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Two wrong prescriptions

  • Published
    31st Oct, 2023

Context:

RBI's recent decision on interest rates and open market operations highlights concerns over inflation and economic indicators.

Concerns over RBI's Policy Measures

  • Unchanged Interest Rates: In October, RBI kept interest rates stable, as expected. Surprisingly, they hinted at open market operations for liquidity management.
  • Impact on Government Bonds: RBI's statement led to a 12 basis point increase in 10-year government bond yield, reaching 34%.
  • Policy Objective Ambiguity: The move raises questions about RBI's objective. Is it solely inflation concern, or are other factors influencing decisions.

Inflation and Economic Indicators

  • Inflationary Concerns: Inflation remains above RBI's target range. While September saw a drop, the central bank couldn't factor this in.
  • Core Inflation Trends: Core inflation (excluding food and fuel) has decreased, indicating no signs of food inflation spill-over.
  • Questionable Tightening Measures: In a situation of easing food price shock and weakening underlying price pressures, OMOs may signal excessive tightening.

Credit Growth and Currency Dynamics

  • Surge in Retail Loans: Retail and personal loans have surged, posing concerns about borrowers' quality and potential stress.
  • Rising Defaults: UBS study shows an increase in borrowers with multiple personal loans, heightening the risk of defaults.
  • Currency and Forex Reserves: RBI's intervention in forex markets is evident. However, as global rates rise, defending the currency becomes challenging.
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