"Corpses are more fit to be
thrown out than is dung."
—Heraclitus (Greek, 544-483BC)
Word for the day
Minimax (n)
A strategy of game theory
employed to minimize a player's maximum possible loss.
(Source: Dictionary.com)
Malice towards
none
PM Modi is able to inspire
all but Congress and her associates!
Mind your expectations
If one were to go by media reports - (a) all the market
participants are keenly waiting to hear RBI governor this morning; (b) a large
majority has already assumed and assimilated a 25bps cut in policy repo rate;
(c) a more aggressive easing will catalyze a sharp rally in Indian equities led
by rate sensitive financials, realty, auto and infra sectors; and (d) a 25bps
cut with no clear promise for more cuts will disappoint the markets and a sell
off will follow almost immediately.
All seems so simple and well settled. Life cannot be easier than
that!
Without speculating over Governor Rajan what may or may not do later
today, I find it pertinent to note that global markets, including India and US,
are almost there, where these were before US FOMC met earlier this month with
much anticipation and expectations.
There are many more incidental data point that need to be
considered while forecasting market direction on the basis of what RBI governor
does or omits to do. For example, consider the following:
(a) In the previous RBI
rate cycle (Jan 1998- Apr 2003), RBI's primary policy rate fell 500bps from 11%
to 6%. In this period SBI prime lending rate fell 375bps from 14% to 10.25%.
The current cycle began at RBI policy rates 8% and SBI prime
lending or base rate at 10%. Obviously this cycle will be much smaller as
compared to the previous one.
(b) The previous cycle saw
cash reserve ratio (CRR) falling 650bps from 11% to 4.5%. This cycle is
beginning with CRR at 4%. This move along with material re-capitalization of
banks catalyzed a super cycle in Indian banking stocks.
(c) The previous rate cut
cycle (FY1998-FY2003) saw economy growing at 5.4% CAGR. The growth accelerated
with a lag from FY04 onward and averaged over 8% in next five years.
The accelerated global demand catapulted by huge infusion of
liquidity by central banks was one of the reasons responsible for acceleration
in growth. This time global liquidity is almost redundant to global demand.
(d) The producers price
inflation averaged around 4% during FY1998-FY2003, incentivizing investment in
capacity building. This time inflation expectations are much lower, at least
for next 2yrs.
(e) Indian equities
yielded NIL return during 5yr period FY1998-FY2003. The following five years
(2003-2007) yielded over 40% CAGR.
However, in past five years, Indian equities have already yielded
in excess of 5% CAGR. So the returns in this cycle may be much lower as
compared to the previous bull market.
What I infer from these and many such data points is that this
cycle is nothing like the previous one. The cycle may be short and not that
sweet. Neither leveraging nor de-leveraging will be an umbrella theme. Cheaper
credit may not propel consumption or investment like before.
I am therefore keeping my return expectations for next couple of
years very low.
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