We have a boring macroeconomic policy in which NOTHING happened.
This is horrible for media companies and TV companies who have lined up experts to speak simultaneously on this policy. There is hardly anything to talk about, though the weather is awesome in Bangalore.
But because Capital Mind is like this, we will highlight what little you might make something of. From the document:
Growth projections have been revised down from 5.7% to 5.5%. Not that they’ve been right that often.
Inflation target is now 5.0%. If you look at the chart closely, it doesn’t look that they believe in it either. Plus WPI is a hugely flawed figure, and even if it were marginally decent, the dollar rise and fuel price hikes will cause WPI to hurt.
Liquidity conditions will remain tight until things stabilize in the forex market, and recent measures to cut liquidity will be reversed in a calibrated manner. Meaning, no sudden removal of any move. The government is requested to please get their act together and set up policies that will increase exports and reduce imports.
A major risk is the QE taper by the US and/or Europe. That will cause funds to flow out and boom, the rupee collapses.
My view: They would like to ease, but they can’t because of the external deficit. This has been interpreted to mean something like we’d like to help you but our hands are tied. But that is the wrong interpretation. The natural tendency of the measures they would otherwise take – of easing rates or increasing liquidity – will result in an EVEN bigger current account deficit as it weakens the rupee. The “external” is a serious problem. It’s like saying I can’t help you because I’m having a heart attack – please, fix the heart attack first.
So basically they have to wait till conditions improve naturally. That will take a LONG time, or could happen tomorrow. The long time is about getting more exports going. The tomorrow is about having foreign flows return. The former will happen as the currency equation sets in. The latter is unlikely given our elections next year.
