Why RBI chose not to cut policy rate and instead ease CRR?

The market was expecting the Reserve Bank of India to cut interest rates after the government announced some key policy reforms last week. But by keeping the repo rate unchanged at 25 basis points, the RBI has made it clear that it is more worried about curbing inflation in the short term. However, in a bid to ease liquidity in the system, the central bank has trimmed the cash reserve ratio by 25 basis points.

Following are the key points from the mid-quarter monetary policy review, and an explanation for why RBI chose to keep the repo rate unchanged.

* Globally, as risks have risen, both the European Central Bank (ECB) and the US Fed have responded with liquidity measures intended to calm financial markets and provide further stimulus to economic activity. While these measures have certainly mitigated short-term growth and financial risks, they will also exert pressure on global asset prices, and particularly, commodity prices.

* While the recent upward revision in diesel prices and rationalisation of subsidy for LPG is a significant achievement, in the short-term, there will be pressures on headline inflation.

* Growth in several major emerging and developing economies (EDEs) is also moderating. Additionally, drought conditions in major grain-producing areas of the world and the possibility of further hardening of international crude prices in view of the fresh dose of quantitative easing impart ubiquitous risks to overall global macroeconomic prospects.

* A moderation in the trade deficit combined with increased inflows in response to domestic policy developments could ease pressures on the balance of payments. However, risks from global factors, in terms of both capital movements and oil prices will persist. Given these external risks, holding down the current account deficit to sustainable levels will depend on durable fiscal consolidation.

RBI keeps policy rate unchanged, CRR cut by 25bps

The Reserve Bank of India (RBI) on Monday kept the repo rate-the key policy rate-unchanged in its mid quarter monetary policy review, but cut cash reserve ratio (CRR) by 25 basis points to 4.50%. CRR is the portion of deposits that banks keep with the RBI. However, it normally does not earn any interest for banks. The policy action is almost in line with the market expectation.

The central bank's stance indicates that it is worried about the inflationary fallout of the diesel price hike, and would wait for some more time before softening its stance on interest rates. The 25-basis point cut in CRR is expected to release around Rs 17,000 crore into the system.

Banks are currently comfortable with the liquidity situation. In the last couple of weeks, lenders have borrowing below Rs 100 crore through RBI's liquidity adjustment facility (LAF). This is in stark contrast with the LAF level hovering between Rs 75,000 crore to Rs 1 lakh crore 3-4 months back. However, RBI's CRR cut came into effect with a future outlook.

"Going forward, the wedge between deposit growth and credit growth could widen on the back of the seasonal pick-up in credit demand in the second half of the year. This, combined with outflows on account of advance tax payments and the onset of festival-related currency demand, could accentuate pressures on liquidity over the next few weeks," RBI said.

Earlier in the year, RBI decreased the policy or repo rate by 50 basis points in April. It slashed cash reserve ratio by 150 bps so far in 2012. Repo and reverse repo remained unchaged at 8% and 7% respectively. RBI continued with its primary policy focus in "the containment of inflation and anchoring of inflation expectations."

"In April, the Reserve Bank implemented a frontloaded policy rate reduction of 50 basis points on the expectations of fiscal policy support for inflation management alongside supply-side initiatives for addressing the deceleration of investment and growth. As these expectations did not materialise and inflation remained firmly above 7.5%, the Reserve Bank decided to pause in its policy easing in the mid-quarter review of June," the regulator said in its credit policy statement.

The core inflation did not show any sign of relief with non-food manufactured product inflation rose to 5.6% in August as against 5.1% in April. "Even as demand pressures moderate, supply constraints and rupee depreciation are imparting pressures on prices, rendering them sticky," RBI said.

Meanwhile, the banking regulator has hailed the government's latest reform measures. Last week, the government announced a slew of measures to revive the sluggish economy. Those included a hike in diesel price by Rs 5, limiting subsidized LPG cylinders at 6 a year per family, allowing foreign direct investments in aviation and multi-brand retail upto 49% and 51% respectively. It also decided to dilute stakes in public sector units.

"Domestically, growth continues to be weak amidst a negative investment climate; however, the recent reform measures undertaken by the Government have started to reverse sentiments. The Government undertook long anticipated measures towards fiscal consolidation by reducing fuel subsidies and selling stakes in public enterprises," RBI said adding that steps taken to increase FDI should add to both greater capital inflows and higher productivity.

Fed launches big stimulus, to buy bonds until jobs rebound

The Federal Reserve launched another aggressive stimulus program on Thursday, saying it will buy $40 billion of mortgage debt per month and continue to purchase assets until the outlook for jobs improves substantially.

In a significant shift in the direction of U.S. monetary policy, the Fed has tied its unconventional bond buying directly to economic conditions, a move that is likely to be controversial among central bank critics.

"If the outlook for the labor market does not improve substantially, the committee will continue its purchase of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability," the Fed said in a statement.

In an additional step that reflects just how concerned Fed officials have become about the health of the economy, policymakers said they would not likely raise rates from current rock-bottom lows until at least mid-2015. Previously, it had set such guidance at late 2014.

The decision comes in the face of widespread questions about the likely effectiveness of a further foray into unorthodox monetary policy, including from Republican presidential nominee Mitt Romney.

The latest purchases build on the $2.3 trillion in U.S. government and housing-related debt the Fed has already bought.

The new move is even bolder than many investors had anticipated given its open-ended nature and clear links to unemployment.

COOLER GROWTH

U.S. economic growth cooled in the second quarter, coming in at a tepid 1.7 percent annual rate, and forecasters do not believe it is doing much better now.

The economy created just 96,000 jobs last month, less than needed to keep up with population growth. While the unemployment rate edged down to 8.1 percent it was only because so many Americans gave up on the search for work.

At 2 p.m. (1800 GMT), the Fed will provide fresh forecasts that could show softer projections for economic growth and higher unemployment, which would help provide a rationale for its decision.

Fed Chairman Ben Bernanke will discuss the decision during a news conference at 2:15 p.m. (1815 GMT).

EBay redesigns logo, reflecting marketplace shift

SAN FRANCISCO (Reuters) - EBay Inc executive Devin Wenig unveiled a new logo on Thursday, a re-design he said reflected a shift by the online marketplace away from auctions and collectibles toward full-priced, buy-it-now merchandise.

The new logo keeps eBay's famous colors, red, blue, yellow and green, but the letters are thinner and arranged inline, rather than the previous, slightly jumbled approach.

The new design will be rolled out across the company's websites this fall.

"The eBay logo is known the world over, so changing it was not a decision made lightly. The time felt right," Wenig, president of eBay Global Marketplaces, wrote in an email to employees.

EBay is focusing more on new, fixed-priced sales as it tries to compete better with Amazon.com Inc, which has been growing faster. Wenig said the new logo reflects this new direction.

"It's eBay today: a global online marketplace that offers a cleaner, more contemporary and consistent experience," he wrote.

"Auction-style listings, used goods, vintage items and quirky, one-of-a-kind finds are still a big part of what makes buying and selling on eBay special," Wenig added. "But we've evolved a lot in the past few years, and eBay is much more than auction-style listings today."

Exports decline 9.7% in August

Exports declined by 9.7% year-on-year to USD 22.3 billion in August due to the global economic slowdown.

During April-August, the shipment dipped by about 6% to USD 120 billion from USD 127.6 billion in the same period last year, Commerce Secretary S R Rao told reporters here.

Imports during the month, too, slipped by 5.08% to USD 38 billion, leaving a trade deficit of USD 15.7 billion.

During the first five months of the current fiscal, imports contracted by 6.2% to USD 191.1 billion. Trade deficit during the period under review stood at USD 71.1 billion. "Trade gap is well under control," Rao said.

Diesel price hiked by Rs 5/litre; petrol, kerosene spared

The government today decided to hike diesel prices by Rs 5 per litre effective midnight tonight, but left petrol, kerosene and LPG rates untouched. The politically "bold" move is aimed at reining in the country's heavy fiscal deficit and fend off the threat of being the first in the BRICS group of emerging economies to be downgraded to junk.

A cabinet committee, headed by the Prime Minister, agreed to raise diesel prices by 12%, or Rs 5 per litre, excluding VAT (value-added tax), and restricted sales of subsidised LPG cylinders to six per consumer annually, the government said in a statement. It left petrol and kerosene prices unchanged. The excise duty on petrol has been cut by Rs 5.50 per litre.

Diesel in Delhi costs Rs 41.32 a litre and after this hike, it will cost Rs 46.95, after considering 12.5% VAT on the hike.

Petrol needed a hike of Rs 6 per litre but the government offset that by reducing excise duty by Rs 5.50 per litre from existing rate of Rs 14.78 per litre.

The move is expected to reduce oil-marketing companies’ under recoveries by Rs 20,300 crore.

The tough decisions, which came under immediate attack from allies like Trinamool Congress and Samajwadi Party and opposition alike, were taken at a meeting of the Cabinet Committee on Political Affairs (CCPA) chaired by Prime Minister Manmohan Singh. It will come into effect from midnight.

The government, which has been facing criticism of policy paralysis, had last hiked the price of diesel by Rs 3 a litre in June last year.

BACKGROUND

-- New Delhi subsidises the prices of diesel, cooking gas and kerosene to dampen inflation and protect the poor, a popular policy that has nevertheless put a severe strain on public finances.

-- The rising bill from the fuel subsidy and the resulting strain on public finances have put India's investment grade credit rating in peril.

-- India's rate of inflation probably picked up in August from July's near three-year low as poor summer rains drove up food prices, a Reuters poll showed.

-- The Reserve Bank of India is expected to keep its key interest rate steady when it reviews its monetary policy on Monday, according to a Reuters poll earlier this month. It has called on the government to free up supply constraints that have pushed up food prices, and launch fiscal reforms.

With inputs from agencies.

IIP, inflation data to guide market mood this week

Stock markets are likely to witness volatile trading in the coming week in view of industrial output and inflation data that are lined up for release, according to experts.

That apart, there are indications that the government may hike fuel prices impacting market sentiment.

While stock markets may open on a bullish note following European Central Bank's announcing last week a bond-buying plan to revive euro-zone's ailing economies, key triggers for domestic markets in the form of IIP numbers and inflation data will appear from the middle of the week.

July's industrial output data will be released on September 12, and August headline inflation figure on September 14.

While slowdown in economic growth has made investors cautious, inflation remains above the comfort level of the government as well as the Reserve Bank, keeping interest rates high.

The new data will provide key inputs for a decision on interest rates coming ahead of RBI's monetary policy review on September 17, analysts said.

"Concerns over slowing growth and high level of inflation in the economy are expected to persist in the near-term. The Indian markets continue to take positive cues from global events in spite of the weak domestic economic and political environment," Angel Broking said in a report.

It further said that RBI is unlikely to cut key rates in the mid-quarter review of the policy due next week since upside risks to inflation continue to persist.

Macroeconomic concerns may prompt investors to book profits at higher levels after a smart rally in the market last week, analysts said.

"It will not be easy to hold on to the gains amid growing concerns about the economy and the government's ability to push through key reforms," an expert said.

Besides, the government is widely expected to hike petrol, diesel, cooking gas and kerosene prices simultaneously in the coming week.

While the move will ease pressure on oil marketing companies, high crude oil prices remain a concern for the markets for the fear of fanning inflation.

On NSE index Nifty's weekly outlook, Rakesh Goyal, Senior Vice President, Bonanza Portfolio, said: "For the coming week, if Nifty sustains above 5,350, likely upside target shall be 5,400-5,450. On the other hand, if it goes below the 5,300 level, further selling pressure is likely up to 5,280-5,250."

On the global front, the Federal Open Market Committee (FOMC) will hold meeting on September 12-13 and markets will keenly await its outcome.

Petrol price hike of Rs 5 likely in 24-48 hrs: Source

A fuel price hike was imminent and sources claim the government may allow oil marketing companies to go ahead with a petrol price hike of Rs 5 per litre.

CNBC-TV18's Nayantara Rai reports quoting oil ministry sources that the development in the pricing front is expected in the next 24 to 48 hours. They feel there is no reason for the oil marketing companies to wait after the monsoon session of parliament concludes to increase prices, adding that the Prime Minister’s Office as well as the Finance Ministry are on board.

The oil marketing companies have already lost Rs 600 crore in Q1. They are not compensated for petrol sales and therefore, there is not reason to not allow them to hike prices.

Even for the under recovery figure of diesel, LPG and kerosene, the companies have still not received any support from the centre. They are unlikely to receive any support till the end of December.

The next big question is then when will prices of diesel and LPG be hiked? Sources say, a cabinet note has been sent from the Oil Ministry to the cabinet secretariat proposing a price hike on diesel and LPG.

The quantum might not be there, but the union cabinet will be asked to support a steep price hike saying that it is very much the need of the hour as the Companies have to be protected.

Also, this cabinet note will have some proposals on how to try and reduce subsidy incurred on LPG sales. Therefore, it is set for two reforms, one would be capping the number of LPG cylinders to 4 and 6 per family. However, the other proposal for the rich and MPs to voluntarily give up the LPG subsidy is something the Oil Ministry is not in favour of.

The ministry will also ask the cabinet to try and increase the price of kerosene.

Gold set for dramatic fall if central bankers disappoint

The recent rally in gold, which touched a near six-month high this week, is unlikely to last, say commodity analysts, who forecast prices could fall 10% over the next month if central bank actions disappoint.
Trading close to key resistance level USD 1,700 an ounce, gold prices have had a bull run over the past one month, rising 5.5%, on expectations of monetary easing by both the US Federal Reserve and the European Central Bank (ECB).

But Warren Gilman, CEO of research firm CEF Holdings, says this rally has not been justified given the lack of clarity from policymakers in the West.

The ECB is scheduled to meet Thursday and the Fed next week, and Gilman warns that a sharp fall in gold prices could be coming very soon if the outcome of these central bank meetings disappoints.

“I’m expecting more rhetoric and little in the way of concrete action. The fall in gold could happen as quickly as this week, as we start to see Europe hasn’t been sorting itself out and the solution to solving the debt crisis is not near,” Gilman told CNBC.

Andrew Su, CEO of Sydney-based commodity brokerage Compass Markets, agrees that gold is vulnerable to a “dramatic” downturn as he believes the ECB is unlikely to provide any definitive plans in terms of its bond-buying program.

“We have significant resistance at USD 1,700 and have a lot of opportunity for market disappointment over the next couple of days,” Su said.

He adds that gold could hit USD 1,530, a key technical support level, and then even move below very quickly to USD 1,500. “We are looking to short gold at current levels,” he said.

Dhiren Sarin, Chief Technical Strategist, Asia-Pacific at Barclays, says while he expects a temporary pullback in gold in the coming days given the “significance” of the psychological hurdle at the USD 1,700 level, he is ultimately looking for the precious metal to move higher.

“As long as gold stabilizes in the USD 1,625-1,640 area, we would view a pullback as a healthy development and set up for further gains,” Sarin said