"Monetary accommodation appears to be stimulating asset price inflation to a greater extent than it is mitigating the distress in the economy"
Jayanth Varma Member of the RBI’s Monetary Policy Committee
Monetary policy, says Varma, has little role to play in mitigating the human tragedy. It is now becoming increasingly clear that even vaccines may not stamp out the epidemic and we may have to live with it for years—Varma mentioned countries like Israel which are seeing fresh cases in spite of very high levels of vaccination. Our Herd Immunity Tracker points to the waning efficacy of vaccines.
How long then should monetary policy be kept accommodative?
The ill-effects of the pandemic persist only in some contact-intensive sectors, while others are now operating above pre-Covid levels. Similarly, it is MSMEs and the weaker companies which are unlisted that have been affected the most, while MNCs and larger companies have been largely unaffected. Monetary policy is too blunt a tool to provide targeted relief to the affected groups. Instead, fiscal policy should be used for the purpose.
Inflationary expectations are getting entrenched, because the RBI has signaled that it will support growth, come what may. It’s therefore time to raise the reverse repo rate, to signal it is committed to the inflation target, which would ‘anchor’ expectations, reduce risk premia, and sustain lower long term interest rates for longer thereby aiding the economic recovery.
What are the global implications?
Other central bankers would do well to pay heed to Varma’s remarks. The US Fed’s minutes too showed that its members have started to talk about tapering bond purchases, which has, once again, started to worry the markets.
Other concerns include slowing Chinese growth and the unsettling policy changes in China. In fact, global fund managers’ allocation to emerging markets fell on account of the China scare. In China, industrial production and retail sales slowed in July, due to a fresh outbreak of the virus and the floods in Henan. China’s GDP forecasts have been cut, but much depends on how the authorities react to slowing growth.
They need to help expand the consumer base in China. ‘The Xi administration is trying to simultaneously deal with the instabilities of the past few decades — environmental, equity, geopolitical risks — while ensuring financial stability and inclusive growth. If it delivers such inclusive growth, we believe China will avoid the middle-income trap — and our bet is that it will be successful in that endeavour.’- Invesco report, Read Now.
India Ratings has revised down its forecast for India’s GDP growth for FY22 to 9.4 per cent. The reason: ‘Households have been sustaining their consumption needs by both dipping into their savings and incurring debt. With the COVID-19 pandemic still looming large on the Indian economy, households are no longer hopeful of a significant upside to their income in the near to medium term. This, coupled with low consumer confidence and depleted savings, is expected to limit the growth in consumption demand.
The only bright spot is exports, and the recent export promotion scheme should help, although the amount provided is far from enough.
Another positive is the rise in funds flowing into Indian start-ups, as well as the amounts being raised through IPOs in the Indian markets, which, when spent, will boost the economy.
Which sectors are doing well in India?
The Nifty Realty index is outperforming the market this year. Given that housing has linkages with 20 other sectors and sub-sectors in the economy, it is a large positive.
Things aren’t so clear cut in the auto sector, with the semiconductor shortage and the disruption from electric vehicles looming ahead.
What are the thoughts of the RBI regarding the current situation?
Overall, the RBI maintains that valuations continue to be a concern. Investors should wait for a correction before taking fresh positions.
Macro factors, especially interest rates play an important role for equity investments. And with markets at an all-time high, interest rates at an all- time low, and inflation looming large, we must be vigilant and plan our equity investments and ensure that they have been made for the long term, or else we may face pain during volatility and corrections.
MIMI PARTHA SARATHY
Sinhasi Consultants Pvt. Ltd.
There are so many macro factors that affect the markets, which is why it is important for you to have a financial advisor who knows how to maximize your returns in the face of uncertainty and euphoria. Important trigger points which will surely cause pain to our portfolios and investments must be carefully studied to understand their implications on our portfolio. Our planners work with the best macro-economic advisors in the country to foresee, plan and allocate with contingency plans in place for all eventualities.
MPC Minutes: Jayant Varma ensures turn to normal, CNBC TV18 | Taper tantrum fears: Fed chair has to be careful not to unleash market chaos, THE SYDNEY MORNING HERALD | Federal Reserve preparing for taper this year, July minutes show, CNBC | Why Jay Powell should be bold at Jackson Hole, FINANCIAL TIMES