The economic data appears to be worsening every minute.
Notwithstanding the sharp rally in stock market, there is little that indicates
toward improvement in macro environment anytime soon.
Before investors could digest the below expectation 1QFY14 GDP
data released last Friday, manufacturing PMI data for August further clouded
the outlook. Indian factory activity shrank for the first time in more than
four years last month.
To further weaken the consumption story, latest data suggest
that Indian diesel consumption was down 6.6% in Jul'13 and 2% in Apr-Jul'13. It
is important to note that India accounted for 38% of global diesel demand
growth in 2012 (12% in 2011). Diesel cracks (margins on producing diesel in
refinery) are down 35% over last 8 weeks and petrol cracks down 58% over last
six weeks.
Moreover, Singapore gross refining margins (GRMs) have
completely collapsed over past 6weeks. This might be a reflection of demand
collapsing in Asian economies.
This suggests that there is a decent probability of Asian
economies revisiting 1997-98 crises. The worrisome part is that unlike 1998
India is no longer an insulated economy.
If US Federal Reserve (Fed) decides to slow down its bond buying
program (tapering) as expected, emerging markets would begin to prepare for
withdrawal of large pie of US$3.9trn invested in emerging markets over past
four years. A disorderly adjustment might cause mayhem in the short term.
In context of India, Fed tapering should generally lead to
higher rates globally and a stronger dollar. Theoretically both these trends
should neutralize each other insofar as INR is concerned. However, rise in
outflows or no inflow during the period of adjustment may cause sharp INR
depreciation.
A weakening currency and rising interest rates, when domestic
demand, both public and private, is collapsing may threaten a period of
stagflation at a time when political establishment would be practically
defunct.
In our view, the government and RBI have sensed the storm that
is brewing. The helplessness shown by the prime minister indicates to this.
Desperate measures suggested by oil minister indicate to this. The vanished
trademark smile and missing twinkle in the eyes of finance minister indicate to
this.
In all this despondency there is suggestion to postpone RBI
policy meet to a date after the Fed meeting on 17-18th September. In
our view, this will tantamount to complete surrender. The message that will go
out would be “our monetary policy is now subservient to Fed policy”. A bad
precedence would thus be created.
In our view, it is rather the time to anticipate the worst and
prepare for that, rather than waiting for Fed to spell out its policy and then
react to that or exodus of foreign investors to begin.
Sharing the war plan with investors and businesses would only
help the confidence level and anxiety.
Thought for the day
“Girls you've gotta know when it's time to turn the page.”
- ―Tori Amos, Tori Amos: From the Choirgirl Hotel
- ―Tori Amos, Tori Amos: From the Choirgirl Hotel
Word of the day
Auspicate (v)
To initiate with ceremonies calculated to ensure good luck; inaugurate.
(Source: Dictionary.com)
Shri Nārada Uvāca
Have you ever heard of a parliamentary democracy where the head of the government pleads ignorance about whatever ministers of his cabinet do or have done?
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