Tag: inflation

RBI sees Rs 2 lakh crore hit from Covid; medical spends depleting deposits, cash fast, BFSI News, ET BFSI

Banking & Finance

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The Reserve Bank of India has estimated that the second wave may result in a Rs 2-lakh-crore loss in output during the current fiscal even as it said speed and scale of vaccinations will determine economic recovery.

The RBI’s output loss is factored into its revised GDP forecast in the latest monetary policy estimates, where it slashed growth projections from 10.5% to 9.5%.

The projection was on the assumption that real GDP will grow by 18.5% in the first quarter, which is on a much lower base given the contraction last year.

“By current assessment, the second wave’s toll is mainly in terms of the hit to domestic demand. On the brighter side, several aspects of aggregate supply conditions – agriculture and contactless services are holding up, while industrial production and exports have surged amidst pandemic protocols,” the central bank said.

A loss of economic output may not have a direct corelation with the GDP, but points to some loss in the value-addition across the economy, it said.

Deposits, cash depleting

The RBI said the rate of decline in deposits has been higher, indicating that household savings have dropped in sharp contrast to the first wave. “Additionally, currency holding with the public has also decelerated significantly to 1.7% during April 2021 in comparison to the growth of 3.5% a year ago, implying heavy outgo towards Covid-induced medical expenditure.”

The move ahead

The report highlights the advantages of repurposing and reprioritising revenue and expenditures to extract “bang for the buck”. The report said that the public sector can lead the private sector in unlocking growth opportunities. In addition, it can partner the private sector, and step back to allow the private sector to take the lead in sunrise areas.

“While has tested the limits of flexibility in fiscal policy frameworks in India as in the rest of the world, it has offered a unique opportunity to redefine fiscal policy in a manner that emphasises ‘how’ over ‘how much,” the report said.

The report, authored by RBI deputy governor M D Patra highlights the finance ministry estimates that to achieve herd immunity and regain recovery momentum, the target population to be vaccinated is 70 crore by September 2021 and around 113 crore more doses are needed. Accordingly, around 93 lakh vaccinations are required per day to achieve the herd immunity.

Covid wave weakening

RBI observed that the second wave is rolling back almost as fast as it rolled in. On June 14, the daily cases fell to a seventh of their peak of 4,14,188 a month ago (May 6). The seven-day average, which smooths out daily fluctuations, also declined by a fifth from its peak of close to 4 lakh. This is also reflected in the doubling rate, which increased to 247 days from its trough of 34 days at the end of April.

Supply bottlenecks

While the surge in inflation may have a lot to do with pandemic base effects, it is also fuelled by years of underinvestment having made the supply response less dynamic, exacerbated by supply chain bottlenecks, the RBI said. “In this situation, monetary policy is hostage to its own stance and loose financial conditions that it creates will cause excessive risk taking in markets even as inflation migrates upwards,” it said.



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‘Focus on growth will continue’

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The six-member monetary policy committee decided to maintain status quo on the policy repo rate to support growth, which has been laid low by the second Covid-19 wave , and to tackle inflationary pressures arising from rising global commodity prices, especially crude oil, and logistics costs.

RBI Governor Shaktikanta Das and Deputy Governors MK Jain, MD Patra, M Rajeshwar Rao, and T Rabi Sankar fielded questions from the media. Excerpts:

Why is RBI focussed only on supporting the 10-year benchmark Government Securities (G-Secs) in its market interventions?

Das: We focus on the entire yield curve, across maturities, and not just the 10-year G-Secs. Somehow there is a perception about the RBI being focussed only on 10-year G-Sec. For example, in the last G-SAP (G-Sec Acquisition Programme) auction, we had G-Secs across the maturity profile for purchase. The bond yields look inverted because there is abundant liquidity. So, naturally, the short-end (G-Secs) rates fall more than 10-year or 14-year rates. Therefore, the curve looks steep. But it is not so. If you look at the 10-year or the 14-year segments, the rates haven’t really gone up.

Whether 6 per cent yield on the 10-year G-Secs is sacrosanct, there is nothing like that. We have talked about an orderly evolution of the yield curve and we are focussed on that.

How will lower inflation print for April give you more elbow room?

Das: The inflation print for April at 4.3 per cent gives us elbow room. And elbow room means, it gives us space with regard to liquidity operations, enables us to step up liquidity infusion into the system.

With inflation being revised up, does it mean that policy normalisation will start?

Das: With regard to normalising the policy stance, there is no thinking at the moment. Our earlier CPI inflation projection was 5 per cent and now we have revised it to 5.1 per cent. This is not a significant upward revision.

What is your assessment of the impact of the second wave?

Das: Rural and urban demand was dented in the first wave. But the expectation is that the second wave has moderated (in terms of number of fresh cases)….Our assessment is that the impact of the second wave will be confined within the first quarter.…Our expectation is that from the second quarter, the overall demand position also will improve.

How long can you look through incipient inflationary pressures?

Patra: In several MPC statements, the analysis of inflation has been done. And the view of the MPC is that at this time the inflation is not persistent. It will turn persistent when it is backed by demand pull. At the current stage, we find the demand very weak and there is no demand pull in the inflation formation. It is mostly on the supply side and therefore we have chosen to look through. But we are very, very vigilant about demand pressures and we will keep on monitoring as and when demand pressures start feeding into the inflationary process.

How concerned are you about the pass through of WPI inflation into CPI?

Das: We are monitoring the the revival of growth — how growth is taking roots. We are monitoring the inflation dynamics…So, the MPC has consciously decided to focus on growth and give forward guidance in terms of the accommodative stance, spelling out what is meant by accommodative. So, the focus on growth will continue. The inflation, according to the MPC’s assessment, during the current year, is 5.1 per cent, which is well within the 2-6 per cent band.

Corporate loan book has not picked up and private capex revival has not started. What is your assessment and, based on the announcements today, is there no need for a stimulus package?

Das: We have not told banks to push credit. We discussed the credit flow in the earlier meeting…We have requested banks to implement the resolution framework. The RBI never tells banks to push credit. Credit flow depends on market demand and borrower profile and borrowing proposal. The dent on the economy is in the first quarter. From the second quarter, overall economic activity will pick up.

NPAs of banks will remain within the stress test of Financial Stability Report ?

Das: On NPAs, the projection (FSR said GNPA ratio may rise from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario; the ratio may escalate to 14.8 per cent under the severe stress scenario) we gave in the last FSR will be within that. The figures are manageable. We will spell out the details in the FSR.

Do you see a risk to the general government’s debt sustainability over the medium term?

Patra: Public debt will be about 90 per cent of GDP at the end of March 2022. Our assessment is based on the Domar condition of (public debt) sustainability, which requires that the growth rate of the economy should be higher than the interest rate at which the government services the debt, that condition is fulfilled as of now. The level of debt-to-GDP is set to decline over the next six years. So public debt is sustainable.

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RBI keeps rates unchanged to support growth

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The Monetary Policy Committee of the Reserve Bank of India has decided to maintain status quo on key policy rates.

“The MPC took stock of the evolving macroeconomic and financial conditions and the impact of the second wave of Covid on the economy. Based on its assessment, the MPC voted unanimously to maintain the status quo on repo rates and maintain an accommodative stance for as long as possible to revive growth,” said RBI Governor Shaktikanta Das on Friday after the meeting of the MPC.

Also read: Monetary policy must remain accommodative

The policy repo rate remains unchanged at 4 per cent while the reverse repo rate is at 3.35 per cent.

The move comes amidst expectations of slowing growth after the second surge of the Covid-19 pandemic and local level lockdowns that have impacted economic activity. However, inflationary risks persist.

 

The RBI had kept key interest rates unchanged at the last MPC meeting held in April.

The RBI, in its Annual Report 2020-21, had also said that “the conduct of monetary policy in 2021-22 would be guided by evolving macroeconomic conditions, with a bias to remain supportive of growth till it gains traction on a durable basis while ensuring inflation remains within the target.”

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RBI’s MPC begins deliberations amidst hopes of status quo in policy rate

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The Reserve Bank of India’s rate-setting panel, Monetary Policy Committee (MPC), began its three-day deliberations on Wednesday amid expectations of status quo on the benchmark rate, mainly on account of uncertainty over the impact of the second wave of the Covid-19 pandemic.

Moreover, fears of firming inflation may also refrain the MPC from tinkering with the interest rate. . The outcome of the bi-monthly monetary policy meeting will be announced on Friday.

Also read: How the RBI managed a large surplus transfer to the Centre in a difficult year

The RBI had kept key interest rates unchanged at the last MPC meeting held in April. The key lending rate, the repo rate, was kept at 4 per cent and the reverse repo rate or the central bank’s borrowing rate at 3.35 per cent.

M Govinda Rao, Chief Economic Advisor, Brickwork Ratings, said the better-than-expected GDP numbers provide the much-needed comfort to the MPC on the growth outlook.

However, with the imposition of partial lockdown-like restrictions to contain the virus spread in several parts of the country, the downside risk on growth recovery has intensified, he said.

“Hence, the RBI is likely to continue with its accommodative monetary policy stance. Considering the risk of inflation emanating from the rising commodity prices and input costs, Brickwork Ratings expects the RBI MPC to adopt a cautious approach and hold the repo rate at 4 per cent,” he noted.

Dhruv Agarwala, Group CEO, Housing.com, Makaan.com and PropTiger.com believes the RBI can maintain its accommodative stance in light of the economic impact of the second wave of Covid-19, without endangering its key goal of keeping inflation under control.

Reviving growth has become an important objective due to the economic damage caused by the recent lockdowns, he said, and added the RBI should also consider providing more liquidity to the National Housing Bank to enable the stability of housing finance companies, which in turn will allow the real estate sector to expand.

Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank was of the view that in the current environment, the choices before the Monetary Policy Committee may be limited.

“With the second phase of the pandemic impacting consumption and growth, the MPC will likely maintain status quo on policy rates, continue with an accommodative policy stance and ensure adequate liquidity in the system – all in an effort to stimulate growth. While it will keep one eye on inflation levels on the back of rising global commodity prices, it currently will focus on supporting economic growth,” Ekambaram said.

According to Sandeep Bagla, CEO of TRUST AMC, “It is expected to be a no change policy, with continued economy friendly soft interest rate bias.”

The RBI annual report released last week has already made it clear that “the conduct of monetary policy in 2021-22 would be guided by evolving macroeconomic conditions, with a bias to remain supportive of growth till it gains traction on a durable basis while ensuring inflation remains within the target.” The Reserve Bank, the report added, would ensure that system-level liquidity remains comfortable during 2021-22 in alignment with the stance of monetary policy, and monetary transmission continues unimpeded while maintaining financial stability.

In the assessment of the RBI, the evolving CPI inflation trajectory is likely to be subjected to both upside and downside pressures. The food inflation path will critically depend on the temporal and spatial progress of the south-west monsoon in 2021.

The government has retained the inflation target at 4 per cent with the lower and the upper tolerance band of 2 per cent and 6 per cent, respectively, for the next five years (April 2021 – March 2026).

Also read: ‘RBI may keep repo rate unchanged’

Retail inflation, based on Consumer Price Index (CPI), slipped to a three-month low of 4.29 per cent in April mainly on account of easing of prices of kitchen items like vegetables and cereals. The RBI mainly factors in the CPI while arriving at its monetary policy.

As per the RBI annual report, supply-demand imbalances may continue to exert pressure on food items like pulses and edible oils, while prices of cereals may soften with bumper foodgrains production in 2020-21.

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‘RBI may keep repo rate unchanged’

Banking & Finance

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The rate-setting monetary policy committee (MPC) is likely to stand pat on the repo rate, in view of sticky inflation and dimming growth prospects amid the second wave of the pandemic.

The six-member MPC has held the repo rate rock-steady at 4 per cent since May 2020.

Retail inflation

Though retail inflation eased to 4.29 per cent in April from 5.52 per cent in March, the surge in wholesale inflation to 10.5 per cent in April from 7.39 per cent in March is expected to engage the committee members’ attention as it could spill over to the retail side.

The MPC will have to walk a tight rope; on the one hand it wants to rein-in inflation, on the other, it wants to support growth. Hence, MPC members may vote to keep the repo rate unchanged as well as continue with the accommodative policy stance.

“In the upcoming June 4 policy meeting, the RBI may want to sit tight in view of the high pandemic cases.

“We think the one change it might make is a markdown in the FY22 GDP growth forecast,” said Pranjul Bhandari, Chief Economist, India, HSBC Securities and Capital Markets (India) Private Ltd; Aayushi Chaudhary, economist; and Priya Mehrishi, associate, in a report.

Surplus liquidity

They observed that starting in Q4 (October-December) 2021, when the proportion of population vaccinated reaches critical mass, the RBI may start lowering surplus liquidity, raising the reverse repo rate, and change its stance to neutral.

“Having said that, an increase in the 4 per cent benchmark repo rate can wait for longer in our view,” said the economists.

The policy repo rate was last reduced from 4.40 per cent to 4.0 per cent on May 22, 2020.

“We believe that the Monetary Policy Committee has no option but to stay accommodative, even as it monitors incipient price pressures and keep all rates on hold, while likely extending its Government Securities Acquisition Program (GSAP),” said Rahul Bajoria, Chief India Economist, Barclays Securities (India) Pvt Ltd, and Shreya Sodhani, Research Analyst, Barclays Investment Bank, Singapore, in a note.

They emphasised that since May’s policy announcements, the growth outlook has degraded further, with greater evidence that inflation headwinds may remain persistent going into H2 (July-December) 2021.

However, with some relief on the virus caseloads, the RBI can balance its message around prospects for a return to economic normality.

In its Annual Report, the RBI observed that looking ahead, the evolving retail/ CPI inflation trajectory is likely to be subjected to both upside and downside pressures. The food inflation path will critically depend on the temporal and spatial progress of the south-west monsoon in 2021.

“Second, some respite from the incidence of domestic taxes on petroleum products through coordinated action by the Centre and States could provide relief, although international crude oil prices continued to be volatile.

“Third, a combination of high international commodity prices and logistic costs may push up input price pressures across manufacturing and services,” said the report.

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Crypto versus gold debate rages on Wall Street as flows reverse, BFSI News, ET BFSI

Personal Finance

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Gold is back with a vengeance this month just as the crypto rally falls apart, refueling the Wall Street debate over the link between the two putative hedging assets.

Bullion funds have seen the biggest two weeks of inflows since October and prices are edging closer to $1,900 an ounce. In contrast, Bitcoin has plunged by almost 40% from a $63,000 peak and funds are recording outflows.

Yes, the weaker dollar and falling inflation-adjusted yields are big reasons for the gold revival. Elon Musk-spurred volatility, meanwhile, has snuffed out some of the speculative euphoria in Bitcoin, while undermining its ambition to attract the institutional crowd.

Yet, all this fascinates a market cohort that point out the parallels between digital gold and the real deal. They’re both viewed as inflation hedges, commodities in scarce supply and capture the cultural divide between young, tech-obsessed traders and boomer traditionalists.

Meanwhile, the likes of JPMorgan & Chase & Co. and ByteTree Asset Management say gold’s recent ascent appears to have come at least partly expense of Bitcoin as investors rotate between the two.

“There is still so much confusion between Bitcoin and gold,” wrote Charlie Morris, founder of ByteTree in a note. “They coexist, and they both thrive in an inflationary environment.”

In a report on shifting gold and Bitcoin trends, Morris suggested that fund flows are having an unusually large impact in boosting the gold price, and vice versa Bitcoin’s outgoing flows are depressing prices.

Past may be prologue: Earlier this year, Bitcoin funds pulled in institutional cash as money managers extolled a case for digital currencies to creep into gold’s spot in a portfolio. With the economic growth in full swing, more than $20 billion then left bullion-backed ETFs in the six months to April.

For some strategists, the bullion market is a starting place to divine their price forecast for Bitcoin. In a world where investors allocate gold and Bitcoin evenly to their portfolios and the two assets converge in volatility, it would imply a valuation of Bitcoin at $140,000, JPMorgan has previously estimated.

“Needless to say such convergence or equalization of volatilities or allocations is unlikely in the near future,” strategists led by Nikolaos Panigirtzoglou wrote.

Since the Covid-19 vaccine breakthrough triggered an economic rebound in November, exchange-traded funds tracking gold sold almost 12 million troy ounces through to the start of May, worth about $22.5 billion at today’s price.

Investors pulled almost $14 billion from the SPDR Gold Shares ETF (ticker GLD) in the period, helping cut total assets in the world’s largest gold ETF by 29%. Some $1.6 billion has flowed back into the fund to put May on course for the best month since July.

In day-to-day action, the direct link between gold and Bitcoin is hard to pin down, suggesting the connection is more about market psychology than real-money flows. The threat of price pressures and weakening dollar are good reasons for the metal’s current rally.

And while predictions for Bitcoin prices have been chastened by the selloff, the enthusiasm hasn’t gone away. Bloomberg Intelligence strategist Mike McGlone, who has a price target of $100,000 for Bitcoin, says there’s still a chance crypto can become a digital reserve asset and that makes it worth the risk.

“Gold may be losing its significance, so it may be simply prudent to diversify,” wrote McGlone. “The human nature of acknowledging a new asset class is what we see as a primary Bitcoin support.



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Ray Dalio bats for crypto’s relevance, admits to having “some” Bitcoin, BFSI News, ET BFSI

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MUMBAI: Renowned billionaire hedge fund manager Ray Dalio today admitted to owning “some” Bitcoin as he stressed the argument that the cryptocurrency can act as the best store of value in an inflationary environment.

The sharp change in Dalio’s position will come as music to the ears of cryptocurrency investors who have been battered by an intense meltdown in the asset class over the past week. The value of Bitcoin alone has crashed over 50 per cent from its record high although the cryptocurrency staged some comeback on Monday as it rose as much as 15 per cent.

At 08:27 pm, Bitcoin was trading 10.7 per cent higher at $37,711 on cryptocurrency exchange WazirX.

“I have some Bitcoin,” Dalio said in an interview at CoinBase’s Consensus 2021 event.

Dalio said that in an inflationary scenario, he would rather have “Bitcoins than bonds” as he echoed the argument some institutional investors have made recently in the cryptocurrency’s favour, i.e., Bitcoin could replace gold as a better hedge against runaway inflation that may happen in the West in the coming years.

The owner of the largest hedge fund in the world Bridgewater Associates, which manages assets worth over $100 billion, has recently warmed up to Bitcoin after being against it as soon as November.

“It seems to me that Bitcoin has succeeded in crossing the line from being a highly speculative idea that could well not be around in the short order to probably being around and probably having some value in the future,” the hedge fund manager had said in January.

However, Dalio reiterated that the cryptocurrencies will face existential threat from regulators and central banks.



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Why rising inflation impacts growth stocks

Personal Finance

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Two school friends and veteran investors bumped into each other after decades in a coffee shop. As they sipped their cup, their ears perked up to a song ‘this is ourselves under pressure. Under Pressure.’

Veena: My portfolio has been under pressure recently. I was heavily invested in Nasdaq 100 funds, early stage technology and growth stocks and I thought they will continue to do well.

Ram: Some of them may do well in the long run, but in the short to medium term they will continue to remain under pressure if recently emerging concerns on inflation in the US persist.

Veena: Why should inflation or interest rates impact technology stocks.

Ram: Stock markets look to future earnings and discount it to net present value (NPV). When treasury yields move up on inflation concerns, your discounting rate increases and your NPV of earnings reduce.

Veena: Yes, but I still don’t understand why growth stocks should fall more than other stocks?

Ram: That is because the earnings of growth stocks are more back-end loaded. For example if you take a five-year period, most of the growth stock’s earnings may come only in the 4th and 5th year.Well-established companies which are likely to report consistent earnings..

Since the earnings are five years away, you need to discount it five times. When interest rates are low, it hence works in favour of growth stocks.

Veena: So, you mean when interest rates rise, the discounting rate increases and it impacts NPV of later year earnings?

Ram: Yes. Check this on excel. Assume discounting rate of 6 per cent and there are 2 companies A and B (growth) with same total earnings of ₹100 in 5 years, but A gives earnings of ₹20 for each of the 5 years, and B gives the earning of ₹100 only in the 5th year. NPV of A’s earnings is ₹84.25 and B’s is ₹74.73. Increase the rate to 8 per cent, A’s NPV is ₹79.85 and B’s, ₹68.06.

Veena: A’s NPV reduces by 5.2 per cent, while decline for B at 8.9 per cent due to the 2 per cent interest rate increase?

Ram: Bingo! Hence, growth stocks are under pressure.

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SBI chief, BFSI News, ET BFSI

Banking & Finance

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State Bank of India (SBI) will try to keep the interest rates benign as long as possible with a view to supporting the economic growth, its chairman Dinesh Kumar Khara has said.

On the impact of the second wave of COVID-19 on non-performing assets of the bank, the SBI chief said that as the lockdown was not pan-India, one will have to wait and watch to assess its impact on the banking sector.

Observing that multiple variables including inflation have a bearing on the interest rates, he said, “our effort is to support the growth initiatives. To really ensure that happens, we will try to keep the soft interest rate regime for as long as possible.”

In an interview to PTI, Khara said it is too early to give any colour to likely scenario of NPAs because of local restrictions.

The impact of lockdown differ from states to states as it is not uniform, he said, adding, “so, probably we can wait and watch for some more time before making any comment on impact on economy and NPA situation.”

Speaking about various initiatives of the country’s largest lender, Khara said, SBI has decided to set up makeshift hospitals with ICU facilities for COVID-19 patients in some of the worst affected states.

The bank has already earmarked Rs 30 crore and is engaging with non-governmental organisations (NGOs) and hospital management for setting up medical facilities on an emergency basis for the treatment of COVID-19 patients.

He said the bank intends to put in place 1,000 beds with 50 ICU facilities in the states that are the worst affected.

SBI is also collaborating with hospitals and NGOs to provide oxygen concentrators for patients.

“We have put in place an action plan. We have earmarked Rs 70 crore plus out of which we are giving Rs 21 crore to 17 circles for COVID-19 related initiatives,” he said.

For the safety of employees and their families, he said, the bank has tied up with hospitals across the country to facilitate treatment of those who have fallen sick on a priority basis.

About 70,000 employees out of 2.5 lakh strong staff strength have already got vaccinated. The bank has decided to bear the cost of vaccination for its employees and their dependent family members.



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What is inflation-adjusted return – The Hindu BusinessLine

Personal Finance

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A phone call between two friends leads to a talk about inflation-adjusted returns.

Akhila: What are you up to, Karthik?

Karthik: I was planning to buy a television set for ₹50,000. But I later changed my mind to save and invest that amount to buy a better version next year.

Akhila: I hope inflation doesn’t eat into your returns.

Karthik: What do you mean?

Akhila: A few economists expect inflation to rise going ahead. If that happens, your inflation-adjusted returns can be low or even negative.

Karthik: Can you explain that?

Akhila: If you invest that ₹50,000 at four per cent p.a. in a fixed-income instrument, your investment will be worth ₹52,000 by year-end. Say, the average inflation over the next one year is six per cent and the price of the TV set which you decided not to buy, becomes ₹53,000. Let alone buying a better version, your investment amount won’t be sufficient to buy even the current model.

Karthik: Ouch!

Akhila: Inflation-adjusted returns, also called real returns takes into account the inflation rate while calculating the return on an investment.

Karthik: How do I calculate real returns?

Akhila: You can simply subtract the rate of inflation from the return on your investment. In the above example, the real return on your investment would be -2 per cent. That is, 4 per cent return minus the inflation rate of 6 per cent.

Karthik: That’s pretty simple.

Akhila: The above formula gives an approximate rate of real return. To be precise, you can use the formula — ((1+return)/(1+inflation rate)) – 1.

Karthik: Are there any savings instruments in the market that offer returns linked to inflation?

Akhila: There used to be inflation-indexed bonds but they are no longer available.

Karthik: Equities would give higher returns, right?

Akhila: Equity is said to deliver inflation-beating returns in the long-run. But remember, for the sake of earning higher inflation-adjusted returns, you should not go for investments that do not fit your risk appetite.

Karthik: What are the alternatives in the fixed income space?

Akhila: You can consider floating-rate instruments, coupon rates on which are linked to interest rate movements in the economy, which are a play of inflation as well.

Karthik: I remember reading the Simply Put column in BL Portfolio a few weeks back that talked about floating rate instruments such as Floating Rate Savings Bonds 2020, the PPF and the Sukanya Samriddhi Yojana.

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