Some food for thought
"Paris ain't much of a town."
—babe Ruth (American Athlete, 1895-1948)
Word for the day
Temerity (n)
Reckless boldness; rashness.
First thought this morning
A discussion with an NRI friend last evening was quite
revealing. Like many other NRIs settled in developed countries, this one is
also hypochondriac. He, like many of his peers, sincerely believes that he
suffers from serious "home sickness" and must return to his
"roots" someday. Paradoxically, in the same breadth he makes intense
efforts to pull his friends and relatives out of their roots and migrate to
"better life'!
No one denies that the quality of material life is much better
in those countries as compared to India. With the spread of awareness about
Yoga, Indian culture etc., the spiritual life has also improved significantly
in past couple of decades. Many spiritual gurus are focusing more on Indian
Diaspora abroad, than they bother about the poor folks here.
Then what is that makes NRIs feel home sick!
After 2hrs of intense interrogation, what all I could make is
that they really miss the chaos. The bustle in markets, streets, and temples,
they have grown with is part of their DNA. Orderly life is something they like
but cannot love.
The second and third generations, which have not experienced the
Indian chaos, have little or no empathy with their so called roots, and hold
desire to come back. These people belong there and there only; an occasional
visit to see Tajmahal or pay homage to Tirupati Devsathanam, notwithstanding.
We seriously need to pause for a minute and reconsider twice
before hitting the forward button on the social media messages that intend to
make us feel proud of the achievements of NRIs, especially the second or third
generation.
Chart of the day
From inflation to growth - MPC changes path, midway
A farmer asked an economist the way to the place he wanted to
go, the economist answered “to go there I would not start from here!”
The fiscal headwinds to growth, sticky core inflation, rising
global uncertainties, muted business confidence, poor investment growth,
diminishing household savings, capital starved banking system, worsening
current account, etc. — all is well documented, debated and largely
assimilated.
Despite all this, on Wednesday evening, Vice Chairman of NITI
Ayog opined that "This is the right time for RBI to think about a rate cut
and give investment a boost so that all engines start firing. The ball is in
the RBI's court."
There was nothing new in this. Ministers and planners have
always been seeking rate cuts to spur growth. But RBI has not been obliging
them often. Especially, since the then RBI governor Raghuram Rajan made
inflation targeting fulcrum of the RBI monetary policy.
This time however MPC did oblige the mandarins in North Block
and Yojna Bhawan. Ignoring the dissent of two members (Dr. Viral Acharya and
Dr. Chetan Ghate) , MPC went ahead and cut the rates by 25bps. The Committee
also changed its monetary policy stance from calibrated tightening to
"neutral", implying that it is open to even more cuts in future.
In my view, by making this cut, MPC has used half the water in
its bottle for washing hands, while crossing a long desert.
While the positives from the latest policy announcement are few
and widely discussed, I would like to highlight a few areas of concern that an
investor must take into account:
(a) Transmission of
rate cut would be possible only if banks cut the deposit rates also. Given that
the gap between deposit and credit growth has been widening for past couple of
years, lower deposit rates may not augur well for the health of the overall
banking sector.
Moreover, considering that the in the Finance Bill finance
minister has proposed to enhance the threshold for TDS on savings deposits to
rs40,000 from the present Rs10,000, there are decent chances that lot of
"cash deposits" move to small savings. The higher deposit rate
differential may only make the shift faster and deeper.
(b) 25bps rate cut is
not likely to result in any dramatic increase in investments, which is more a
function of demand growth and output gap. MPC in its own policy statement has
admitted "some indicators of investment demand, viz., production and
imports of capital goods, contracted in November/December. Credit flows to
industry remain muted".
In fact MPC noted in its policy statement that "the output
gap has opened up modestly as actual output has inched lower than potential.
Investment activity is recovering but supported mainly by public spending on
infrastructure."
(c) In the press
conference following the MPC meeting, RBI governor hinted that the inflation
target has been achieved and RBI shall now decisively act to foster economic
growth.
I am not sure, if this was the intent while establishing MPC.
Anyways, 25bps in no way is a decisive action. If inflation has been reined,
RBI should have unleashed material amount of liquidity and cut rates by
emphatic say 50-75bps to make a difference to growth trajectory. Even with this
cut, MPC has cut GDP growth projection for FY20 to 7.4%.
Besides, in past few years RBI has been pathetically off the
target insofar as the inflation forecast is concerned. MPC should have
discounted that track record.
Remember, liquidity tightening is usual during general
elections. The "cash" would need to be transported to constituencies
before the code of conduct comes into effect and EC takes over the security
forces. Besides, advance tax outgo and delayed refunds and payments (to manage
fiscal deficit) shall also impact liquidity in next couple of months.
(d) The graded risk
weightage of NBFCs (based on their credit rating) is principally a good
measure. However, this may not be the most appropriate time to implement this.
First, the credibility of credit rating agencies is at their
lowest post IL&FS default that was AAA rated the day it defaulted on its
obligations.
Second, this may actually exacerbate the crisis in financial
sector, as the cost of funds may increase disproportionately for the struggling
lenders which may be rated lower.
Upward shift and steepening of yield curve may make business
environment even tougher for NBFCs.
Industry consolidation is good; elimination of inefficient
operators better and highly desirable; but this may not be the best time to do
this.
(e) Lower Indian
rates may result in narrowing of yield differential between INR assets and
foreign currency assets. Besides, INR which is under pressure from worsening
CAD, may weaken a little more. The vicious cycle may get completed if Fed does
hike (against popular expectations) and USDINR carry trade unwinds violently.
To make my point clear, I shall stay cautious about these
factors. But MPC has added not an iota to my worries yesterday.
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