Rupee protection not at risk of growth destruction
It is time for monetary policy to stay supportive for growth; sustainability of GDP growth below 5% will emerge as serious threat to Indian economy (and markets). Having said this, all domestic macroeconomic cues continue to stay resistive to growth; high retail inflation, uptrend in wholesale inflation, pressure on current account deficit, risk on fiscal deficit, sharp depreciation in rupee, sluggish investments, supply-side bottlenecks etc., do not support shift into aggressive growth supportive monetary policy stance. On the other hand, the tight liquidity and elevated money market rate curve in the shorter end, as strategy to address Rupee exchange rate (and CAD) has not yielded desired results. Taking all these together, the best fit is for RBI to take a balanced approach between growth and inflation, Rupee and liquidity while putting pressure on the Government to remove supply-side bottlenecks and remove policy irritants to revive consumption and investment.
The stake-holder’s confidence on the way forward is weak given the pipe-line political risks from ensuing elections. The new RBI Governor has begun the task well bringing in some kind of relief into the near term. What the system needs now is follow-on measures (and actions) to set up a firm launch pad for strong recovery in GDP growth momentum back into FY14 Budget estimate of 6.0-6.5%. This is the one-point factor to get the economy (and markets) into bullish momentum. The recent IIP print signals formation of turn-around signals in growth while inflation data print provides little comfort on sustainable reversal with pipe-line pressure from fuel and primary articles. The expectation from RBI is to stay focused on growth (as the most major risk to economy) while not diluting its efforts to control inflation and manage CAD (and Rupee exchange rate).
The new Governor is expected to stay pause on policy rates and SLR/CRR, but consider loosening its firm grip on liquidity and interest rates. There is immediate need to shift the operating policy rate from MSF into LAF, if not in full but with higher percentage at LAF so as to drive the call money rate from above 10% into 7.25-8.75% on higher liquidity support at LAF. The highly skewed (and inverted) money market rate curve needs to be reversed which will be bullish on rate and equity markets; resultant marginal pressure on the Rupee may be acceptable if it leads to 62-65 consolidation.
Moses Harding
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