Sunday, December 30, 2012

So what can RBI do?

It seems RBI is caught between the devil and the deep sea.

The Financial Stability Report paints a gloomy picture on Indian economy and not without reasons. The most serious of them is the news about the house hold savings stumbled to mere 7.8% last year from almost 13% couple of years ago. This is scary by any standards for any central bank.The very reason India withered away many financial sunamies are only to the high savings rate. In the mad rush to show 9% growth we turned into a consumption economy and traded our benefit of savings economy and thus exposing ourselves to financial crisis.

The banks are not at all in good shape and adding the restructured loans to the bad loans the total bad loans growth is at alarming pace as per RBI's own standards. RBI very will know of the fact that a quarter or half point cut in Repo cannot save the banks.  Any rate reduction from RBI will first be absorbed by the banks before they pass into the consumers and corporates. Most of our corporates forgot to do the business with reasonable margins, so I dont think they will be benefited with these token rate cuts.Now what can happen:

Scenario 1:

The RBI due to their own (overtalking) will be forced to cut interest rates in January 30, and thus putting country into deep financial mess. Remember any rate cut will be used by corporate and realty mafia to induce common people to consume more without any reason and thus avoid any meaningful correction to the overheated economy. So atmost this can be used to postpone the crash for few months. The inflation will not be contained given the fact that the Rupee is fast losing its value.

    **overtalking:  The RBI should have merely said that rate cuts will come once the inflation contains within the comfort levels. Instead of that, RBI has given a hard date thus cave in the pressures of blood sucking corporate mafia and to election minded finance minister

                                                 to be continued

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