With Retail CPI at 9.78% and Fuel prices about to go up in this week, the public comment by the Finance Minister to curb RBI's monetary control mechanism is a sign of strains in the fabric of the team that should be proud of having put it together so well since 2008.

It is probably a sign of a tough ask of the Finance Minister from his cabinet colleagues as his bureaucrats that are part of his policymaking team have otherwise been unequivocal in their support of the RBI's monetary policy till now. A high retail inflation definitely needs more interest rate corrections and esp if Duvvoori Subbarao feels so, the Finance Minster should be able to understand the reasons for it as well from Kaushik Da and MSA as both agree with his concerns as well as the primacy of RBI in Friday's ratemaking decision. I still feel we could absorb upto 100bps in rate hike 

Whether Pranab Mukherjee moves out of Finance or not, however, India has to be able to absorb more price hikes in Fuels with or without GST and DTC which are already victims of a dividded polity and a borderline mandate for the government. It does not help that Congress has run out of leaders with a ational stature and that the BJP offers no choices either

Economically, RBI will sweeten the rate hike deal with a cut in SLR and that may also be extended to upto 100 bps ion Friday or in subsequent policy meetings. That should also mean that yields need not move northwards from here and the 18 - 20 basis points move as a result of lower CRR could well need checks and balances with higher rates

However, banks globally also have to put in effort to understand risk ( esp retail risk ) and make an effort to catch up on substantial retail underwriting systems and make sure all documentation is processed with the right water marks  for example, underwriting for Variable rate home loans should be done at the higher possible rate when judging capacity in income etc ) and that operational investment could do more for policy transmission and better rates to good quality retail customers

 

Posted via email from The investment blog on Post