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RBI likely to hold key interest rates on Tuesday

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The RBI building in Mumbai.
The RBI building in Mumbai. Photo credit: AFP/Sajjad Hussain
Photo credit: indianews.com
Photo credit: indianews.com

Mumbai: The Reserve Bank of India (RBI) is expected to hold interest rates at its monetary policy review on Tuesday and is more likely to cut rates by the end of the year when there is more clarity on the monsoons.

According to the Export-Import Bank of India, the rising trend in inflation seen over the last two months and the rainfall deficits are expected to weigh over the considerations of weak economic performance.

“Consequently, policy rate cut by the RBI in its third bi-monthly policy appears bleak. The RBI is likely to maintain status quo on rates in its bi-monthly policy meet on August 4,” it said.

Consumer price-indexed (CPI), or retail, inflation rose to an eight-month high of 5.4 percent in June riding on costlier food, fuel, housing, clothing and footwear.

While the CPI-urban for June inched higher to 4.55 percent, the CPI-rural jumped to 6.07 percent from 5.52 percent in May.

At its last review in June, RBI cut the repo rate, at which it lends short-term to commercial banks, from 7.5 percent to 7.25, but left other parameters like the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) unchanged at 4 percent and 21.5 percent, respectively.

It was the third repo cut this year in June, while the central bank had indicated that there may not be any further cuts in the near term.

Giving the reasons for the June policy stance, RBI Governor Raghuram Rajan said plans for lower food output needed to be in place, global financial markets were volatile, factory output was recovering unevenly, services sector was emitting mixed signals, fuel inflation was up, exports were down and liquidity had improved.

According to India Ratings and Research, the RBI is likely to wait and watch on rates on Tuesday.

“Ind-Ra expects the policy stance to reflect RBI’s continued intention to anchor both inflation and inflationary expectations. This has become even more important for RBI after its agreement with the government to follow a framework of inflation targeting,” it said.

Meanwhile, American research firm Moody’s Analytics, in a report this week, warned against the NDA government’s moves to tamper with the autonomy of the Reserve Bank of India in deciding on interest rates as potentially damaging for the economy.

“We believe that a government-elected panel undermines the RBI’s independence. Moving to the new model would severely dent the RBI’s competency: Credibility would be lower, politics would drive decisions, and transparency would be reduced,” the economic research company said.

The government last week released the draft Indian Financial Code, which proposes to remove the RBI governor’s veto right in the monetary policy committee.

Besides taking away the RBI governor’s authority to veto interest rate decisions, the draft also proposed that the monetary policy committee would have four representatives of the government and only three from the central bank, including the RBI “chairperson”.

“Overall, we believe that tampering with the central bank’s independence would make it difficult to anchor inflation expectations. This would weigh on India’s economic prospects, particularly financial market stability,” said the Moody’s report.

“But given the criticism of the draft bill, it is unlikely to pass parliament,” it added.

Terming the measure as a “dangerous road ahead”, it said India’s monetary policy, with Governor Raghuram Rajan at the helm, has been effective.

(IANS)

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Businesses in Vietnam Face Cash Shortage: Study

Cash Shortage Hurts Investment in Vietnam

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Vietnam Booming Economy
A woman sells vegetables at an outdoor market in Hanoi, Vietnam. VOA

Businesses in Vietnam face a cash shortage that is preventing as much as $24 billion that could be invested in the nation’s $250 billion economy, according to a study by PwC Vietnam.

The financial services company analyzed the 500 businesses in Vietnam with the highest revenue that have been listed on both the Ho Chi Minh City Stock Exchange and the Hanoi Stock Exchange for the last four years or more. PwC Vietnam analysts said that those companies’ “cash conversion cycle” has increased, meaning that they have to wait longer from the start of the business cycle, when they first make their investments, until those investments start to pay off in the form of revenue.

“We continue to see cash flows being sacrificed to attain top line targets in Vietnam, which is not sustainable for businesses in the long run,” said Mohammad Mudasser, who leads the working capital management practice at PwC Vietnam. “Managing operating working capital is a cross-functional responsibility,” he added.

Top line refers to revenue, while bottom line refers to profit.

Vietnam economy
Due to lesser investments in businesses, startups are not growing in Vietnam. VOA

To sacrifice cash for the sake of revenue targets usually means that companies are willing to make an initial cash investment, often to buy inventory that can be sold for revenue. However the long cash conversion cycle suggests that there are some inefficiencies along the way, such as longer wait times between billing a customer and actually collecting the payment.

While there is no perfect business cycle, the PwC Vietnam study suggests companies in Vietnam could tackle some inefficiencies to unlock further potential in the already fast growing economy.

In 2018 Vietnam had one of the highest cash conversion cycles in Asia, at 67 days, which is an increase of two days compared with 2017, according to PwC Vietnam. That compares with an average in Asia of 58 days, and in particular 64 days in neighboring Thailand and 54 in Malaysia. That means those other Southeast Asian countries are able to turn their investments into cash sooner than Vietnam does.

“The fast-growing companies had significantly higher short term debt growth, indicating risks to the sustainable growth of these companies,” PwC Vietnam, a consulting company that sells tax and accounting services, said in a press release.

If the U.S. Federal Reserve Bank increases interest rates in the coming year, as some economists are expecting, emerging markets, such as Vietnam, could follow. That would increase borrowing costs for companies, increasing their vulnerability to debt.

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However it estimated that only a fraction of that capital could be released, $11 billion, because some of the capital has to stay in the business cycle. Analysts said inventory and outstanding invoices, known as accounts receivable, where the best bet for improving efficiency. That could mean that too much inventory is being held, or that companies are waiting too long to be paid by customers. (VOA)