EcoPolitical

The latest reading of the Indian CPI (Sept 2019) came out at 3.99%. This may cause some re-think within policy circles on the current rate reduction cycle. However, a closer look at the data suggests that there is nothing alarming about this print. First, it is still slightly below the target inflation of 4% (-/+ 2ppt). Second, the core inflation, even as its calculated using exclusion method has actually come down from 4.3% in Aug19 to 4% in Sept. Finally, if we were to use my true core measure (i.e. excluding items based on their actual volatility and not just the food+fuel exclusion), then the core inflation has come down to 3.11% in Sep-19 from 4.69% in Dec-18. In fact the core inflation continues its downtrend unabated as seen below: The rise in inflation in September 2019 was due to a surge in volatile items. Notably, despite this surge the volatile inflation has not broken above the technical downward trend line. Given where it is poised today, I believe it will ho...

Summary: While admittedly RBI does not strictly follow the Taylor rule, it is a useful tool in analyzing policy. The current rate stance of RBI implies a trend growth rate of only about 3%, a sharp discount to long term growth target of 7%. RBI would need to cut rates by over 200 bps to reach a level where trend growth of 7% can be accommodated under the Taylor Rule mechanism. While at the current anemic cut size of 25 bps each review cycle, it would take well over a year to reach this level. Analysis of its past rate cuts using the Taylor formula suggests that RBI has been more reactive to output gaps than inflation gaps. This is in itself surprising given how much of the chatter around policy announcements is dominated by inflation data. Given that India is today facing a favourable inflationary gap, as well as negative output gap, it is intriguing to note RBI's continuing gradual approach to monetary policy. On the backdrop of another anemic cut in rates by the Reserve Bank...

Punjab Maharashtra Cooperative Bank (PMC) is latest in the series of bad news emanating from the Indian banking sector. While this was a result of misfeasance by PMC bank's management and thus not systemic in that sense, it does raise question marks on the audit and scrutiny procedures of the Reserve Bank of India (RBI). The details of the scam and how the management hid it, can be read from this link  for those interested. So, was it possible to gauge that the books of PMC were not really kosher? To examine this issue, this author made a series of bell curves in MS- Excel of select financial data for a sample universe of 54 Urban Cooperative Banks, the peer group of PMC. The data was obtained from the RBI website. The bell curve will allow us to easily juxtapose the select financial data for PMC vis-a-vis the average data for the universe of its peer group. The central brown/ golden line denotes the average of the data being studied in each graph. For exa...