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Reading Between Lines RBI Governor Speech in London

March 15, 2013

RBI_IndiaThe Indian StockMarket Turned Buoyant as RBI Governor gave some hints of Rate Cuts and Satisfcation over the Budget. We commend RBI Governor’s Daredevil steps not to bow down to illiterate Politicians of India and taking a stand which is in the interest of the nation so far. Here are the key highlights of the Speech @ London School of Economics.

Inflation
If the domestic petroleum sector was a free market and if global prices passed through to domestic prices, demand would arguably have declined in response to rising prices. But such a demand adjustment was blocked by the administered (subsidized) pricing regime of petroleum products.

Reduction in subsidies will remove price distortions, improve efficiency and provide a much better investment environment. Diesel prices are undergoing increases per month now and over time will likely reduce fuel demand. This was seen this month also where overall diesel demand is down 2%.

Major factor fuelling inflation has been wage pressures. MGNREGA has been one of the biggest contributor to this and we have seen payout here decrease. [Our Comment – Congress Vote Bank Politics is to be Blamed]

With demand moderating, producer pass through has gone down which has reflected in lower margins for corporates. Demand side inflation has and will likely stay contained as consumption moderation is taking place. At current trajectory, we will likely undershoot 6% by April (March and April have a huge base effect).

CAD & Fiscal Deficit
There has been some very welcome, although much delayed, action on correcting both the CAD and the fiscal deficit over the last six months. The Government has raised customs duty on gold imports in an effort to restrain gold imports. More notably, the recent budget has firmly embraced fiscal responsibility by restraining the fiscal deficit next year consistent with the road map recommended by the Kelkar Committee.

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