RBI stands pat but sends mixed signals, says Nomura

Nomura says the Indian rupee is fundamentally poised to weaken, however, with the RBI keen on defending the currency, further measures to tighten liquidity and potentially even a repo rate hike cannot be ruled out

The Reserve Bank of India (RBI) left the repo rate and the cash reserve ratio unchanged at 7.25% and 4.00%, respectively, in line with the consensus and expectations. "Because of the uncertainty on the timing of the reversal of these measures and implications of higher overnight rates, we see limited reasons to believe that front-end rates will reverse any time soon. In fact, we think Mumbai inter-bank offer rate (MIBOR) and overnight call fixings will continue to track the marginal standing facility (MSF) rate at 10.25% and, therefore, even if front-end rates move lower initially on dovish interpretations of the RBI, they are unlikely to stay lower," said Nomura Financial Advisory and Securities (India) Pvt Ltd, in a report.


Nomura said, there were no surprises in the RBI statements from a rates market perspective. If anything, the RBI explicitly suggested in its guidance that it is looking at rolling back the liquidity tightening measures in a calibrated manner, when the rupee stabilises.


The key statement in RBI guidance was "the recent liquidity tightening measures by the Reserve Bank are aimed at checking undue volatility in the foreign exchange market and will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation."


"Though explicit mention of rollback qualifies for a less hawkish than market ‘feared’, we think it is too open a statement to get excited on the dovish side, as it doesn’t provide any timeline on the rollback of tightening measures," Nomura said.


The RBI revised down its GDP growth projection to 5.5% y-o-y in FY14 (year ending March 2014) from 5.7% earlier due to tepid global growth and persistent weakness in industrial activity. The RBI modified its WPI inflation projection - it expects WPI inflation of 5% by March 2014 as compared with around 5.5% y-o-y during FY14.


In Nomura's view, the policy game-plan is as follows...


The RBI's tight liquidity stance should help stabilise the currency. The government will use this 'window of opportunity' to announce reforms to narrow the current account deficit. As the currency stabilises the RBI will reverse these liquidity-tightening measures and start cutting rates to support growth. Indeed, the RBI has mentioned multiple times, both in yesterday's macroeconomic report and today's policy document that the current tightening measures are temporary and the government should use the breathing space provided by the RBI measures to announce structural reforms. So what can be the likely government response?


Nomura says in its view, the government is likely considering multiple options to garner dollars such as tapping non-resident Indian (NRI) deposits, swap lines with other countries, sovereign bond issuance. Additionally, import duties on consumer goods and luxury items may be imposed. If gold imports remain high, then further quantitative restrictions may be imposed.


While the RBI has guided that these measures are temporary, there is no guarantee that depreciation pressures will end within that timeframe. Concerns over (US) Fed quantitative easing (QE) tapering and slowing emerging market (EM) growth mean investors remain cautious on EMs, hence external financing difficulties may continue for much longer, Nomura said.


"Alternatively, the government's policy response during the next few months may not satisfy investors that fundamental/sustainable solutions are being put in place. In this situation, rupee may continue to weaken. However, the longer the depreciation pressure continues, the longer the tightening measures will need to remain in place and the greater the stress on domestic balance sheets of banks and corporates, leading to higher credit risk. Or the RBI will have to let the currency adjust in line with fundamentals, once the 'temporary' phase expires", it said


"In fact, by sending confusing signals in today's policy on whether it is trying to defend the currency (tighter policy) or wanting to support growth (looser policy), there is a growing risk that the rupee will depreciate and the RBI will need to enact further measures to tighten liquidity, potentially having to hike the repo rate. We assign a 20% probability," the report said.


According to Nomura, the Indian economy and policymakers are caught between a rock and a hard place. "In our view, rather than artificially trying to draw a line in the sand on the currency at the cost of creating a domestic credit crisis, policymakers should allow a gradual currency depreciation and the government needs to significantly tighten its fiscal belt and announce real reforms rather than band aid solutions. We remain negative on India's economic outlook over the next nine months due to deteriorating external finances, feedback effects from a weak rupee and likely policy responses, a poor growth outlook and the election cycle."


"In our baseline scenario (we attach a 70% likelihood), we expect repo rates to remain on hold this fiscal year and GDP growth at a below-consensus 5.0% y-o-y in FY14, the same as in FY13, despite better agriculture growth. We pencil in 75bp of cumulative repo rate cuts in FY15," Nomura added.


BCCI’s probe panel for IPL spot-fixing illegal, says Bombay High Court

Just two days back, the probe panel has given a clean chit to Srinivasan, Gurunath Meiyappan, as well as Raj Kundra of Rajasthan Royals in the spot-fixing and betting charges in the IPL cricket tournament

The Bombay High Court on Tuesday held the two-member probe panel set up by it to look into spot-fixing and betting charges in the Indian Premier League (IPL) cricket tournament as illegal and unconstitutional. This is supposed to a severe blow to Board of Control for Cricket in India (BCCI), and its president-in-exile N Srinivasan.


Just two days back, the probe panel in its report gave a clean chit to Srinivasan, his son-in-law and owner of Chennai Super Kings team Gurunath Meiyappan, as well as Raj Kundra, owner of Rajasthan Royals and husband of actor Shilpa Shetty.


A Division Bench of Justices SJ Vazifdar and MS Sonak while allowing a public interest litigation (PIL) filed by the Cricket Association of Bihar and its secretary Aditya Verma, said the constitution of the probe panel was 'illegal and unconstitutional'.


The PIL challenged the constitution of the two-member commission, set up by the BCCI and IPL Governing Council to probe allegations of betting and spot fixing.


The petition alleged blatant bias by former BCCI President Srinivasan in the light of mounting allegations against himself and in constituting the probe panel as he is the vice-chairman and managing director of India Cements Ltd, which owns the IPL team — Chennai Super Kings.


The PIL urged the court to direct BCCI to recall its order constituting the probe panel and instead the court shall form a panel of retired judges as it may deem fit to hold inquiry against Meiyappan, India Cements Ltd and Jaipur IPL Cricket Pvt Ltd with regard to their involvement in spot-fixing and betting.


Hackers bring down website of New Zealand PM

The hacktivist group was protesting the plans to allow New Zealand's intelligence agency to spy on local residents

Anonymous, the hacker-activist (hacktivist) group on Tuesday briefly crashed website of New Zealand Prime Minister John Key. The hacktivist group was protesting the plans to allow New Zealand's intelligence agency to spy on local residents.


A group identifying itself as Anonymous NZ posted a clip on YouTube saying it had attacked Key’s website and 12 others linked to the ruling National Party to show its opposition to 'a despicable piece of legislation'.


“John Key make no mistake the majority of New Zealanders oppose this bill. Due to your own arrogance and your unwillingness to listen to the people we have decided to take direct action,” the group said in a message posted on the site.


New Zealand’s intelligence service, the Government Communications Security Bureau, is currently barred from spying on New Zealand citizens or residents.


The bill is currently before Parliament and expected to pass by a single vote, although groups ranging from the Law Society to Internet giants Facebook and Google have raised concerns about the proposal.


Key’s website was operating normally by afternoon and the prime minister condemned the hackers. Speaking with Radio New Zealand, he said, “(It’s) pretty juvenile behaviour in my view. These people are obviously doing something that’s both illegal and inappropriate. They’re trying to make their own political point, but their point is wrong.”


Key argues the restriction should be removed so it can cooperate more closely with agencies such as the police and military in an increasingly complex cyber-security environment.


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