"Opposition brings concord.
Out of discord comes the fairest harmony."
—Heraclitus (Greek, 544-483BC)
Word for the day
Wayworn (adj)
Worn or wearied by travel.
(Source: Dictionary.com)
Malice towards
none
The common man is certainly
not interested.
Who are the people, Mr.
Anand Sharma is addressing with so much passion?
Are you surprised?
Governor Rajan surprised the market yet again front loading the
monetary easing by cutting key policy repo rate by 50% to 6.75%, lowest since
March 2011. The market could have celebrated the occasion more enthusiastically
but for the chilly winds blowing from Pacific that kept many participant
indoors.
I have been maintaining that RBI monetary policy may not have much
impact on Indian equities in near term. I see no reason to change this view.
Nonetheless, I find it pertinent to highlight key points in the
much awaited policy statement of the Governor Rajan that made me thoughtful. I
found the statement a mix of positives and negatives - more negatives than
positives from equity market view point.
First positives:
*
Indian Manufacturing has been in expansionary
mode for the ninth month in succession. Industries such as apparel, furniture
and motor vehicles have experienced acceleration. Furthermore, the resumption
of growth in production of consumer durables in recent months, after a
protracted period of contraction over the last two years, is indicative of some
pick-up in consumption demand, primarily in urban areas.
*
Rising public expenditure on roads, ports and
eventually railways could, however, provide some boost to construction going
forward.
*
Year-on-year food inflation dropped sharply, led
by vegetables and sugar. Cereal inflation moderated steadily during
April-August.
*
Liquidity conditions eased considerably during
August to mid-September. In addition to structural factors such as deposit
mobilisation in excess of credit flow, lower currency demand and pick-up in
spending by the government contributed to the surplus liquidity.
*
Foreign exchange reserves rose by US $ 10.4
billion during the first half of 2015-16.
*
Despite the monsoon deficiency and its uneven
spatial and temporal distribution, food inflation pressures have been contained
by resolute actions by the government to manage supply. The disinflation has
been broad-based and inflation excluding food and fuel has also come off its
recent peak in June.
*
The coming Pay Commission Report could add
substantial fiscal stimulus to domestic demand, but the government has
reaffirmed its desire to respect its fiscal targets and improve the quality of
its spending.
*
While the Reserve Bank’s stance will continue to
be accommodative, the focus of monetary action for the near term will shift to
working with the Government to ensure that impediments to banks passing on the
bulk of the cumulative 125 basis points cut in the policy rate are removed.
*
CPI inflation is expected to reach 5.8 per cent
in January 2016, a shade lower than the August projection.
...and the areas of concern are—
*
Since August 2015, global growth has moderated,
especially in emerging market economies (EMEs), global trade has deteriorated further
and downside risks to growth have increased.
*
Since the Chinese devaluation, equity prices,
commodities and currencies have fallen sharply. Capital flight from EMEs into
mature bond markets has pushed down developed market yields, and risk spreads across
asset classes have widened.
*
In India, a tentative economic recovery is
underway, but is still far from robust. Rural demand remains subdued as
reflected in still shrinking tractor and two-wheeler sales.
*
External demand conditions have turned weaker, suggesting
a more persistent drag from lower exports and cheaper imports due to global
overcapacity. This contributes to continuing domestic capacity
under-utilisation, decelerating new orders and a rising ratio of finished goods
inventories to sales.
*
As a result of still tepid aggregate demand,
output price growth is weak, but input material costs have fallen further,
leading to an increase in margins for most producers. Weak aggregate demand
appears to have more than offset the effect of higher margins to hold back new
investment intentions.
*
Some forms of bank credit such as personal loans
grew strongly as did non-bank financing flows through commercial paper, public
equity issues and housing finance. (This read with "lower currency demand,
indicates much lower business activity at retail level, elevated financial
stress and rising household leverage.)
*
With services exports moderating, the widening
of the merchandise trade deficit could lead to a modest increase in the current
account deficit (CAD) during Q2.
*
The median base lending rates of banks have
fallen by only about 30 basis points despite extremely easy liquidity
conditions. This is a fraction of the 75 basis points of the policy rate
reduction during January-June, even after a passage of eight months since the
first rate action by the Reserve Bank. Bank deposit rates have, however, been
reduced significantly, suggesting that further transmission is possible.
Markets have transmitted the Reserve Bank’s past policy actions via commercial
paper and corporate bonds, but banks have done so only to a limited extent.
(This highlights the elevating risk profile of corporate debt. Expect more
Amtek like cases in future.)
*
With global growth and trade slower than initial
expectations, a continuing lack of appetite for new investment in the private
sector, the constraint imposed by stressed assets on bank lending and waning
business confidence, output growth projected for 2015-16 is marked down
slightly to 7.4 per cent from 7.6 per cent earlier.
The bond and currency market reaction to the rate cut was also bit
surprising. One would have expected a larger move both in yields and INR. May
be the market wants to hear more from the governor before making a decisive
move.
