"Appreciation is a
wonderful thing: It makes what is excellent in others belong to us as
well."
—Voltaire (French 1694-1778)
Word for the day
Atonement (n)
Reparation for a wrong or
injury.
Malice towards none
Why no one from political
class appears on TV discussions about Dera Sachha Sauda and Honeypreet, while
it is a common knowledge that almost all political parties sought patronage of
Dera, Baba and Baby.
First random thought this morning
Six days of drive through three states, three ATM withdrawals,
five gas fillings, 15 meals and some shopping in strictly cash only markets —
not even a single Rs2000 bill seen anywhere.
It's hard not to get suspicious.
The suspicion I get is that either RBI is systematically
withdrawing Rs2000 bills from the system and introducing Rs500 and Rs200 bills
instead; or all unaccounted money has been converted into pink notes and stored
safely in some dark rooms.
What could cause a bear market - 3
Last week, I started a discussion regarding what
could cause a bear market in Indian equities (see here and here). Taking the discussion forward, in my view the
following could go wrong making case for a deep correction in equity
valuations.
Please note I definitely do not
intend to apply the Murphy's law here that "whatever can go wrong, will go
wrong." I am initiating this discussion just to make sure that I am
prepared for the worst, in the eventuality if things do begin to go the wrong
way.
1. Oil
prices: FY15-FY16 GDP got a significant boost from the collapse in
global crude prices. The growth accelerated despite poor consecutive monsoons.
Since then the global crude prices have stabilized around USD50/bbl. The global
consensus is that the oil prices may not fall much from the current levels and
eventually stabilize in USD55-60/bbl range in 2019-2020. This forecast
juxtaposed with medium term INR forecasts of Rs68-69/USD, and commitment of the
government to keep fuel pricing completely market driven, would suggest we may
see some adverse impact of oil on overall GDP growth.
2. Twin
deficit: In past four years, one of the remarkable improvement in
Indian macro parameters has been in the current account deficit (CAD) and
fiscal deficit (FD). The CAD improved from over 5% of GDP in FY13 to less than
2% of GDP in FY17. However, CAD has now bottomed out and likely to rise in FY18
and FY19. Though with over USD400bn in reserve and still strong capital flows,
the financing is not seen as a problem.
The spiral effect of GST is
expected to continue impacting GDP well early parts of FY19. This clouds the
outlook for ambitious tax collection growth budgeted by the government.
The central government has so far
walked a very tight rope on fiscal discipline. But some cracks are showing in
the State fiscal gaps. As the private investment remains uncertain and
consumption not showing much promise either, public consumption and investment
would be needed to support the growth from collapsing closer to general
elections in 2019. Recent cut in excise duty on fuel may be seen in this
context.
As per advance estimates, the
kharif crop this season could be 2 to 3% lower vs. last year. This may keep the
stress in rural economy at elevated level, giving rise to demand for loan
waivers from many other states, just before key elections.
3. Rates:
Irrespective of the slowdown in economic growth and slowest credit growth seen
in many decades, there is little visibility of a sharp correction in lending
rates and bond yields from the current levels.
Rise in global rates, further
write downs on stressed assets as bankruptcy resolution picks up, likely rise
in government borrowing, slowdown in portfolio flows, and upward risks in
inflation outlook, and rise in demand for formal credit as informal markets dry
up, may prevent any meaningful correction in rates from current levels....to
continue tomorrow
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