi-annual publication of FSR in October 2009. Today, the FSR is released in the months of June and December every year. The FSR focuses on both macroeconomic and market related risks.

Current FSR report
The FSR of the month of December 2024 identifies two distinct risks associated with the upcoming new administration in the USA which will assume office in a fortnight. The first risk is the uncertainty brewing in the economy due to the support given to cryptocurrency by Trump’s regime. While, the second risk is the risk to the global economy from Trump’s proposed economic policies. It could occurring due to increasing geopolitical tensions, uncertainty associated with trade and industrial policies and potential tightening of financial conditions around the world leading to lower global economic output compared to its baseline projects.

The victory of Donald Trump in the US presidential elections gave a liberating path for the people and institutions who support the idea of decentralised finance or DeFi and particularly cryptocurrency. The Trump has a favorable opinion about Bitcoins and preference for crypto friendly regulations. Following the victory of Trump, Bitcoins registered pricing hiting more than $100,000 in the secondary market. This rally was influenced by the expectation of implementation of crypto-friendly policies under his regime.

Three reasons influencing the Bitcoins
There are three reasons which strongly influenced the rally of Bitcoins. Donald Trump in his election has constantly promised that he would make a strategic bitcoin hoard. This hoard would act as a reserve asset, where the US government would accumulate and hold a significant amount of Bitcoin. This reserve asset would be similar to any country’s foreign exchange or gold reserves. The main purpose for creating this reserve asset is to bring stablization in the financial system by mitigating inflation and also to strengthen its position in the global cryptocurrency market. The second reason is Trump and his family are closely connected with the cryptocurrency and DeFi movements via investments. The last reason is Trump nominated Paul Atkins, cryptocurrency supporter for the position to head the Securities and Exchanges Commission. It hints at easing up of earlier regulatory restrictions on crypto products.

Views of RBI
The Reserve Bank of India is worried about the risks associated with crypto products on the overall financial system. Its attempt to ban crypto products in India was rejected by the Supreme Court of India. As the Supreme court said that RBI does not have the right to impose restrictions on cryptocurrency trading. After this judgement, RBI strengthened the regulations and prohibited regulated entities from financing or supporting crypto products.

Many senior officers have given their public opinions on risks associated with cryptocurrency. The Deputy governor of RBI, T. Rabi Sankar stated that cryptocurrencies are created with the specific purpose to avoid a regulated financial system in his public speech in the year 2022. Further he stated that the cryptocurrencies have the potential to destroy the currency system, the monetary system, the banking system and overall government’s capacity to control the economy. The crypto products act as a threat to the financial sovereignty of a nation. There is also a possibility of strategic manipulaton by private firms or the governments who created and control them. These are reasons which led to the formation of the most advisable and possible choice of banning cryptocurrency in India.

During the discussion at Peterson Institute, Washington DC in October 2024, the former governor of RBI, Shaktikanta Das asserted the risk associated with cryptocurrency to the financial and monetary system. He requested coordination between central banks across the world regarding regulation on the crypto products.

Despite all this, the strong position of the Trump administration towards crypto products is increasing anxiety within RBI and its view towards risks associated with it. The current FSR report particularly states that widespread use of crypto-assets and stablecoins will certainly affect macroeconomic and financial stability. It could adversely impact the effectiveness of monetary policy, fical risk and avoid capital flow managment measures. It will also draw away the resources available for the purpose of financing the real economy and in turn threaten global financial stability. Despite the crypto products market being small in size, it keeps on growing. Its association with the traditional financial system is increasing to a potential systemic risk. Stablecoins also pose a potential risk.

The RBI is worried about the linkages between the monetary system and DeFi due to the potential it carries. As instability in DeFi can lead to temporary issues like liquidity problems, maturity mismatches, price volatility in assets and also have a spillover impact on the real economy, while regulators having no control on it.

Trump is promoting tokenisation as well. He and his three sons are providing support to World Liberty Financial, who develops tokens against crypto products. Though the company declines association with Trump’s extended family, there are proofs such as purchases of tokens or play roles of advisory.

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RBI Maintains Neutral Stance: Balancing Inflation Risks and Growth Slowdown
Business, Equities, Market News, Markets - December 9, 2024

RBI Maintains Neutral Stance: Balancing Inflation Risks and Growth Slowdown

RBI Maintains Neutral Stance: Balancing Inflation Risks and Growth Slowdown

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) extended its status quo on policy rates in its latest meeting, keeping the repo rate unchanged at 6.50%. The decision, supported by a majority vote of 4 out of 6 members, underscores the central bank’s cautious approach in managing inflation risks while ensuring sustained economic recovery. Notably, two members voted for a 25 basis points (bps) rate cut, reflecting concerns over the ongoing growth slowdown.

Inflation Concerns Shape Policy Decision
The RBI’s decision to maintain its neutral stance stems from an uptick in inflationary pressures. The central bank sharply revised its baseline Consumer Price Index (CPI) inflation forecast for Q3 FY25, raising it by 0.9 percentage points. Similarly, the full-year inflation forecast has been increased by 0.3 percentage points, highlighting persistent price pressures.

RBI Governor Shaktikanta Das reiterated the significance of price stability, emphasizing its role in supporting sustained growth. “High inflation adversely impacts consumption and investment activity,” he noted, signaling the MPC’s vigilance in managing inflation expectations. The October CPI print of over 6%—driven primarily by food inflation—further underscores the need for caution.

Revised Growth Projections Reflect Slowdown
Acknowledging weaker-than-expected economic performance in the first half of FY25, the RBI lowered its full-year GDP growth forecast from 7.2% to 6.6%. The second quarter witnessed a seven-quarter low in growth, prompting a recalibration of projections.

Despite this, the RBI projects a rebound in the latter half of FY25, with real GDP growth expected to rise to 7% in H2 FY25. Governor Das expressed confidence in the recovery, citing early signs of improvement in high-frequency indicators such as rural demand, government consumption, and external trade.

Liquidity Measures to Support Growth
In a move to address liquidity challenges, the RBI announced a 50 bps reduction in the Cash Reserve Ratio (CRR), bringing it down to 4% of banks’ net demand and time liabilities. This measure, last implemented in April 2022, is expected to inject approximately ₹1.16 trillion into the banking system.

This liquidity infusion aims to counter tightness arising from the RBI’s dollar sales to stabilize the rupee. Current estimates suggest a durable liquidity surplus of ₹1.88 trillion, significantly lower than the ₹4.88 trillion recorded in early October.

The CRR cut complements other liquidity-enhancing measures, such as raising the ceiling rate on Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits by 1.5% above the reference rate until March 2025. This move seeks to attract higher capital inflows amidst declining foreign portfolio investments (FPIs) and net foreign direct investments (FDIs).

Inflation and Growth Outlook
Inflation Trajectory:
The RBI’s revised inflation projections signal a cautious outlook. Headline inflation is expected to average 5.7% in Q3 FY25, up from the previous estimate of 4.8%. Over the subsequent two quarters, inflation is projected to moderate to 4.55%, before aligning with the RBI’s 4% target in Q2 FY26.

Food inflation, a key driver, is anticipated to ease with the arrival of the winter crop and improved supply chain dynamics. However, the potential for second-round effects from elevated food prices remains a concern. Surveys indicate that input and selling prices could firm up in Q4, necessitating close monitoring of inflation data in the coming months.

Growth Prospects:
Despite the downward revision in growth forecasts, the RBI remains optimistic about a recovery. Factors supporting this outlook include robust Kharif production, favorable Rabi crop prospects, and an uptick in investment activity.

High capacity utilization in the private manufacturing sector and the government’s fiscal space for increased capital expenditure are expected to bolster growth. Additionally, resilient global trade and buoyant services demand are likely to sustain external and urban consumption, although geopolitical and geo-economic uncertainties pose risks.

Policy Implications and the Road Ahead
The MPC’s cautious approach suggests that policy easing in the February 2025 meeting will hinge on inflation and growth dynamics. With inflation projected to remain above the 4% target until mid-2025, any rate cuts will depend on a durable reduction in price pressures.

The infusion of durable liquidity through the CRR cut provides the RBI with the flexibility to monitor macroeconomic conditions. Financial conditions remain supportive, as evidenced by strong bank credit growth surpassing nominal GDP growth and robust credit deployment across key sectors.

The National Statistical Office (NSO) will release advance GDP estimates before the next MPC meeting, offering critical insights into underlying economic momentum. While the baseline trajectory suggests room for a cumulative 50 bps rate cut under a neutral stance, persistent inflationary pressures could delay monetary easing. Conversely, if growth underwhelms, the MPC may adopt an accommodative stance, potentially enabling up to 100 bps of rate cuts over the next year.

Conclusion
The RBI’s latest policy decision reflects a balanced approach, prioritizing inflation management while addressing growth concerns. By maintaining a neutral stance and implementing targeted liquidity measures, the central bank aims to navigate a challenging macroeconomic landscape. The trajectory of inflation and growth in the coming months will be crucial in determining the MPC’s future course of action. For now, the RBI’s cautious optimism provides a foundation for sustaining economic recovery amidst global uncertainties.

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Business, Equities, Market News, Markets - September 2, 2024

The Impact of RBI's Money Policy and Bank Earnings on Loan-to-Deposit Ratios

The Impact of RBI’s Money Policy and Bank Earnings on Loan-to-Deposit Ratios

The loan-to-deposit ratio (LDR), a crucial metric for assessing a bank’s liquidity and lending effectiveness, has significantly decreased in the banking industry in recent years. Economists, politicians, and financial experts have all vigorously debated this tendency. Fundamentally, the Reserve Bank of India’s (RBI) reduced money creation and a notable rise in bank profits are the two key causes of the reduction in LDRs. Comprehending these processes is essential to grasping the wider consequences for the banking industry and the economy.

The lower pace of money creation by the RBI is one of the main causes of the fall in LDRs. A central bank creates money via expanding the monetary base and issuing new currency, both of which increase the amount of liquidity in the banking system. In practice, less new money enters the economy when the RBI scales back its money production efforts.

There are a number of reasons why there could be less money creation, including a purposeful policy change to fight inflation or stabilise the currency. The tightening of monetary policy by the RBI in response to inflationary pressures has had a major role in the recent drop in LDRs. The central bank attempts to control inflation by increasing interest rates and decreasing the money supply, but this ultimately restricts the amount of money that banks may lend. Because of this liquidity constraint, banks are unable to lend as much, which lowers the loan-to-deposit ratio.

Bank profits have increased significantly in tandem with the RBI’s decreased money creation. A decrease in non-performing assets (NPAs), increased interest rates, and cost-cutting initiatives are some of the causes of this profit surge. Banks often take a more conservative approach to lending as they get more successful, emphasising quality over quantity.

Increased earnings frequently result in a bank’s capital base strengthening, increasing its capacity to keep reserves and lowering the need for riskier lending practices. Furthermore, banks are able to depend increasingly on fee-based revenue rather than conventional interest income from loans as a result of their increased profitability. Because they may now earn money from investment banking, wealth management, and transaction fees, banks are under less pressure to maintain high loan-to-deposit ratios.

A further dynamic that further adds to the reduction in loan-to-deposit ratios is created by the interaction between weaker money creation by the RBI and higher bank profits. Because there is a decrease in money creation, banks must exercise greater caution when managing their liquidity and frequently choose to preserve larger reserves over making additional loans. In addition, banks now have a financial buffer thanks to their higher profitability, which lessens their need to make risky loans in order to make money.

The overall economy is significantly impacted by the drop in loan-to-deposit ratios. It may be a sign of a more secure and cautious banking industry, but it might also mean less loan activity, which could have an effect on economic expansion. Reduced loan-to-deposit ratios (LDRs) indicate that banks may not be making the most of their deposit base to sustain credit growth, which might result in a slower rate of economic growth—particularly in industries that largely rely on bank financing.

To sum up Reduced money creation by the RBI and higher bank profitability are two of the many reasons contributing to the complicated issue of declining loan-to-deposit ratios in banks. Banks are becoming more cautious and risk-averse, as seen by this trend, but it also raises concerns about the effects on loan availability and economic development. Policymakers, regulators, and market participants must comprehend these dynamics in order to effectively manage the banking industry’s changing terrain and its effects on the whole economy. It will be vital to keep an eye on how these variables interact and influence banking and economic activity in India as the crisis develops.

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Global Rate Cuts and its Implication’s on Indian Markets

Global Rate Cuts and its Implication’s on Indian Markets

The Indian stock markets are on the brink of significant gains as global central banks are expected to initiate a cycle of rate cuts. This optimistic outlook is driven by a convergence of favorable domestic and international factors, including robust economic growth, a stable political environment, and, most notably, the anticipated easing of monetary policy across major economies. As global financial markets brace for lower interest rates, India’s equity markets are likely to be among the key beneficiaries.

After years of strict monetary policies meant to contain inflation, central banks all over the world are indicating rate decreases, which is a significant change in the global economy. The main causes of this change in attitude among investors are the economy’s slowing growth, ongoing inflationary pressures, and geopolitical unpredictability.

Interest rate cuts are a tool used by central banks to encourage borrowing and investment. By lowering the cost of borrowing, central banks aim to stimulate economic activity, increase consumer spending, and ultimately drive economic growth. The expectation is that lower interest rates will lead to increased investment by businesses, more spending by consumers, and, consequently, higher demand for goods and services.

The transfer of capital across national boundaries is one of the most direct consequences of global rate reduction. Investors frequently look for better returns in developing markets when interest rates in established economies decrease, which increases capital inflows into nations like India. When foreign investors buy Indian bonds and stocks, asset values rise and stock markets benefit.

For emerging markets like India, lower global interest rates are a boon. Rising capital flows into developing countries are usually the consequence of rate reductions in developed economies, as investors seek greater profits.
India, with its strong economic fundamentals and attractive growth prospects, is well-positioned to attract a significant share of these inflows. This influx of foreign capital is expected to provide a substantial boost to Indian equity markets, driving up stock prices and enhancing market liquidity.

Investor sentiment in India has been increasingly bullish, driven by a confluence of factors. The consistent performance of Indian equities, particularly in sectors like technology, pharmaceuticals, and consumer goods, has instilled confidence among both domestic and international investors.
Many Indian companies have reported better-than-expected quarterly results, reflecting robust demand and effective cost management. This trend is expected to continue, especially in sectors that are poised to benefit from global rate cuts, such as real estate, infrastructure, and financial services.

While global rate cuts can provide short-term boosts to the Indian economy through increased capital inflows and stock market rallies, there are long-term implications to consider. For instance, excessive dependence on foreign capital can make the Indian economy vulnerable to external shocks. If global investors suddenly withdraw their investments due to changes in global monetary conditions, it could lead to a sharp correction in Indian markets, potentially destabilizing the economy.

While the outlook for Indian stock markets is largely positive, investors should remain cautious of potential risks and challenges. Global economic conditions, while improving, remain fragile. Any unexpected developments, such as a sudden escalation in geopolitical tensions or a resurgence of inflationary pressures, could disrupt financial markets and dampen investor confidence.
While global rate cuts are expected to benefit Indian markets, they could also lead to increased volatility. Rapid inflows of foreign capital, while beneficial in the short term, could create asset bubbles if not managed carefully.

In conclusion, Rate reductions throughout the world have mixed effects on the Indian economy. They can have short-term advantages like capital inflows, stock market gains, and the possibility of domestic rate reduction, but they can also have drawbacks like instability in the currency, inflationary pressures, and susceptibility to outside shocks. India has to be cautious about the dangers and maintain a balanced approach in order to take advantage of the possibilities presented by the global rate decreases. To guarantee sustained economic growth, India’s authorities must continue to be proactive in regulating these dynamics as the world’s monetary circumstances change.

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India's Inflation Soars in November: A Look at the Drivers and Policy Response

India’s Inflation Soars in November: A Look at the Drivers and Policy Response

Introduction:

In November, India experienced a notable rebound in inflation, primarily attributed to a surge in food prices. The increase, marked by various factors, poses challenges to the ongoing efforts to maintain price stability. This report delves into the key contributors to the inflation rebound, its implications, and potential considerations for policymakers.
➡️India’s retail inflation, measured by the Consumer Price Index (CPI), rose to 5.70% in November 2023, driven by higher food prices.
➡️This marks a rise from 4.87% in October and brings inflation closer to the upper end of the Reserve Bank of India’s (RBI) target range of 2-6%.
➡️The increase in food prices, which account for nearly half of the inflation basket, was led by items like onions, tomatoes, and pulses.
➡️Core inflation, which excludes volatile food and energy prices, remained subdued at 4.3%.

REASONS FOR THE INFLATION REBOUND:

I. Unfavorable weather conditions: Heavy rains and unseasonal hailstorms in key agricultural regions disrupted crop production and led to supply-chain disruptions.
II. Festive season demand: Increased demand for food items during the festive season put a strain on existing supplies, pushing prices higher.
III. Global factors: The ongoing war in Ukraine and other geopolitical uncertainties continue to impact global commodity prices, including food and energy.

IMPLICATIONS:

I. Impact on Consumer Purchasing Power: The rise in inflation, particularly driven by higher food prices, could potentially erode consumer purchasing power. This may have implications for household budgets and discretionary spending, impacting overall economic activities.
II. Policy Challenges: The inflation rebound poses challenges for policymakers tasked with maintaining a delicate balance between price stability and supporting economic growth. Policymakers may need to reassess monetary and fiscal measures to address emerging inflationary pressures.
III. Interest rates: It can lead to higher interest rates, which can make it more expensive for businesses to borrow and invest.

POLICY RESPONSE TO INFLATION:

I. Monetary Measures:
The Reserve Bank of India (RBI) has proactively responded to the inflationary pressures by implementing a series of repo rate hikes. Since May 2023, the central bank has raised the repo rate four times. This monetary tightening is a strategic move aimed at curbing inflation and maintaining price stability.
II. Future Monetary Policy Outlook:
Given the persistent inflation challenges, there is a likelihood that the RBI will continue its monetary policy tightening in the upcoming months. The objective is to bring inflation back within the central bank’s target range, demonstrating a commitment to inflation control.
III. Government Intervention:
Apart from monetary measures, the government is expected to take initiatives to address supply-chain disruptions and enhance agricultural productivity. These interventions are crucial in tackling the root causes of the inflationary pressures, particularly in the context of rising food prices.
IV. Supply-Chain Management:
Government efforts may focus on fortifying supply chains to minimize disruptions and ensure the smooth flow of essential goods. Enhancing the resilience of supply chains is essential for stabilizing prices and mitigating the impact of supply-side shocks.
V. Agricultural Productivity:
To address inflation at its source, the government may implement policies aimed at boosting agricultural productivity. This could involve investments in technology, infrastructure, and agricultural practices to improve output and reduce dependency on imports.

FUTURE OUTLOOK:

I. The future trajectory of inflation will depend on several factors, including global commodity prices, weather conditions, and the success of government policies.
II. Experts predict inflation could stay above 5% in the next few months due to seasonal factors and possible supply-side bottlenecks.
III. The RBI’s policy decisions will be crucial in managing inflation and ensuring economic stability

CONCLUSION:

In conclusion, November’s inflation surge, led by higher food prices, poses a significant challenge to India’s price stability objectives. The RBI’s repo rate hikes signal a proactive approach to control inflation, complemented by expected government interventions targeting supply chains and agricultural productivity. Future inflation trends hinge on global factors and policy effectiveness. With projections indicating inflation above 5%, the RBI’s decisions will be pivotal for sustaining economic stability.

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RBI Charts Course for Sustainable Growth: Inflation Control as the Key

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RBI talks about Geopolitical ripple effects on Indian economy
Business, Expert Views - July 11, 2022

RBI expects Inflation to cool from October.

RBI expects inflation to cool from October:

Inflation in India is expected to slow down from October. The Central bank will minimize its aggressive action to cut down inflation, as per Governor Das.

As per RBI governor Shaktikanta Das, global factors should have more consideration while assessing inflation targets and current developments in Europe. The governor was focused on the importance of monetary policy. It will help in reducing inflation and inflation targets, despite fears that policy tightening could crease economic growth. He also added, after controlling inflation in the second half, there are chances of recession in India.

The Central bank on Friday eased its monetary policy to increase foreign investment and lift foreign exchange reserves. In India, inflation is above RBI’s target since the start of the year. This affected a hike in interest rates by 90 basis points in the last 2 months. All the central banks have been fighting against inflation driven by surging commodity prices, the Russia-Ukraine war, and supply chain disruptions. In June, RBI said expected inflation was at 6.7% and will cool down from October.

The impact of global factors on the domestic economy has increased over past years due to pandemics and war. So there should be greater recognition of global factors in local inflation and economic growth. This requires more coordination among countries to tackle problems. As per International Monetary Fund’s Latest projections, around 77% of countries have reported an increase in inflation, and this number could reach up to 90% in 2022.

Conclusion:

RBI governor suggested that not all tightening sessions have ended in recession.  He even mentioned that these measures won’t last long. The Central Bank and other major banks have revised GDP projections. It indicates a loss of pace in the growth of the economy rather than loss of a level. RBI governor mentioned many times that RBI plans to bring down inflation to 4% with a sensible slowdown in the economy. Inflation has also raised concerns about whether monetary tightening will end in a global recession or if there can be a soft landing. Global factors have difficult policy alternatives between price stability and economic activity.

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