{"id":381247,"date":"2024-06-19T18:25:03","date_gmt":"2024-06-19T12:55:03","guid":{"rendered":"https:\/\/zerodha.com\/z-connect\/?p=381247"},"modified":"2024-06-24T15:14:56","modified_gmt":"2024-06-24T09:44:56","slug":"its-the-economy-stupid-the-real-job-of-the-rbi","status":"publish","type":"post","link":"https:\/\/zerodha.com\/z-connect\/subtext\/its-the-economy-stupid-the-real-job-of-the-rbi","title":{"rendered":"It\u2019s the economy, stupid! The real job of the RBI"},"content":{"rendered":"\n<p><em>We love IndiaDataHub\u2019s weekly newsletter, \u2018<\/em><a href=\"https:\/\/indiadatahub.substack.com\/\"><em>This Week in Data<\/em><\/a><em>\u2019, which neatly wraps up all major macro data stories for the week. We love it so much, in fact, that we\u2019ve taken it upon ourselves to create a simple, digestible version of their newsletter for those of you that don\u2019t like econ-speak. Think of us as a cover band, reproducing their ideas in our own style. Attribute all insights, here, to IndiaDataHub. All mistakes, of course, are our own.&nbsp;<\/em><\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<div class=\"wp-block-group has-background is-nowrap is-layout-flex wp-container-core-group-is-layout-ad2f72ca wp-block-group-is-layout-flex\" style=\"background-color:#dedede\">\n<p class=\"has-background has-medium-font-size\" style=\"background-color:#dedede\"><strong>KEY TAKEAWAYS<\/strong><\/p>\n\n\n\n<ul style=\"background-color:#dedede\" class=\"has-background wp-block-list\">\n<li>India&#8217;s inflation falls to 4.75%, largely due to a further reduction of core inflation. <\/li>\n\n\n\n<li>Falling inflation alone does not guarantee a repo rate cut. RBI&#8217;s main job is to ensure monetary stability, not growth.<\/li>\n\n\n\n<li>Most people agree that housing prices will go up even faster than they are right now.<\/li>\n\n\n\n<li>India&#8217;s trade deficit came to $23 bn, after imports grew by 8%, while exports grew by 9%. <\/li>\n\n\n\n<li>The US Fed hasn&#8217;t cut interest rates at its last meeting, and probably won&#8217;t start until September. <\/li>\n<\/ul>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-why-we-aren-t-cutting-rates-already\"><strong>Why we aren\u2019t cutting rates already<\/strong><\/h2>\n\n\n\n<p>India\u2019s Inflation has now fallen for the <em>fifth <\/em>month in a row. Our inflation reading came to 4.75% \u2014 0.08% below April. Between December last year and May, inflation has fallen by almost a full percent \u2014- dropping from 5.69% to 4.75%.&nbsp;&nbsp;<\/p>\n\n\n\n<p>As has been the case for many months now, our core inflation has been falling. It\u2019s now at 3.1%. Most of our price rise, on the other hand, is because food prices continue to climb. And that has continued in May, when food prices were 7.9% higher than a year ago.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-8.jpeg\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"675\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-8-1024x675.jpeg\" alt=\"\" class=\"wp-image-381673\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-8-1024x675.jpeg 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-8-300x198.jpeg 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-8-768x506.jpeg 768w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-8.jpeg 1456w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/a><\/figure>\n\n\n\n<p>The markets are pricing this falling inflation into the yield on government bonds. When inflation is high, you&#8217;ll want a better deal if you\u2019re giving money to the government \u2014- after all, inflation is quickly eating into the value of that money. With lower inflation, people are more comfortable with less interest. And so, now that inflation is falling, 10-year G-sec yields are at their lowest in a year \u2014 at 7%.&nbsp;<\/p>\n\n\n\n<p>This fall also comes, in part, because the markets seem to think a rate cut might be close. As we saw <a href=\"https:\/\/zerodha.com\/z-connect\/subtext\/its-the-economy-stupid-to-cut-or-not-to-cut\">last week<\/a>, two of the six members of RBI\u2019s board now want rates to be cut. If rates are cut, money becomes cheaper for the economy. Then, people aren&#8217;t quite as insistent on earning a high interest.&nbsp;<\/p>\n\n\n\n<p>But if inflation is going down, why isn\u2019t the RBI cutting rates already? What\u2019s taking it this long? Here\u2019s the thing: the RBI only looks at inflation to <em>hike<\/em> rates. Inflation coming down, on the other hand, isn\u2019t reason enough for the RBI to cut rates.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-9.jpeg\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"675\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-9-1024x675.jpeg\" alt=\"\" class=\"wp-image-381674\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-9-1024x675.jpeg 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-9-300x198.jpeg 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-9-768x506.jpeg 768w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-9.jpeg 1456w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/a><\/figure>\n\n\n\n<p>I know, I know. That seems unfair. But it makes sense when you really think about it. The RBI only cuts rates when it\u2019s worried for the health of the economy. If India\u2019s growth starts to falter under the strain of high rates, it will relent and bring them down. If not, though, it\u2019ll probably continue with high rates.&nbsp;<\/p>\n\n\n\n<p>Right now, the economy isn\u2019t faltering at all. It\u2019s quite exuberant, really. Retail investors participate in the markets at an unprecedented rate, real estate prices are rising, unsecured lending is going up \u2014 these aren\u2019t signs of a struggling economy. If anything, these are indications that the economy is heating up a little. The MPC <em>needs<\/em> to be cautious. It is prudent for it to keep rates a little higher than it would otherwise like.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-14.png\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"679\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-14-1024x679.png\" alt=\"\" class=\"wp-image-381675\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-14-1024x679.png 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-14-300x199.png 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-14-768x509.png 768w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-14.png 1456w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/a><\/figure>\n\n\n\n<p>While many people think the RBI just balances growth and inflation, its bigger goal is to ensure <em>monetary stability<\/em>. It isn\u2019t supposed to chase growth. Its job is to be the sane voice in the room. It\u2019s supposed to think about <em>risk<\/em>.&nbsp;<\/p>\n\n\n\n<p>Booming stock markets and credit-based spending make an economy <em>look<\/em> good. But when they rise faster than the economy that&#8217;s underneath them, there\u2019s always a chance that something will go wrong. It\u2019s the RBI\u2019s job to stop things from getting to that point. At the moment, people\u2019s optimism about the economy is only growing. Look at the chart above for instance \u2014 GDP growth expectations for FY 25 have been only going up, off late. There simply isn\u2019t a big reason for the RBI to cut rates just yet.&nbsp;&nbsp;<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity is-style-dots\"\/>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-prices-hitting-the-roof\"><strong>Prices hitting the roof<\/strong><\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-10.jpeg\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"678\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-10-1024x678.jpeg\" alt=\"\" class=\"wp-image-381676\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-10-1024x678.jpeg 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-10-300x199.jpeg 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-10-768x508.jpeg 768w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-10.jpeg 1456w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/a><\/figure>\n\n\n\n<p>Indians think housing prices will climb very, <em>very<\/em> quickly this year.&nbsp;<\/p>\n\n\n\n<p>How do we know? Well, take a look at RBI\u2019s Inflation Expectations survey, which comes out once every couple of months. It asks people how they think housing prices will move in the next year.&nbsp;<\/p>\n\n\n\n<p>Look at the graphs above. Two things tell you that housing prices are heating up:&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>More people think housing prices will jump up faster than currently are than at any other time in the last decade.&nbsp;<\/li>\n\n\n\n<li>Fewer people think housing prices will decline than at any time in the last decade.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>Seven in every ten people wonder how long they\u2019ll be able to afford housing for, while almost nobody thinks houses will be cheaper any time soon. That\u2019s great news if you\u2019re a home-owner, and terrible news if you aren\u2019t.&nbsp;<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity is-style-dots\"\/>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-may-trading\"><strong>May trading<\/strong><\/h2>\n\n\n\n<p>We have the latest numbers on how much India traded with everyone else in May. Here are the highlights:&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>India\u2019s exports went up by 9%, year-on-year.&nbsp;<\/li>\n\n\n\n<li>India\u2019s imports went up by 8%, year-on-year.&nbsp;<\/li>\n\n\n\n<li>India\u2019s trade deficit (that is, imports minus exports) came to ~US$ 23 billion. That\u2019s much more than it was last month, but around where it was last May.&nbsp;<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-15.png\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"686\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-15-1024x686.png\" alt=\"\" class=\"wp-image-381677\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-15-1024x686.png 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-15-300x201.png 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-15-768x515.png 768w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-15.png 1456w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/a><\/figure>\n\n\n\n<p>Here&#8217;s how we\u2019ve fared on individual items:&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-11.jpeg\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"681\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-11-1024x681.jpeg\" alt=\"\" class=\"wp-image-381678\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-11-1024x681.jpeg 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-11-300x199.jpeg 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-11-768x511.jpeg 768w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/06\/image-11.jpeg 1456w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/a><\/figure>\n\n\n\n<p>Pulses are an interesting story. India\u2019s pulse production took a bad beating this year. This has sent the price of pulses up by the double digits, and is keeping food inflation high. In response, we\u2019ve been importing pulses in bulk. May makes for the third month in a row when our imports went up by more than 100% year-on-year.&nbsp;<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity is-style-dots\"\/>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-no-country-for-low-rates\"><strong>No country for low rates<\/strong><\/h2>\n\n\n\n<p>Remember how, <a href=\"https:\/\/zerodha.com\/z-connect\/subtext\/its-the-economy-stupid-to-cut-or-not-to-cut\">last week<\/a>, nobody expected the US Fed to cut its policy rates? Well, they were right. The Fed met last week and kept its rates unchanged.<br><br>Here\u2019s what will happen next, at least as per the markets: The Fed will next meet on July 31, when it\u2019ll probably leave things unchanged once more. The cuts will start at its subsequent meeting, in September. By the end of the year, people expect, rates will be down 0.5%. Or, well, that\u2019s what they believe <em>right now<\/em>. The end of the year is still a long time away.&nbsp;<\/p>\n\n\n\n<p>(Why do we keep talking about US rates here, you ask? We\u2019ve written about this <a href=\"https:\/\/zerodha.com\/z-connect\/subtext\/this-week-in-data-for-dummies-monetary-policy-consumer-confidence-china-deflation-and-more\">before<\/a>, but in a nutshell: when US Fed rates are high, the RBI finds it harder to beat inflation.)<\/p>\n\n\n\n<p>A couple of quick updates from the rest of the world:&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Japan kept its interest rates unchanged yet again. Its inflation has stayed high for a few months \u2014 though nobody knows if this is a good thing. After all, it saw <a href=\"https:\/\/foreignpolicy.com\/2024\/01\/15\/japan-economy-inflation-deflation\/#:~:text=With%20higher%20import%20costs%20and,target%20set%20by%20the%20BOJ.\">25 straight years<\/a> of deflation before this, and that wasn\u2019t too great either.&nbsp;<\/li>\n\n\n\n<li>In May, China\u2019s inflation climbed to 0.4% \u2014 the fourth straight month of inflation. That\u2019s definitely better than the <a href=\"https:\/\/zerodha.com\/z-connect\/subtext\/this-week-in-data-for-dummies-monetary-policy-consumer-confidence-china-deflation-and-more\">deflationary tail-spin<\/a> it was in a few months ago.&nbsp;&nbsp;<\/li>\n<\/ul>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity is-style-dots\"\/>\n\n\n\n<p>That\u2019s all for the week, folks! Thanks for reading.&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>If inflation rises, the RBI hikes interest rates. If it goes down, the RBI does nothing. Why? For that, you need to know the RBI&#8217;s real job.<\/p>\n","protected":false},"author":242542,"featured_media":377930,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[532],"tags":[583,854,596,795,855,704,681,645,825],"class_list":["post-381247","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-subtext","tag-china","tag-housing","tag-inflation","tag-japan","tag-merchandise-trade","tag-rbi","tag-repo-rate","tag-trade-balance","tag-united-states"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v23.5 (Yoast SEO v26.6) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>It\u2019s the economy, stupid! 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