Fifth Bi-Monthly Monetary Policy – Likely Outcome

The Reserve Bank of India will be publishing its fifth and probably the last bi monthly monetary policy for the calendar year 2015. The reason of it being “probably” the last is there are chances of Out of Cycle Policy actions if US Federal Reserves decides to increase its interest rates in their next FOMC meeting which will be held on 15-16 Dec, 2015. Although, looking at the current scenario, its is difficult to predict what the FED might decide in the near future. However, I will focus predominantly on domestic factors in this blog to conclude the likely outcome of the monetary policy. 

Here are a few links for the readers to recap on the scenarios of the entire year:


Lets focus on the domestic factors first. Index of Industrial Productions in the past two months has been on the lower side. The surprising slowdown despite rate cuts does call for a rate cut at a macro level, but the impact has been predominantly due to global growth slowdown. CPI on the other hand, increased to 5.14% in Sept while 5% in October. The sudden increase in CPI is due to the prices of pulses increase heavily in this quarter. WPI, so far has been showing a dis-inflationary path but the wide difference in the two indicators is still a problem for the CSO and the RBI in terms of reliability. The two indicators,namely CPI and WPI, are causing an ambiguity in terms of the inflation figures. The divergence between the two has been increasing lately. The image below might explain as to how these indicators are contradicting each other. However, since RBI has been focusing on taming inflation on a priority basis, the focus will be lower on the slowing IIP figures.

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On the domestic front, the banking sector still seems to fight the rising NPAs. The part that Dr. Rajan would be worried about apart from that is the deposit growth outpacing the credit growth continuously for the past 12 months. The good part of the bad situation is that the gap between two is reducing gradually.  Although, RBI is doing its bit in uplifting the current conditions of the banks by rolling out timely reforms, a robust solution would always be a pickup in the domestic demand. Till that time, I guess RBI’s hand would be tied up for any further actions. Liquidity conditions as well seem to be comfortable with the call money rates fairly stable and well within the repo window which does not call for any further easing in the near future. 

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On the global front, the slowdown is deepening and might continue to stay subdued in the near future. China is facing immense distress situation. US on the other hand is waiting for the inflation figures to increase to the expected levels so that they can take a call on hiking the rates. Euro Zone as well is struggling to come out of the dis-inflationary path despite the extended quantitative easing. 

Economic condition in terms of reforms does not look great with hurdles for GST passage persistent. On Dec 5th, the Arvind Subramanian committee will give its recommendation for the GST rate. Winter session will decide the course for the growth rate as well as the market conditions for the Indian stock markets. A pickup in the gold monetization scheme will also be a key metric in determining the fiscal condition in the coming year. 

To conclude, with the CPI, WPI and the food inflation rising, IIP reducing slightly, substantial probability of a US FED hike, the RBI in its fifth bi-monthly monetary policy will maintain a status quo in terms of the repo rate(6.75%) and the CRR (4%). SLR on the other hand will be reduced by 25 bps. SLR will be 21.25% from the current levels of 21.5%. The importance will be on the tone of the speech on Tuesday and the same will tentatively signal RBI’s intentions in the near future. With this action, Dr. Rajan might put the ball in the Govt’s court to roll out the necessary reforms to move the economy forward. It will be important for the Govt, RBI and the CSO to also reach a consensus on the inflation indicator for a much clearer picture in terms of the real conditions in the economy. RBI will be closely watching the inflation figures before they decide to do any further easing. 

Thank you.


The Wobbly “Wagen”

The Volkswagen group has been in the news lately for its emission scandal. In sept, VW(Volkswagen) was accused of understating the emission numbers and approving the emission tests with the help of a software. It is not the first time that a car making company is facing such accusations. Prior to this there have been recalls by various car makers such as Ford(2012), General Motors(2013), Ford(2013), Maruti Suzuki (2014), General Motors(2014), Honda (2015) etc. So what makes VW a special case? The Emission Defeat Device. Volkswagen, has surpassed the emission test with a completely different approach that has started questioning the corporate governance in the group as well. In “The Wobbly Wagen”, we will discuss about what exactly had VW put in place and how its works, the effects of the scandal so far, the implications in terms of corporate governance, share prices and the way forward for VW group.

In September, the Environmental Protection Agency (EPA) found that many VW cars being sold in the US had a “defeat device” – or software – in diesel engines that could detect when they were being tested, changing the performance accordingly to improve results. The company has also been accused by the EPA of modifying software on the diesel engines fitted to some Porsche and Audi as well as VW models. The defeat software thus made things easy and ugly at the same time for VW. The image below will give a brief idea on how the defeat software works and its interesting!


Emission Defeat Device
        Emission Defeat Device

VW accepted those accusations stating that the software existed in the engines. The effects after the acceptance have been immense on the reputation, credibility and revenue of the world’s largest car maker. VW was forced to call back its cars in the US and the UK amidst the information going public. What started in the US has spread to a number of countries. The UK, Italy, France, South Korea, Canada and, of course, Germany, have opened investigations. Throughout the world, regulators and environmental groups are questioning the legitimacy of VW’s emissions testing. VW has started the recall of  8.5 million cars in Europe, including 2.4 million in Germany and 1.2 million in the UK, and 500,000 in the US as a result of the emissions scandal.


Over the past decade and more, car makers have poured a fortune into the production of diesel vehicles – with the support of many governments – believing that they are better for the environment. Diesel cars were just getting popular in the world economy. With this scandal, predominantly being found in diesel cars, the sales of such cars might be difficult in the coming future for any car maker. While on the reputation front, VW has dented its reputation in majority of the economies and the losses for which cannot be hedged. Looking at the financials, with VW recalling millions of cars worldwide from early next year, it has set aside €6.7bn to cover costs. That has resulted in the company posting its first quarterly loss for 15 years of €2.5bn in late October. But that’s unlikely to be the end of the financial impact. The EPA (US) has the power to fine a company up to $37,500 for each vehicle that breaches standards – a maximum fine of about $18bn. The entire situation has also led to the resignation of their long lasted CEO since he lost support of the key shareholders.


Corporate governance, the upcoming risk management measure, has yet another time being questioned with the VW scandal news. In 2014, in the US, regulators had  raised concerns about VW emissions levels, but these were dismissed by the company as “technical issues” and “unexpected” real-world conditions. If executives and managers willfully misled officials (or their own VW superiors) its difficult to say that the company had stringent corporate governance. On the other hand, UK Trade body has also failed in upgrading their emission tests in the recent past. The tests at present fail to embrace the new testing technologies and more realistic on-road conditions.

The VW share prices on the other hand, have reduced by almost 30-35% in the past month. The downfall although, does not seem to recover anytime soon looking at the current conditions.


The way forward for VW seems to be a bumpy ride in most of the economies. The issues of corporate governance need to be addressed to avoid any further worsening of the reputation. The financial impact although is going to take at least a year to recover. In this instance, it’s an open case. And when you’re caught with your hand in the cookie jar to that extent, you really have no choice but to take ownership of it and do all you can to minimize the damage.

Thank you. 🙂