Sunder’s List: the RBI’s stealth QE

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Is the RBI to blame for persistent inflation and the sliding rupee? The RBI periodically engages in OMOs (Open Market Operations) where it buys/sells government bonds to manage liquidity. For example, during tax season, corporate treasuries sell bonds to pay tax. The RBI might conduct an OMO to soak up these bonds and sell them later when the liquidity situation normalizes. But the RBI has not been selling the bulk of its securities back into the market. In FY13, the RBI has bought Rs 687 billion of bonds until 12 June. This annualizes to an unprecedented Rs 3.4 trillion of bond-buying, and at 3.4% of the GDP (the US Fed’s bond buying in 2011 was 3.9% of US GDP.) Only Rs 480 billion of the Rs 687 billion has been through pre-announced OMOs, and the rest through un-announced unsterilized interventions. (Soberlook)

If this is true, then the RBI holding rates steady makes sense. Any reduction in interest rates now will only stoke further inflation while government “policy paralysis” chokes investment and further entrench inflation expectations. S&P: Many leaders oppose steps that would reduce the discretionary powers of public officials over regulated sectors of the economy out of self-interest, not ideology, fearing the loss of political power. (FT)

Growth in the US is slowing, much of Europe is in recession, China’s growth outlook has weakened, the reform processes in India have stalled and other large emerging economies have slowed dramatically. “The engines of world growth are running out of steam while the trailing wagons are going off the rails. Emerging market economies are facing sharp slowdowns in growth while many advanced economies slip into recession.” (FT)

Meanwhile, the euphoria from the Greek elections was extremely short lived. Europe closed sharply lower: Stoxx 50 -1.3%, Germany +0.2%, France -0.6%, Italy -3%, Spain -2.9%, U.K. +0.3%. Dow -0.12% to 12752. S&P +0.3%.

Good luck!

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