Vijay Kumar Gaba

 The classical Bollywood blockbuster Mother India (Mehboob Khan, 1957), was one of many Indian movies of that era that exposed the ugly realties of Indian society, especially feudal dominance, repression of destitute, and exploitation of women. But made Mother India a classic was the courage and grit of a destitute woman, who stood not only against the oppressor but also against her own son who decided to rebel and take the path of crime and violence. One particular instance from the movie that has stuck to millions of minds is about the pledge of gold bangles by the protagonist Radha (played by Nargis) to the unscrupulous money lender Sukhi Lala (played by Kanhaiya Lal) to repay an old debt. In the end, the rebel son of Radha, Birju (played by Sunil Dutt), attacks Sukhi Lala’s household and forcibly takes the bangles and kills Lala to avenge the atrocities done by him to his family, especially his mother. The pair gold bangles thus became the symbol of feudal repression, women exploitation, rebellion by poor and oppressed, and revenge.

Traditionally, gold has been an important means of social and financial security for rural and semi urban population in India, due to poor availability of banking facilities. The success of financial inclusion program in past one decade (especially in past 6years) has however changed the things in many respects. Gold has emerged as key collateral for working capital and emergency credit in past one decade. Though still there is no dearth of exploiters like Sukhi Lala and oppressed like Radha in hinterlands, but conditions have improved materially from 1950s and 1960s. Especially in past one decade, the business of gold loans in organized sector has recorded remarkable growth. Lower rates, easy access, convenient and fast disbursal has made gold loans popular amongst the middle and lower middle class households.

A recent report published by World Gold Council (WGC) highlighted how gold loans are helping Indian households to weather storms, like global financial crisis (2008-10) and Covid-19 (2020).

The following points highlighted in the report are noteworthy for investors, especially the investors in gold loan companies.

·         As of 3Q2019, 52% of investors owned some form of gold, with 48% having invested in the 12 months preceding 3Q2019. The average Indian household holds 84% of its wealth in real estate and other physical goods; 11% in gold and rest 5% in financial assets. Dependence of rural households in physical assets such as gold has been a result of not just love of gold, but also poor banking penetration till lately.

·         Digitalisation of economy and e-commerce penetration are fundamentally altering the age-old scenario, so an element of option beyond gold and real estate in asset portfolio is setting in – though this may take time and may need some catalyst to show tangible results. As of now, love for gold and a window to accumulate wealth without much of the disclosure that financial assets ensue, keeps gold central in rural wealth.

·         Gold loans are popular in both urban and rural areas. They compare favourably with personal loans regarding quicker processing time, no requirement of income proof or prior credit history, and low processing fees. With such advantages, the overall gold loan market has grown from INR 600bn (US$12.6bn) in FY 2009-10 to INR 9,000bn (US$122.6bn) in FY 2019-20, a compound annual growth rate (CAGR) of 31.1% over the last decade.

·         Unorganised gold loan market still accounts for 65% of the gold loan market but organised gold loan market has grown with the market penetration and geographical expansion of financial service institutions and financial inclusion.

·         Gold jewellery kept as a collateral against gold loan by top three gold loan NBFCs (Muthoot Finance, Muthoot Fincorp and Manappuram Finance) totalled 298.8t at end of FY20. The combined gold holdings of these three NBFCs would rank in the top 20 gold reserves of central banks and supranational organizations.

·         Gold loan NBFCs became a de facto choice of consumers during 2006-10 due to their convenience, quick disbursals of loans, and lower interest rates. The growth was also supported by rising gold price during the period.

The organised gold loan market has opportunity to grow with collateralised gold holdings of 1,280t, equivalent to approx. 5% of the total outstanding gold stocks in India. The organised gold loan market can continue to provide lending against gold jewellery both to individuals and small businesses, potentially helping to meet their financing needs. Technology has also become a key enabler in spreading the reach of gold loan business, increasing the penetration of financial inclusion through gold loan industry. The digital offerings in the form of online gold loan (OGL) scheme had become popular since inception.

·         Technology can become a key enabler in the growth of the gold loan market in India. Gold loan NBFCS have already embraced online gold loan scheme which has increasingly become popular since its launch. But more can be done in this area with launching of self-servicing kiosks in branches and public location, launch of gold valuation machine. e-KYC and loan disbursement and repayments using e-wallets and prepaid cards.

S&P expects NPAs to rise

The rating agency S&P Global, has cautioned that the Indian bank NPLs will rise to 10%-11% of gross loans as forbearance is phased out. The rating agency however believes that Top-tier private sector banks and finance companies have sufficient capital buffers but public sector banks would need more capital to tide over the crisis.

“India financial institutions will likely have trouble maintaining momentum after the amount of new nonperforming loans (NPL) declined in the first half to Sept. 30, 2020. S&P Global Ratings believes forbearance is masking problem assets arising from COVID-19. With loan repayment moratoriums having ended on Aug. 31, 2020, we expect to see a jump in NPLs for the full year ending next March.”

Monetary policy at critical juncture

In past few days the weather in India has changed rather swiftly. The winter has set in couple of weeks of early. The higher mountains are already covered with snow. North of Vindhyachal, the air has distinct chill; in South the weather is pleasant. The atmosphere is generally hazy, with heavy cool air not letting the pollution fly away.

In political troposphere also, the heat has subsided with conclusion of intensely contested elections for Bihar assembly. However, the political stratosphere continues to remain hot and dusty, as the political leaders move further east towards West Bengal with their retinue.

In financial markets also the season has changed. Past couple of months has not seen any noticeable disaster in corporate debt sphere. Hopes of recovery have been rekindled with many beleaguered borrowers (DHFL, IL&FS, Jet etc.) showing some encouraging signs. The suspended debt schemes of Franklin Templeton have also given hopes to investors that a significant part of their money may be returned in next 6months.

In stock markets, the quarterly result season has just ended. The market participants were keenly watching the financial results of companies for the July-September quarter, as it was the first quarter after the state of total lockdown imposed in March ended and the economy began to open up. The corporates have mostly surprised the market participants positively. The results and commentary for the forthcoming quarters have been mostly encouraging. The markets have not only warmed upto the idea of normalization in growth in 2021, buy heated up significantly, rising to new highs.

I find the following views and opinions of various brokerages noteworthy:

GDP in 2QFY21 to decline, farm sector to do well

There is near unanimity amongst analysts and economists that the GDP data for 2QFY21, to be released this Friday, will show a negative YoY growth; though there is no consensus on the extent of GDP contraction. The estimates vary widely between 5% and 11%. It is also a consensus that farm sector has done remarkably well in 2QFY21.

I find the following views of Nirmal Bang Institutional Equity Research nearest to my own estimate:

GDP in 2QFY21 is likely to decline by 8.2% YoY. Agriculture & Allied sector is likely to do well with a growth of 4% YoY in 2QFY21. Industry (excluding Construction sector) is likely to witness a decline of 4.6% YoY. The Services sector (including Construction sector) will likely decline by 11.2% YoY in 2QFY21 with the sharpest contraction of 25% YoY in Trade, hotels, transport and communication sector. We expect a sharp improvement in the Construction sector, which will decline by 6.5% YoY in 2QFY21 after declining by 50.3% YoY in 1QFY21.

We continue to factor in a protracted economic recovery. For FY22, on a low base, we are working with a GDP growth of 6%. In our view, containment measures may well get extended into 1HCY21, making us maintain our cautious view on growth.

On top of a bumper Kharif (monsoon) crop that has likely aided the 2QFY21 GDP growth, the latest sowing data indicates that Rabi (winter) crop is also likely to be doing well. As per Prabhudar Liladhar research Fertilizer and farm chemical growth data for Rabi crop is quite encouraging. There is 18% growth in total sales in October driven by 34%/8% growth in Urea/NPK. SSP placements up 21% YoY. Sale of domestically manufactured fertilisers are up 13% while that of imported fertilisers are up 34% YoY, driven by Urea.

IIFL securities recently wrote, “…the sudden recent rally in crop commodities could prove a significant tailwind for CY21. In the broader specialty chemical industry, Indian companies reported mixed results, but still far better than their leading global counterparts, who remained under serious pressure.”

2QFY21 earnings, broadly buoyant

As per Motilal Oswal Securities - The Sep-quarter (2QFY21) corporate earnings season was a blockbuster one, with big beats and upgrades across our Coverage Universe. With an upgrade (>5%) to downgrade ratio (<-5%) of 4:1, this has by far been the best earnings season in many years. 63%. Nifty sales declined 6.7% YoY (est. -5.2%), while EBITDA/PBT/PAT reported growth of 8%/14%/17% YoY (est. -0.3%/-7%/-5%). 62% of Nifty-50 companies reported a beat on our PAT estimates, and only 18% posted results below our expectations.

HDFC Securities, also confirmed this view. A recent note by the brokerage stated - Q2FY21 was a strong quarter. Key highlights of the quarter: (1) Q2 margins beat estimates across multiple sectors due to sharp cost-cutting initiatives and improved pricing power in the wake of lower competition; (2) positive management commentaries on Sep/Oct exit run-rate of revenues as unlocking led to sharp demand rebound in multiple sectors; (3) market share gains for the larger companies; (4) much improved collection trends for lenders; (5) continued uptick in capital markets activity, leading to strong performance for brokers and exchanges.

Consensus turning bullish on markets

As the benchmark indices regain the entire loss from January – March 2020 and trade at their all time high levels, the brokerages seem to be turning bullish on Indian equities.

Morgan Stanley write in a recent note: “COVID-19

infections appear to have peaked, high-frequency growth indicators are coming in strong, government policy action is beating expectations, and Indian companies are picking up activity through the pandemic. Thus, we expect growth to surprise on the upside, rates trough to be behind, and real rates to remain in negative territory for several months. We lift our F2021,F2022, and F2023 EPS estimates for the BSE Sensex 15%, 10%,and 9%, respectively – we are now between 6% and 7% above consensus estimates. By our estimates, the market will be trading at 16x forward earnings at our new BSE Sensex target of 50,000 in December 2021 (our old index target was 37,300 for June 2021).

Sector wise outlook

Motilal Oswal Securities published a compendium of management commentary post 2QFY21 results. The key highlights of the commentary are as follows:

Banking: Commentaries of banks suggest there was an improvement in growth and asset quality. The asset quality outlook is much better than initially feared as collection efficiency picked up sharply in 2QFY21. Collection efficiency in the Top 4 private banks was above 95% and for SBI it was 97%, excluding the Agri segment.

Consumer: Rural demand continues to outperform urban demand. Some of the cost-saving measures implemented by companies during the lockdown are likely to sustain going forward.

Auto: A preference for personal mobility, pent-up demand, and normalization of the supply chain have led to demand recovery. However, most companies mentioned being cautious due to uncertainty regarding demand sustainability post the festive season.

IT: management commentaries indicated the pandemic has acted as a tailwind for the sector - as enterprises are undertaking cloud adoption at a faster pace and digital transformation at the workplace has accelerated.

Cement: companies have informed that cement prices have firmed up across regions in Oct'20 and were up by INR10/bag over Sep'20 on average - despite the quarter being a seasonally weak one.

Healthcare: Despite the COVID-led impact on the Domestic Formulation (DF) segment, the intensity of YoY decline is gradually reducing in Acute therapies with an increase in patient-doctor-MR connect. Operational cost-saving benefits are expected to continue over the medium term.

Capital Goods: Managements across the board attributed to recovery in the Products business being faster v/s the Projects business.

Textile sector outlook

As per a recent note by Motilal Oswal Securities, earnings visibility has improved across players in the textile sector. The Home Textile industry witnessed a strong demand revival during 2QFY21 on high demand from big retailers. Apparel/Fabric/Yarn players are tail-riding on an industry revival: These players may benefit from a paradigm shift in demand to India, huge build-up of pent-up demand and benign raw material prices. The USD:INR is depreciating at a faster pace than the USD:RMB, which has made Indian exporters competitive v/s the Chinese. demand, Indian manufacturers are increasing capacities and focusing on increasing utilization levels.

Production linked incentives (PLI) seen as game changer

The recent measures taken by the Indian government to promote manufacturing in India as structural positive for Indian economy. Goldman Sachs in a recent note mentioned—

“We see the “Make in India” (MII) initiative potentially having a profound impact on India’s economy. Plans to make India more self-reliant could see the share of manufacturing in GDP rise from 17% to 25% over the next few years, creating 100mn new jobs. Knock-on impacts could see India better develop its consumption potential, boosting earnings for domestic companies over time.

In a scenario of full implementation, our Macro team expects real GDP growth to pick up to 8% in the next five years, vs their base case of 5-6%. The team does not bake full implementation of MII into their numbers, given the undoubted challenges: improvements in manufacturing competitiveness, implementation of production-linked incentive (PLI) schemes, better infrastructure, reforms in labour/land laws, more private sector participation, continued political will, and growth in exports. In a recent note, the team noted that Vietnam and India were the most mentioned destinations as alternates to China for manufacturing.”

Global Macro

USD Outlook: Goldman Sachs featured views of three experts in a recent note about the outlook for the US Dollar.

It’s not just the rate of global growth that matters for the Dollar's value, it’s how global growth compares to US growth. Even if the global economy is recovering, if US growth outpaces global growth, the Dollar will remain supported. - Barry Eichengreen (UC Berkeley)

The Dollar’s value surged at the beginning of the coronavirus recession… but it has lost ground since as the global recovery has gained traction. This pattern will likely persist... with good news on the global economic recovery probably weighing on the Dollar… almost regardless of how the US economy is performing relative to key trading partners. - Zach Pandl (Goldman Sachs)

By all logic, the Dollar’s dominance in the global monetary system should be declining… But the reality is that the Dollar’s position remains as dominant as ever. - Eswar Prasad (Cornell)

Bitcoin: JP Morgan in the meanwhile admitted its mistake in rejecting Bitcoin as a scam. From there recent notes however it appears that the brokerage is now inclining towards accepting the cryptocurrency as an attractive asset.

Eric Peters, CIO of Hedge Fund One River Asset Management, reportedly proclaimed (about Bitcoin) that "There Is A Vague Sense That Something Powerful, Apolitical, Transnational, Is Emerging".

Gold: After major underperformance of Gold ETFs in past three months, many analysts have started questioning the rally in gold.

Regulation

RBI: Over weekend, a committee set up by RBI submitted its report, suggesting major changes in the regulatory framework for private banks, including the ownership structure and promoter holding norms. The market seem to have received the recommendation as a major positive.

A dissenting note however came from none other than the former RBI Governor (Raghuram Rajan) and Deputy Governor (Viral Acharya). The duo, who are now academicians in the USA, questioned the very rationale of the proposal. As per them, allowing Indian corporates into banking sector would be a bombshell. They argue that in the present times, it is even more important to stick to the tried and tested limits in corporate involvements in banking.

SEBI: SEBI is reportedly targeting analysts meets and conference calls hosted by various listed companies to apprise the participants about the latest developments in their respective company. SEBI feels that this creates some sort of information asymmetry as the managements many share some unpublished price sensitive information with the analysts and large investors participating in such calls or meets. SEBI is considering making it mandatory for the companies to share transcripts, notes and details of all such calls to the public withjin stipulated time in the interest of investors.

Some food for thought

“One can know a man from his laugh, and if you like a man's laugh before you know anything of him, you may confidently say that he is a good man.”

— Fyodor Dostoevsky (Russian Author, 1821-1881)

Word for the day

Fidelity (n)

Loyalty

 Many readers have found my thoughts on “hyperinflation” yesterday little abstract (see Hyperinflation - Highly improbable). They want me to elaborate further on why I think that “hyperinflation” is highly improbable in foreseeable future.

I do not mind sharing the bases of my views on this topic. However, before elaborating my views of “hyperinflation”, I would like to clarify that when I say “hyperinflation”, I do not mean the term in its literal sense, because in that sense it makes no sense in the present day conditions. In the current context, by hyperinflation, we should understand episodes of sustained high inflation over a period of many months.

To put this in further context, please note that “hyperinflation” is generally used to describe situations where the monthly inflation rate is greater than 50%. At this rate, an item that cost Rs1 on January 1 would cost Rs130 on January 1 of the following year. At least, in past few centuries, there is no instance of a global episode of hyperinflation. In the first half of 20^th century there were few localized episodes – the most famous being Germany (1922-23) and Hungary (1945-46).

In past 70yrs, Peru (1980s), Venezuela (2014-16), Yugoslavia (1989-1994), Armenia (1992-93), Turkmenistan (1992-93) and Zimbabwe (2004-08) have seen episodes of hyperinflation. It is conspicuous that all these episodes resulted from either geopolitical reasons (war or collapse of extant political order) or civil unrest within the country resulting in collapse of political and/or financial system. Most of the countries facing hyperinflation were either closed economies or were facing global trade restrictions or disruptions. Besides, all these economies were too small to impact global economy, trade and commerce in any significant measure whatsoever. It would therefore be totally unfounded to expect that hyperinflation could strike a major economy of the world like US, EU, Japan, China, or India in foreseeable future.

Insofar as the probability of the episodes of sustained high inflation occurring over a period of many months in a major economy is concerned, I believe that the chances of that are almost Nil in short to medium term (1-10yrs), unless a major war or civil war breaks out involving some major economies of the world, causing sustained disruption in the global supply chain. The bases of my belief, as stated below, are simple and mostly intuitive:

·         Unlike in 20^th century, the global trade and commerce is now mostly dematerialized. The material, money, and labor move digitally. The rebalancing of demand and supply equilibriums is much faster and efficient than before.

·         Demand elasticity for most products, including food and energy has increased significantly. Alternative products and sources of supply are available to mitigate the impact of any supply shock.

·         The discretionary demand dominates the consumption in most of the developed and large developing economies. The inflation for discretionary products, like electronic gadgets, personal care services, etc. is already high. A large part of global consumption (in value terms) may not be essential and could be scaled back with small effort, without having any substantial impact on human life or global order.

·         The productivity of essential goods, like food, energy, clothing etc has significantly increased in past five decades and there is enough inventory of essential goods in the world to mitigate the impact of any supply shock due to natural calamity etc.

·         The global trade and commerce is much larger, faster and easier as compared to five decade ago. An episode of higher inflation due to supply shock is not likely to last longer.

·         The global economy is significantly more integrated now as compared to first half of 20^th century. The impact of higher inflation in a major economy is more likely to spill to the global economy rather swiftly. Hence, it is highly unlikely that supply shocks in a major economy will remain unattended by global trade partners for longer periods.

·         Given the technology and advancement in the weapon systems, the chances of a prolonged war between major global powers are next to NIL.

·         The “tons of money” that we are bothering about is actually not physical money. Most of it is ‘bytes of money” or digital money. If need arises, this can be destroyed as easily as it is being created. In fact, I firmly believe that all the money created by central bankers of developed economies in past 12years shall be destroyed by the central bankers, as soon as it threatens to spark unwanted inflation.

·         There is enough spare capacity of productive infrastructure and housing, etc. in large economies to absorb excess liquidity of money. I believe that US$1trn of additional flows could be easily absorbed in Indian economy in one month, without stoking inflation of essential items.

Insofar as the reflation of depressed commodity prices (many like Zinc and Nickle have traded below cost of production for many months) is concerned, it is not something to worry about. If at all, it may actually be a cause for celebration as it would signal normalization of the global markets and may mark reversion of extraordinary monetary efforts made in past 12years. Terming this as “hyperinflation” and rushing to the “safe havens” like gold etc. to safeguard from it would actually be quixotic, in my view.

 It was particularly gloomy winter evening of 2008 in South Mumbai. The global financial markets had their knees frozen. One of the top global financial institutions, Lehman Brothers had collapsed a couple of months back. Another global financial giant Merrill Lynch lost its identity to Bank of America. Some peripheral European countries were on the brink of defaulting on their sovereign obligations. The bankers in the financial hub of India (South Mumbai) were staring at massive job losses. Numerous businesses were on the brink. Many large investors had also suffered huge losses in their portfolios. For younger investors and bankers in their 20s and 30s, the conditions were totally unprecedented. The fear, uncertainty, scale of value destruction was overwhelming as they had not experienced anything like that before. Most of the then had seen 5yrs of strong bull market in credit and capacity building in infrastructure, energy and housing. Suddenly, all the credit started to look bad and all the capacities worthless.

The US Federal Reserve (Fed) had launched its Quantitative Easing Program (QE1) a week ago. Many other central bankers, including European Central Bank (ECB) was expected to follow the Fed soon. The commitment of central bankers to do “whatever it takes” had calmed the markets only slightly.

In this setting, I had the opportunity of hearing one of the most famous global commodity traders and fund manager in person. The gentleman was in Mumbai at the invite of a local fund house which had launched a Natural Resource Fund just a few months back. This gentleman, in his idiosyncratic style and attire made a passionate pitch for investment in global commodities. He strongly argued that the massive new money printed under the QE program of central bankers will inevitably result in hyperinflationary conditions in the global economy leading to sharp rise in prices of commodities. Quoting from the classical monetary theory books, he presented some hyperbolic charts and diagrams reflecting his projections of commodity prices.

I had many questions for the debonair looking trader cum fund manager, but I chose not to ask any, since I was fully convinced that inflation is certainly not one of the threats to the global economy in foreseeable future. Any question to the expert therefore would have been plain sophistry.

In hindsight, I feel it was a right decision to go with my conviction instead of arguing with the expert and weakening my conviction. As we all know that despite multiple rounds of QE and vigorous efforts to create some inflation, the global economy has continued to struggle with deflationary forces in past 12years. Many commodities are even yet to see their respective 2007-08 prices.

In past couple of months, the hyperinflation has again started appearing in headlines. Numerous reports and articles have been written on how the global economy is fast racing towards hyperinflation. Many strategists have suggested trades for this - gold and silver being the most common. Many traders have taken positions. The Natural Resources Fund launched in 2008 is being marketed again aggressively.

Some wise and smart traders and fund managers are calling it “reflation” instead of “hyperinflation”, indicating that the price rise may be short trading opportunity and not a global trend.

Regardless, my view continues to remain the same as it was in 2008. I strongly feel that hyperinflation, as we know it from classical monetary theory, is a highly improbable event in the modern economic conditions. The present day trade and commerce dynamics, technology, and demand-supply matrices do not support any extraordinary inflationary flare up. And if the hyperinflation premise based on imminent demise of US Dollar, it may also be unfounded.

 In the aftermath of devastation that took place due to the second world war (WWII), some key global institutions were created and multilateral agreements signed to (i) avert chances of another major war; (ii) enhance global cooperation for accelerated reconstruction work; and (iii) promotion of globalization of trade and commerce to ensure equitable growth and development. Bretton Wood agreement signed in 1944 was one of such efforts.

The Bretton Woods agreement established the U.S. dollar as the reserve currency for world. The idea was to prevent competitive devaluations of currencies, avert trade wars and promote international economic cooperation for growth & development. The Bretton Wood signatories agreed to maintain fixed exchange rates between their respective currencies and the US Dollar. The US dollar in turn was pegged to the price of the gold.

Until WWI, most countries followed the gold standard for their respective currencies; which essentially meant that they promised to exchange their currencies for gold of equivalent value as per the current international prices of gold. This significantly constricted the flexibility in their monetary policy, as only a few countries had enough gold reserves to back their monetary requirements for development efforts needed in post war period. Abandoning the gold standard, they printed massive amount of money leading to hyperinflation, which eventually led to great depression and another great war.

Post WWII, most countries considered reverting to gold standard. However, since at that time, US had held more than three fourth of global gold reserves at that time, it was felt that making the gold pegged USD the reserve currency, instead of gold, would provide the necessary flexibility in monetary policy (since unlike gold, the USD supply could be flexible) to support growth and development.

The energy price led stagflation in US eventually led to the demise of Bretton Wood agreement. To get the US economy out of stagflation (no growth and high inflation) President Nixon sharply devalued the USD. Thus sharp devaluation led to a run on the US gold reserves, forcing the US to unpeg USD from gold prices and thus violating the Bretton Wood Agreement. The gold peg ended in 1971 but USD continued to remain the reserve currency of the world in absence of a viable alternative.

Last week, Kristalina Georgieva, IMF Managing Director, in her speech called for a new Bretton Wood Moment for the world (see here). Comparing the damage to the global economy caused by Covid-19 pandemic, she emphasized on the greater need for global cooperation to put the global economy back on growth path. She said, “Today we face a new Bretton Woods “moment.” A pandemic that has already cost more than a million lives. An economic calamity that will make the world economy 4.4 % smaller this year and strip an estimated $11 trillion of output by next year. And untold human desperation in the face of huge disruption and rising poverty for the first time in decades. Once again, we face two massive tasks: to fight the crisis today — and build a better tomorrow.”

She further adeed, “We face what I have called a Long Ascent for the global economy: a climb that will be difficult, uneven, uncertain—and prone to setbacks.

But it is a climb up. And we will have a chance to address some persistent problems — low productivity, slow growth, high inequalities, a looming climate crisis. We can do better than build back the pre-pandemic world – we can build forward to a world that is more resilient, sustainable, and inclusive. We must seize this new Bretton Woods moment.”

She specifically called for “Prudent macroeconomic policies and strong institutions”, “people centric policies” and “climate change” as three imperatives for the new system.

Obviously, the emphasis is on greater global cooperation, sustainability and equality. Unfortunately, a number of analysts, traders and strategists have read her comment to mean return of gold standard.

Neils Christensen, quoted some of the popular comments in his blog post (see here) highlighting how the people are misreading her comments for a BULL call on gold—

“Gold is on its way back to monetary policy in a direct way. The IMF last week confirmed they WILL NOT sell gold reserves. Now they are calling for a new Bretton Woods arrangement. WELCOME TO THE ERA OF GOLD ? — Gold Telegraph

Imf calls for a new Bretton Woods. A new gold standard. Sit tight. Evidence is piling. — Gold Ventures

IT'S OFFICIAL IMF CALLS FOR 'A NEW BRETTON WOODS' 'A New Bretton Woods Moment'— Willem Middelkoop

A New Financial System Backed By Gold. It Will Never Happen You All Said Bretton Woods Was A Gold Backed Monetary System. The Best Is Yet To Come? Baba & Riddlers”

In my view, a new global order will definitely emerge out of this pandemic. The new order will address sustainability and equity issues. Gold will not be a key component of the new order. USD may retain its dominance but it shall face serious challenge from other currencies, including the digital currencies.

US Federal Reserve Chairman Jerome Powell tried to set many speculations aside in his statement post the recent meeting of the Federal Open Market Committee (FOMC), Powell made the following three things very clear:

1.    US Fed policy Bank Rates, and therefore general rate environment, shall stay low till at least 2023.

2.    There is no threat of material rise in inflation in near term, and 2% inflation target shall remain valid till 2023. Even a temporary violation of 2% inflation target before 2023 shall not impact the decision to keep rates near zero till 2023.

This is in sharp contrast to the forecasts made by many global strategists, economists and fund managers, who believe that inflation could become a serious problem in 2021-22. In fact Powell expressed his concerns about the disinflationary pressures persisting.

3.    The job market is expected to improve and below trend unemployment rate of 4% shall be achieved by 2023.

The Federal Reserve however refrained from announcing any additional liquidity enhancement measures, including increasing the bond buying.

The consensus is reading the Federal Reserve's latest policy statement to mean that (a)   USD weakness may persist for some more time at least; (b) The market may continue to drive the Federal Reserve's action insofar as the monetary support (bond or stock buying etc) is concerned; (c) Powell backstop is there but may not be as strong as Draghi backstop.

This long term guidance by Fed must comfort markets and fuel the risk appetite of market participants. I would not like to read too much into the sell-off in markets post the Powell comments. It might be due to unwinding of the positions taken specifically for this event. No announcement related to enhancing Fed's asset purchase program may have disappointed many who were expecting Powell to announce this. But this is most likely a knee jerk reaction.

In this context, the recent statement of RBI Governor Shaktikanta Das is pertinent to note. Addressing to the National Executive Committee of FICCI, Das emphasized as follows:

"On the back of large policy stimulus and indications of the hesitant economic recovery, global financial markets have turned upbeat. Equity markets in both advanced and emerging market economies have bounced back, scaling new peaks after the ‘COVID crash’ in February-March. Bond yields have hardened in advanced economies on improvement in risk appetite, fuelling shift in investor’s preferences towards riskier assets. Portfolio flows to EMEs have resumed, and this has pushed up EME currencies, aided also by the US dollar’s weakness following the Fed’s recent communication on pursuing an average inflation target. Gold prices moderated after reaching an all-time high in the first week of August 2020 on prospects of economic recovery.

Financial market conditions in India have eased significantly across segments in response to the frontloaded cuts in the policy repo rate and large system-wide as well as targeted infusion of liquidity by the RBI. Despite substantial increase in the borrowing programme of the Government, persistently large surplus liquidity conditions have ensured non-disruptive mobilisation of resources at the lowest borrowing costs in a decade. In August 2020, the yield on 10-year G-sec benchmark surged by 35 basis points amidst concerns over inflation and further increase in supply of government papers. Following the RBI’s announcement of special open market operations (OMOs) and other measures to restore orderly functioning of the G-sec market, bond yields have softened and traded in a narrow range in September."

The governor was very guarded in his outlook for the economy. he stated, "high frequency indicators of agricultural activity, the purchasing managing index (PMI) for manufacturing and private estimates for unemployment point to some stabilisation of economic activity in Q2, while contractions in several sectors are also easing. The recovery is, however, not yet fully entrenched and moreover, in some sectors, upticks in June and July appear to be levelling off. By all indications, the recovery is likely to be gradual as efforts towards reopening of the economy are confronted with rising infections. (emphasis supplied)

Obviously, the incumbent governor does not concur with one of his predecessors Dr. C. Rangrajan who appears quite buoyant about the economic recovery in India.

What does it mean for Indian investors?

• Unless there is a Lehman type moment in global markets, the Indian equities may continue to remain supported.

• Precious metal trade should take a hit.

• The bond yields may remain stable, and RBI may maintain yields around current levels even if the food inflation shoots up in next couple of months.

• MPC may maintain status quo on policy rates in its next meeting, while continuing to maintain accommodative stance.

• Economic growth and therefore corporate earnings may not see a sharp recovery even in FY22.