Tuesday, June 2, 2015

To cut or not to cut is not the question

Thought for the day
"The only thing to do with good advice is to pass it on. It is never of any use to oneself."
-          Oscar Wilde (Irish, 1854-1900)
Word for the day
Agog (adj)
Highly excited by eagerness, curiosity, anticipation, etc.
(Source: Dictionary.com)
Malice towards none
Reports suggest that the government is considering Exit Exam for MBBS doctors.
What problem does this exam seek to solve?
Can't Munna Bhai pass this exam also by proxy?
Do we have Munna Bhais only in Medical profession?
 

To cut or not to cut is not the question

 
The GDP date for 4QFY15 has further queered the pitch for Gov. Rajan.
The government authorities are claiming that the data shows that the economic recovery is taking off and rate cut at this point in time will provide the necessary escape velocity. The finance minister himself has publically coaxed Gov. Rajan to cut rates to help the struggling industry and infrastructure developers.
The independent economists however are discounting the recent GDP data as accounting miracle that is not fully corroborated by the evidence available from other sources like corporate financial results, consumption data, industrial production numbers, credit data and other lead indicators. The general view is that economy is still taxing slowly towards the runway and take off is at least couple of quarters away.
The analysts community is mostly expecting a 25bps cut followed by a long pause. Flipping through various reports, I could find little reasoning behind this expectation. Most of it is "just like that".
In my view, the rate decision of Gov Rajan this morning will be driven more by "INR" than "Industry".
Given the elevated level of stress on corporate balance sheets, as evident from the FY15 annual accounts, low demand environment, and poor credit growth despite comfortable liquidity conditions threeo things are more than clear - (a) few bankers want to take risk of giving fresh money to a stressed corporate or even a new project; (b) few corporate balance sheet will justify further lending even if rate fall by 50bps; and (c) some aggressive bankers may be chasing households with high priced relatively small ticket consumer loans, compromising prudent norms and laying foundation for a credit bubble 4-5yrs down the lane.
Under these circumstances a 25bps repo cut would be mostly redundant.
Gov. Rajan would not like to make a bigger cut, as it would risk further strengthening of already strong INR; force more liquidity infusion for buying USD; and thereby weakening the fight against price rise.
From market perspective I will not be too enthusiastic about a rate cut this morning. A sharp rise in financials may provide some short selling opportunities.
A cursory scrutiny of the FY15 annual accounts of profit making private sector undertakings shows a distinct trend of tax refunds and interest on tax refunds. State Bank of India alone reported Rs10bn interest income on IT refunds.
The official claims of no Tax Terrorism need to be closely examined by analysts in light of this trend. An informal interaction with many large tax payers and PSU managers suggests that the practice of forcing tax payers to pay higher advance tax to achieve tax collection targets is still prevalent. This "terrorist" way of deficit financing belies the government claims of "peace" with tax payers. Given that the rate of interest payable on IT refunds is higher than the present 365d treasury bill yields, it also does not make much financial sense.

No comments:

Post a Comment