Humpty Dumpty sat on a wall,
Humpty Dumpty had a great fall,
All the king's horses and all the King's men,
Couldn't put Humpty together again.
The prime minister, finance minister, their advisors, and RBI
governor, all would be wondering why the markets are not listening to them.
They have been repeatedly and vehemently exhorting the participants in Indian
financial markets and businessmen that there is no need to panic over falling
INR, higher CAD, rising inflation, declining growth, etc.
They also have been making attempts to convince people that
situation is not as worse as 1991. The finance minister also suggested a couple
of days ago, that the Indian markets should only be concerned about the events
in India and should not react to data and concerns emanating from other
economies like US and EU.
The following questions beg answers:
(a)
Why there is so much emphasis on 1991?
(b)
Through measures like imposing custom duty on
import flat screen TVs for personal use, and barring Indian nationals from
buying property abroad, what the government actually wants to achieve?
(c)
Does FM seriously believe that India is still a
closed and controlled economy that it was during Asian currency crisis of 1997?
In our view, the situation is actually much worse than 1991 and
calls for substantially larger structural reforms that those initiated in 1991.
May be 1991 timeline is critical for the image of the prime minister, as he
would not like to be remembered as someone who undid his own legacy, i.e.,
economic reforms. But you cannot escape any peril just by acting ostrich.
Secondly, by denying any interference in the currency market and
then taking some random irrelevant measures, they are giving all the wrong
signals to the market. In our view, sooner the market forces discover the true
and fair value of INR, better it would be for the economy. For example, USDINR
at 70 may bring current account to equilibrium faster through destroying demand
for imported goods, especially transportation fuel and consumer discretionary,
and giving some edge to exporters.
Thirdly, the fast worsening economic conditions in other Asian
emerging markets like Indonesia and Thailand, suggests that the current
situation has the potential to degenerate into a full blown Asian crisis. Japn
Korea currency war is not helping either. India being not so closed and
insulated as it was in 1997, may suffer substantially through flight of capital
out of Asian emerging economies. It is therefore naïve to suggest that Indian
markets should not watch or react to the external events.
Insofar as the markets are concerned, we maintain the following
targets:
·
Bank Nifty ~8000 by March 2014. Sell all
rallies.
·
Nifty in 4730 – 5850 range till March 2014, with
some downside risk. Risk reward negative at current levels. Sell all rallies.
·
A consistent 3% annual depreciation in INR in
next many years, after the current volatility subsides and USDINR finds an
equilibrium.
·
Yield curve to stay inverted till March 2014 at
the least. Stay parked in the short term debt (upto 2years).
Thought for the day
“It's discouraging to think how many people are shocked by honesty and how few by deceit.”
- Noël Coward (1899-1973)
Word of the day
Psaltery (n)
An ancient musical instrument consisting of a flat box with strings which are plucked.
(Source: Dictionary.com)
Shri Nārada Uvāca
Rajan announces his arrival with India QE.
Is USD1.3bn long dated bond buying enough to defend yields and currency?
Why not, for God sake, say we will buy USD100bn, beginning with USD1.3bn this Friday.
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