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We summarize the findings from our meetings over the past week with senior
policymakers in the Ministry of Finance and the Reserve Bank of India:
Ministry of Finance
„ In Delhi, the government’s focus now is almost entirely on governance issues
and a forthcoming cabinet reshuffle. Reforms through the legislative channel
have become very challenging.
„ Expectations of controlling subsidy spending and raising substantial
disinvestment revenues have been scaled back.
„ Some diesel and kerosene price increase appears to be just a matter of time,
although the magnitude would not be sufficient to mitigate fully the subsidy risk.
„ Move toward targeted cash subsidies (and market-based pricing) for food and
fertilizer is under way.
„ There is growing recognition that more foreign inflows to the debt market
would be useful from a fiscal and market deepening point of view.
Reserve Bank of India
„ RBI sees only a mild respite to commodity prices.
„ It is particularly worried about the persistent rise in core inflation.
„ The growth momentum is considered to be broadly sound, although it is not
surprising to see interest rate-sensitive sectors are facing some headwinds.
The central bank will focus on broader economic trends rather than the
headline-grabbing developments such as a slowdown in auto sales.
„ The RBI is keen to establish that it cannot afford to err on the side of caution
in its attempts to reduce inflation. The signal being provided is clearly toward
more tightening in the coming months.
Meeting takeaways
Coping with headwinds
We summarize the findings from our meetings over the past week with senior policy-makers
in the Ministry of Finance and the Reserve Bank of India:
Ministry of Finance. We found the atmosphere in Delhi somewhat somber, as government
officials appeared under pressure as they attempt to respond to the recent spate of
governance scandals along with challenges associated with high inflation, rising subsidies
and interest rates, waning sentiments among investors and consumers, and an overall
decline in the reform momentum. The government’s focus now is almost entirely on
governance issues and a forthcoming cabinet reshuffle.
„ There was general acceptance that the legislative environment has become challenging.
The Congress party does not have the votes to pass bills and its coalition has weakened
considerably due to corruption scandals and recent state election setbacks. While a
number of reform bills (including in the areas of land acquisition, insurance sector reform,
FDI sectoral limit, etc.) are with the Parliament, there appears to be little hope of their
successful passage. Under these circumstances, the strategy seems to be to achieve as
much possible through the executive channel; for example, the Ministry of Finance is
working with the RBI to ease financial sector regulation.
„ With respect to the budget, the Finance Ministry is particularly worried about ballooning
oil and food subsidies. At the same time, expectations have already been lowered about
achieving the ambitious privatization target in this year’s budget (INR400bn, 0.4% of
GDP). We understand that some increase in diesel and kerosene prices could be right
around the corner, which would help to reduce, but not eliminate, the subsidy burden
risk and oil company losses.
„ Top-level officials at the Ministry of Finance are focused on moving toward targeted cash
subsidies (and market-based pricing) for food and fertilizer. Efforts to control spending
have also been ramped up; the understanding appears to be that it is imperative to
reduce wasteful spending and clamp down on corrupt procurement practices, even if
that means a short-term reduction in fiscal’s support to the economy.
„ On capital flow management, the Ministry has taken a rather liberal stance, stressing that
more foreign inflows to the debt market would be useful from a fiscal and marketdeepening point of view. The Finance Commission is working on creating more channels
for portfolio investment.
Reserve Bank of India. The RBI’s policy statement on June 16 was more hawkish than
expected, suggesting that it is not lowering its guard in fighting inflation for now:
„ Senior policy officials in RBI recognize that the recent soft patch in US economic data
and rising sovereign debt turmoil in Europe has led to some modest easing in
commodity prices, but even then prices are significantly higher compared to the
historical trend. With little chance of monetary tightening in the G3 any time soon, and
some chance of additional liquidity support, a sharp correction in commodity prices is
unlikely. Net long non-commercial positions on commodities (seen as speculative
positions) such as crude, copper, cotton, soybeans in the futures market remain
substantial, which doesn’t allow the RBI to ease its concerns about the price outlook.
„ On inflation, the ongoing rise in core inflation (running at 7-8% while the RBI’s comfort
range of is 4-4.5%) is worrisome as it reflects persistence of strong demand side
inflation pressures despite the RBI’s continued rate hikes since March 2010. The risk of a
wage-price spiral remains non-trivial, as anecdotal evidence suggests that informal
sector wages, which are generally indexed to food prices, are also on an uptrend. Also,
wages in the organized sector are rising sharply, and rural development programs such
as the NREGA have boosted rural income, Additionally, diesel and kerosene prices hikes
are looming on the near-term horizon, which will push up inflation further.
1
Finally, while
there has been some moderation in food price increase lately, there remain upside risks
as structural shortages in protein rich food items could keep food inflation elevated in the
high single-digit territory for some time.
„ Growth-inflation tradeoff: Compared to concerns related to inflation, growth risks are
less worrisome to the RBI for now. High frequency economic indicators (new industrial
production index, composite PMI, external trade, and corporate profitability) suggest that
broad-based economic expansion continues, although growth momentum in a few ratesensitive sectors such as automobiles has moderated. The fact that industrial sector
growth has hardly slowed (1HFY10/11 growth was 8.2%; 2HFY10/11 was 8.1%), as
reflected by the new IP index (contrary to the old IP index which showed a sharp
slowdown), also probably explains the steady rise in core inflation through the 2H of
FY10/11.
„ Monetary policy expectation: The central bank is keen to point out that it cannot base
its policy decision on sector specific considerations. Hence the slowdown in the growth
momentum in rate sensitive sectors cannot be sufficient justification to change the
monetary tightening stance, especially when economic growth still remains robust and
core inflation continues to hover at uncomfortably high levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We summarize the findings from our meetings over the past week with senior
policymakers in the Ministry of Finance and the Reserve Bank of India:
Ministry of Finance
„ In Delhi, the government’s focus now is almost entirely on governance issues
and a forthcoming cabinet reshuffle. Reforms through the legislative channel
have become very challenging.
„ Expectations of controlling subsidy spending and raising substantial
disinvestment revenues have been scaled back.
„ Some diesel and kerosene price increase appears to be just a matter of time,
although the magnitude would not be sufficient to mitigate fully the subsidy risk.
„ Move toward targeted cash subsidies (and market-based pricing) for food and
fertilizer is under way.
„ There is growing recognition that more foreign inflows to the debt market
would be useful from a fiscal and market deepening point of view.
Reserve Bank of India
„ RBI sees only a mild respite to commodity prices.
„ It is particularly worried about the persistent rise in core inflation.
„ The growth momentum is considered to be broadly sound, although it is not
surprising to see interest rate-sensitive sectors are facing some headwinds.
The central bank will focus on broader economic trends rather than the
headline-grabbing developments such as a slowdown in auto sales.
„ The RBI is keen to establish that it cannot afford to err on the side of caution
in its attempts to reduce inflation. The signal being provided is clearly toward
more tightening in the coming months.
Meeting takeaways
Coping with headwinds
We summarize the findings from our meetings over the past week with senior policy-makers
in the Ministry of Finance and the Reserve Bank of India:
Ministry of Finance. We found the atmosphere in Delhi somewhat somber, as government
officials appeared under pressure as they attempt to respond to the recent spate of
governance scandals along with challenges associated with high inflation, rising subsidies
and interest rates, waning sentiments among investors and consumers, and an overall
decline in the reform momentum. The government’s focus now is almost entirely on
governance issues and a forthcoming cabinet reshuffle.
„ There was general acceptance that the legislative environment has become challenging.
The Congress party does not have the votes to pass bills and its coalition has weakened
considerably due to corruption scandals and recent state election setbacks. While a
number of reform bills (including in the areas of land acquisition, insurance sector reform,
FDI sectoral limit, etc.) are with the Parliament, there appears to be little hope of their
successful passage. Under these circumstances, the strategy seems to be to achieve as
much possible through the executive channel; for example, the Ministry of Finance is
working with the RBI to ease financial sector regulation.
„ With respect to the budget, the Finance Ministry is particularly worried about ballooning
oil and food subsidies. At the same time, expectations have already been lowered about
achieving the ambitious privatization target in this year’s budget (INR400bn, 0.4% of
GDP). We understand that some increase in diesel and kerosene prices could be right
around the corner, which would help to reduce, but not eliminate, the subsidy burden
risk and oil company losses.
„ Top-level officials at the Ministry of Finance are focused on moving toward targeted cash
subsidies (and market-based pricing) for food and fertilizer. Efforts to control spending
have also been ramped up; the understanding appears to be that it is imperative to
reduce wasteful spending and clamp down on corrupt procurement practices, even if
that means a short-term reduction in fiscal’s support to the economy.
„ On capital flow management, the Ministry has taken a rather liberal stance, stressing that
more foreign inflows to the debt market would be useful from a fiscal and marketdeepening point of view. The Finance Commission is working on creating more channels
for portfolio investment.
Reserve Bank of India. The RBI’s policy statement on June 16 was more hawkish than
expected, suggesting that it is not lowering its guard in fighting inflation for now:
„ Senior policy officials in RBI recognize that the recent soft patch in US economic data
and rising sovereign debt turmoil in Europe has led to some modest easing in
commodity prices, but even then prices are significantly higher compared to the
historical trend. With little chance of monetary tightening in the G3 any time soon, and
some chance of additional liquidity support, a sharp correction in commodity prices is
unlikely. Net long non-commercial positions on commodities (seen as speculative
positions) such as crude, copper, cotton, soybeans in the futures market remain
substantial, which doesn’t allow the RBI to ease its concerns about the price outlook.
„ On inflation, the ongoing rise in core inflation (running at 7-8% while the RBI’s comfort
range of is 4-4.5%) is worrisome as it reflects persistence of strong demand side
inflation pressures despite the RBI’s continued rate hikes since March 2010. The risk of a
wage-price spiral remains non-trivial, as anecdotal evidence suggests that informal
sector wages, which are generally indexed to food prices, are also on an uptrend. Also,
wages in the organized sector are rising sharply, and rural development programs such
as the NREGA have boosted rural income, Additionally, diesel and kerosene prices hikes
are looming on the near-term horizon, which will push up inflation further.
1
Finally, while
there has been some moderation in food price increase lately, there remain upside risks
as structural shortages in protein rich food items could keep food inflation elevated in the
high single-digit territory for some time.
„ Growth-inflation tradeoff: Compared to concerns related to inflation, growth risks are
less worrisome to the RBI for now. High frequency economic indicators (new industrial
production index, composite PMI, external trade, and corporate profitability) suggest that
broad-based economic expansion continues, although growth momentum in a few ratesensitive sectors such as automobiles has moderated. The fact that industrial sector
growth has hardly slowed (1HFY10/11 growth was 8.2%; 2HFY10/11 was 8.1%), as
reflected by the new IP index (contrary to the old IP index which showed a sharp
slowdown), also probably explains the steady rise in core inflation through the 2H of
FY10/11.
„ Monetary policy expectation: The central bank is keen to point out that it cannot base
its policy decision on sector specific considerations. Hence the slowdown in the growth
momentum in rate sensitive sectors cannot be sufficient justification to change the
monetary tightening stance, especially when economic growth still remains robust and
core inflation continues to hover at uncomfortably high levels.
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