Bring down the rates
In today's newsletter we talk about RBI's big decision on interest rates and Samsung's move to shift its production base to India.
The Story
So everybody’s looking forward to the Monetary Policy Committee meet to see if RBI is going to cut interest rates. And the overwhelming consensus is that the RBI will go ahead and do it. This hope is largely shaped by the narrative that India is in the midst of a slowdown. And offering cheap loans is a surefire way of stimulating the economy.
However what if it’s not? What if there are issues buried deep within, that render the whole exercise useless?
It’s possible. So let’s talk about the problems.
The first one is called the transmission problem i.e. will the cut in RBI’s interest rates translate to cheaper loans at your neighbourhood bank? The RBI has been fighting hard to make sure it does. In fact, it only recently forced all banks to offer loans with interest rates that mimic the movement of RBI’s repo rate (read as the interest rate at which banks borrow from the RBI). So this way, the bank is obligated to cut its rates when the RBI does it and you effectively solve the transmission problem in one blow.
The downside is that banks lose some flexibility in pricing their loans i.e setting interest rate. In an ecosystem where banks are thriving, this loss in flexibility wouldn’t be a problem. However, considering most banks in India are struggling, this whole forcing thing could potentially backfire to a certain degree.
The second problem is the effectiveness problem — How effective are the rate cuts at all?
Answer — Not everybody is convinced that it is.
One argument is that Indians don’t borrow to spend, or at least not as much as other countries. So how exactly is this going to stimulate demand?
The counter-argument is that when firms borrow at cheaper rates some of the benefits might trickle down to consumers by way of reduced prices. Maybe that’s how a rate cut stimulates demand. It’s debatable.
But then there is an even more fundamental concern. If RBI decides to cut rates today it’ll be the fifth time they’ll have done it within a span of one year. And what were the benefits of the last four rate cuts? One could argue that the situation has only deteriorated over the past year. So if we aren’t seeing tangible benefits accrue out of reduced interest rates, is this simply an exercise in futility?
At the moment, I don’t think anybody knows for sure. But they’re trying and we hope that the economy finds a way to claw itself out of the dumps irrespective of what the RBI does tomorrow.
Fingers crossed then.
Goodbye China, Hello India
So, Samsung is packing its bag in China and is now eyeing to shift its production base to places like India and Vietnam. The shift in strategy could directly be attributed to the rise of Chinese homegrown brands like Huawei and Xiaomi who seem to have knocked the South Korean giant from its tall perch leaving it with a mere 1% market share in China compared to the 15% they commanded back in 2013.
But what does it mean for India?
I don’t know if you’ve noticed this but Samsung has been introducing a bunch of really high end looking phones at very competitive prices of late. And they’ve been able to do this because they’ve been manufacturing locally, instead of importing them from foreign lands.
Hell, they only recently set up the world’s largest handset manufacturing unit in India. And it’s only going to get better from here. With renewed expansion focus in one of the largest emerging markets, Samsung will want to bring down the cost of their phones to compete directly with the likes of Xiaomi.
Because right now, Samsung is the 2nd largest smartphone seller in India with a market share of around 25%. Guess who’s number one? Xiaomi!!! And Samsung is gunning for this place.
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We will see you tomorrow. Until then…