Thought for
the day
“Stand upright, speak thy thoughts, declare The truth thou
hast, that all may share;”
-
Voltaire (French, 1694-1778)
Word of the
day
Analysand
(n)
A person undergoing psychoanalysis.
(Source: Dictionary.com)
Shri Nārada Uvāca
Could we draw some parallel between Malala and Modi or the
thought is completely blasphemous?
Reality check @Nifty 6200 - II
Rates
In September RBI began to unwind the exceptional liquidity
tightening measures announced in June-August period to stem the slid in INR. It
was maintained that the difference between the MSF and repo rate will be
brought down to 100 basis points. Since then MSF rates have been reduced by
125bps and Repo rates have hiked by 25bps. Currently the difference between
short term MSF (9%) and Repo rates (7.5%) stands at 150bps.
RBI also announced an intention to return to normal monetary
operations where the repo rate will return to being the effective policy,
recognizing that inflationary pressures are mounting. The governor expressed
his intent that when the repo rate becomes the effective policy rate, it should
be consistent with inflationary conditions in the economy. The governor also
highlighted that “Let us remember that the postponement of tapering is only
that, a postponement. We must use this time to create a bullet proof national
balance sheet and growth agenda, which creates confidence in citizens and
investors alike.”
This read with (a) firming yields globally (b) persisting
inflationary pressure and (c) constant need to defend INR by augmenting
reserves through higher flows – implies that we may likely see repo rates
rising by 25bps on 29th October and perhaps another 25bps in
December.
Benchmark 10yr yields currently at 8.6% are therefore not
likely to come down in any significant proportion in next few months. For all,
these may actually firm up a little.
Historically, with yields close to 9%, inflation at 7%, GDP
growth sub 5% and earnings growth in single digit, equities have not done well
for too long.
For household investors with long term tax free bonds
yielding close to 9%, the bull case equity returns from current level are
certainly not attractive enough.
Liquidity
Despite the recent measures taken by RBI to ease liquidity
conditions, money market continues to be tight with overnight rates averaging
over 9% and daily deficit persisting over INR1000bn.
The informal money market rates are currently running over
24% pa, a sign of extreme tight liquidity conditions. With busy season already
on, and elections on the horizon, the situation is not likely to ease in next
few months.
To the contrary, worsening working capital cycle, fiscal
tightening leading to lower government spending and likely withdrawal of PSU
cash balance from the banking system (for dividend or capex) could further
accentuate the tightness. The recipients of dividend from PSU would be
government, DFI and household investors. None of these is likely to re-invest
in equity market.
The global liquidity though is easy at this point in time.
This may remain so for next few months at the least. So keep watching daily FII
flows and hold your breath.
…to continue tomorrow
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