India lowered interest rates taking comfort from cooling Inflation as it made the first cut in nine months to support an economy headed for its slowest growth in a decade. Since a 50 basis point cut in April 2012, the central bank had kept interest rates on hold as inflation stayed stubbornly high, ignoring repeated calls from the Government of India for a cut. The RBI unexpectedly also cut the CRR – The amount of deposits lenders must set aside as reserves, easing policy to aid growth as inflation cools and the government curbs the budget deficit. The Reserve Bank of India reduced the repurchase rate to 7.75% from 8%. RBI Governor Duvvuri Subbarao cut the CRR – Cash Reserve Ratio to 4% from 4.25%, effective Feb. 9, adding 180 billion rupees into the banking system. India becomes the first major Asian economy to ease borrowing costs in 2013, after Inflation moderated to a three- year low and the government called for cheaper credit as it vows prudence in next month’s budget to damp price pressures. While the cost of living is still rising by more than 7%, the central bank said today there’s space, “albeit limited,” to spur expansion as it cut the inflation forecast, reported Bloomberg. The yield on the 8.15% government bond due June 2022 fell three basis points after the rate decision. The BSE Sensex rose 0.4%, while the INR- Indian Rupee gained 0.5% to 53.66 per US Dollar. The Bombay Stock Exchange benchmark – BSE Sensex was now up 0.5% at 20200 while Nifty was up 0.5% at at 6109. The Indian Rupee has strengthened more than 1% against the dollar since mid-September, when Prime Minister Manmohan Singh began a policy overhaul to contain subsidies, lure foreign investment and speed up infrastructure projects. “There is an increasing likelihood of inflation remaining range-bound around current levels going into 2013-2014,” the Reserve Bank of India said. “This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks.” The Current Account Deficit (CAD) is expected to have widened in the quarter ended December, the central bank said. It was 5.4% of GDP in the previous three-month period. The Reserve Bank said it’s “critical now to arrest the loss of growth momentum without endangering external stability.” India partially freed diesel prices from state control on Jan. 17 to curb fuel subsidies, adding to recent policy steps. A rise of 0.45 rupees a liter every month until March 2014 will add around 64 basis points to inflation and lower the budget gap by 14 basis points, according to Nomura Holdings Inc.
India’s headline inflation rate moderated to a three-year low of 7.18% in December, and the central bank said there was likelihood that inflation would remain range bound around current levels heading into 2013/14 fiscal year starting April. High inflation, a volatile exchange rate and commodity prices pose huge macroeconomic risks. RBI has not abandoned its cautious stance, stressing on the ‘calibrated and limited’ nature of rate support (from) hereon. The scale of rate cuts is closely tied to the government’s sustained efforts to correct the twin imbalances and moderating inflation trajectory. “Financing the CAD with increasingly risky and volatile flows increases the economy’s vulnerability to sudden shifts in risk appetite and liquidity preference, potentially threatening macroeconomic and exchange rate stability,” the RBI said. Having grown at near-double-digit pace before the Lehman Brothers crisis, the economy has suffered a rapid deceleration. The RBI cut its GDP growth forecast for Asia’s third-largest economy to 5.5% for the current fiscal year, from 5.8% previously, and lowered its projection for headline inflation in March to 6.8% from 7.5% earlier.
The CRR cut by RBI will be adding 180 billion rupees into the banking system & this added liquidity in the system will prove beneficial for risk investments in Equities & Commodities. Commodity Prices can be expected to rise in the near future, although the Repo Rate cut may prove negative for the Precious Metals Group, which are already facing pressure due to the added weight of the tax hike on Gold imports. Agro Commodities can be expected to be the first among the beneficiaries due to the added liquidity in the markets, which naturally triggers higher Inflation. Home Loans will get cheaper as an effect of the lowered rate of Interest. This will also trigger demand for metals which can in turn trigger Inflation.
Like gilded bowling pins against the rolling forces of global populism, the long-favorable tax policies for the wealthy are rapidly falling one by one. First to the scene came Britain and France, then Australia and the United States. And now it may be India’s turn. The chairman of the prime minister’s economic advisory council, C. Rangarajan, seemed to be channeling Obama when he announced that “we need to raise more revenues and the people with larger incomes must be willing to contribute more.” He didn’t identify the rate or income cut-off. But the idea has already stirred a firestorm of debate in the country, which has seen falling tax rates for high earners for much of the past decade, reported CNBC. India’s top tax rate of 30% was set in 1997. Also recently, the country’s former finance minister cited the need for an estate tax in India, saying the country may be seeing too much accumulation of wealth “in a few hands.” The papers are now filled with quotes from Warren Buffett and others highlighting the need for a fairer tax system amidst growing inequality. The top 10% of wage earners now make 12 times more than the bottom 10%, up from a ratio of six in the 1990’s. Critics of a new tax say it would chase away capital and jobs. “Just because we need to increase tax revenues to meet the lower fiscal deficit targets, should we adopt the easiest method of further soaking the rich by imposing a surcharge on those who already contribute as much as 63% of total revenues from personal income tax?” asked Rajiv Kumar Senior Fellow a India’s Center for Policy Research. There is also wide disagreement on what counts as rich. After one politician cited $24,000 as “rich’ in India, one commentator said that “few Indians earning (that amount) think of themselves as rich. And they are already contributing the bulk of the country’s income taxes anyway. Taxing them will only sour the negative mood further.”India is, by some measures, more equal than the United States. The top one percent of earners in the United States took in more than 17% of total income in 2005, according to research from Thomas Picketty and Emmanuel Saez. In India, the share of income for the top 1% is around 9%– which is down from 12% in 1949.
India’s Finance Minister P. Chidambaram in Singapore on a day trip to woo investors, made a case for a credit rating upgrade for the country, telling CNBC that ratings agencies, which have threatened to downgrade Asia’s third-largest economy to junk status, could be forced to change their mind after he presents his annual budget next month. Chidambaram who returned as India’s finance minister in July last year, has taken several steps to boost investor confidence, from allowing foreign equity in several sectors, to cutting subsidies to rein in the fiscal deficit. Indian stocks are up 15% since July last year and the rupee hit an almost three-month high against the dollar on Tuesday, a day after the government decided to increase the tax on gold imports, which have put pressure on the country’s finances. “I think it’s possible (an outlook upgrade) if I show on February 28 that I have kept the fiscal deficit below 5.3% and if my budget estimates show that next year the fiscal deficit will be 4.8%, at that time the ratings agencies should consider improving the (negative) outlook and then the rating,” Chidambaram said. India has set a fiscal deficit target of 5.3% of gross domestic product for the fiscal year ending on March 31, but many experts think it could overshoot this target. The finance minister added that India was on course to bring the deficit down to 3% in the next four years. According to Chidambaram the ratings agencies have no case to downgrade India’s credit rating to junk status from investment grade. “I don’t believe any ratings agency will downgrade us. I said this on Aug. 6 and six months later say it again that there is no case for a downgrade.” Chidambaram said there were a lot of “other candidates in the world” whose fiscal position was worse than India’s, plus India was still growing at 5.7% with only “four or five other countries growing at a faster pace.” “We also have healthy Forex reserves at $300 billion and a high savings ratio of 32% of GDP, we certainly don’t deserve a downgrade,” he said. When asked whether elections scheduled for 2014 could force a “populist budget” next month and lead to a pause in economic reforms, Chidambaram said: “The elections are 14 months away and budgets are not drawn keeping elections in mind. It will be a responsible budget.”
Gold Futures are poised for a fourth monthly decline in January, the worst run since the period to last May. As the global economy shows more signs of growth, the incentive to hold Gold is reduced. Gold Holdings in exchange-traded products are poised for the biggest monthly decline in more than a year as signs that the global economic recovery is strengthening curb demand for haven investments. Assets contracted 0.8% so far in January, the largest decrease since December 2011, according to data compiled by Bloomberg. The holdings, which reached a record in December, dropped to a two-month low of 2,610.272 metric tons yesterday. ETPs trade like shares and enable investors to hold commodities without taking physical delivery. Assets in gold- backed products have risen every year since 2004, expanding 12% in 2012 as futures rose 7%. While the holdings have dropped this month, they remain within 1 percent of the record 2,632.5 tons reached on Dec. 20. Morgan Stanley forecasts that investors will add a net 100 tons of gold to ETPs this year, and has forecast higher average prices each quarter of 2013 as central banks maintain stimulus and expand holdings, according Jan. 24 report. MCX Gold Futures traded on the Multi Commodity Exchange in India slumped to Rs. 30,230 after the RBI announced the widely expected Rate cuts. MCX Silver too dipped a little to Rs. 57,711. Both, MCX Gold & MCX Silver Prices have been on the decline since the last 4 to 5 trading sessions on Global cues & also as the INR appreciated against the US Dollar. MCX Gold can be expected to witness sharp turnaround rises as the INR approaches over bought conditions. Comex Gold Prices have a strong near term support around $1640 & can rise sharply from dips close to this level. Silver Prices though will witness the sharpest ever rises anytime soon. Buying at dips would be the best strategy as of now for the Precious Metals.
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