RBI policy, NFP and jobless growth

Today is an important day, the RBI monetary policy was out at 10:00 am IST with the RBI Governor reading the prepared statement. On the global front, NFP data will be out at around 6:30 IST.

On the RBI policy, the committee decided to keep the rates unchanged and announced the GSAP 2.0 edition with 120k Cr INR. On the liquidity front, the Governor stated that the focus of RBI is shifting increasingly from systemic liquidity to its equitable distribution. Unconventional monetary policies will be needed to distribute liquidity amongst all stakeholders. He also added that the GSAP operation along with cancellation, devolvement, and exercise of green shoe options in GSec auctions clearly convey the RBIs view to the market. To counter the volatility impact of the global capital flows into India, Governor mentioned that RBI acted in the spot, forwards and futures market resulting in orderliness and stability in market conditions. The mood of the statement overall was more sanguine than last time with a second wave of covid clearly creating doubts regarding the economic recovery. But with no major surprises in the policy, the market reaction was tepid with 10-year trading currently at 6.01 against 6% in the previous close.

In yesterday’s news, the precipitous drop in Rupee forwards for the second day in a row and the bond auction devolvement later in the day made everyone take notice. On the forward markets, it appeared that disappearance of a major player on the buy side has suddenly shifted the equilibrium level downward. In its absence the price has to reach a natural level negotiated by importers and exporters, which will emerge only in due course. On the weekly bond auctions, out of 32k Cr INR on sale, the amount of 12.7 Cr INR got devolved on PDs. Maybe the market was trying to be cautious ahead of the MPC which was not something totally unexpected.

Globally the data on the initial jobless claims number came slightly better than expectations, with the number coming down below 400k for the first time since the pandemic started. On the NFP side, which is due to be released today, expectations are that close to 645k job were created in the month of May. This is against the 266k number in April which was a huge miss from the expectation. The unemployment rate is expected to improve to 5.9% from 6.1%. Now on the job front a speech by St Louis Fed President James Bullard makes for a good read. The speech titled An Assessment of US Labor Market points out that even when the payroll employment remained 8.2 million below in April 2021 compared to February 2020, the GDP per se has completely recovered and is now in expansion territory. What this essentially means is that economy is producing more output even with 8.2 million fewer people.

Now readers should pause here and try to assimilate full purport of this statement. It is well-nigh possible that those millions of jobs will no longer be required. The productivity march has made many jobs superfluous. These sudden changes are hard to digest and can have an implication beyond the economic sphere. One would do well to remember that though they are unemployed they are not disenfranchised. Hence the welfare policies at least in the DM world are here to stay. Given that tax increases are difficult to do (read news on Biden’s administration toning down rhetoric on corporate tax hike) the only way to fund welfare is to borrow.