Vijay Kumar Gaba

Moreover, the discount between spot prices three months future at LME widened to the largest since 2006, indicating poor outlook for copper demand in the near term.

Copper prices have fallen over 10% in the past one month alone on disappointing growth data from China. The hopes of a sharp recovery in Chinese growth in near term are fading as more downgrades are indicating. Goldman Sachs reportedly revised its average copper price forecast for 2023 by over 11% to US$8698/t from US$9750/t earlier. Though the optimism over Chinese growth and consequent firmness in copper prices is not lost completely. For example, Bank of America is still maintaining its US$10,000/t copper price forecast for 2023 end in the hope of large demand ramp up as China accelerates spending on its power grid. Nonetheless, the general mood is drifting towards accelerated slowdown in demand.

Since copper is used in infrastructure (power, shipping, buildings etc.) machinery and discretionary consumption (housing, vehicles, appliances etc.) its demand is widely accepted as a lead indicator of the direction of the economy. For its ability to provide a correct prognosis of the health of the economy, the bright metal is popularly known as Dr. Copper.

So, if the latest prognosis of global economy by Dr. Copper is correct—

·         We shall see an accelerated slow-down in global economic activity with little support from China, in the next few months. This shall reflect in poor export demand for India also.

·         The inflationary forces may weaken as tighter money constricts demand further; eventually leading to the next round of monetary easing by the end of 2023 or early 2024. RBI’s growth forecast for FY24 may also get moderated resulting in change in the present “withdrawal of accommodation” monetary stance.

·         Deflation, rather than inflation, could again emerge as the major concern of global policy makers by the end of 2023. Japanese markets that have majorly outperformed the developed peers on easing deflationary pressure could again face pressures.

·         Notwithstanding the Debt Ceiling tantrums and political rhetoric, for global investors bonds may emerge as preferred asset class in near term over equities.

·         Overall, a foundation for a decent equity rally in India over 2024-25 could be laid in the next 6months.

(Inputs from Copper price slides as global demand drops sharply published in the Financial Times)

As per Fortune Business Insight The global big data analytics market size was valued at $271.83 billion in 2022 & it is projected to grow @13.5% CAGR to become $745.15 billion by 2030. Compared to this, as per Stockholm International Peace Research Institute (SIPRI) report, in 2020 the global arms trade is estimated to be US$112bn (actual figures may be little higher). Clearly, data and data analytical services are emerging as one of the most product categories globally.

Obviously, most businesses and states who want to do business would be interested in data pertaining to Indian population and markets. Historically, the census conducted every ten years has provided valuable insights into the potential high growth demand areas in Indian markets. Indefinite postponement of the 2021 census by the government is therefore quite intriguing, given that the product (data) this census shall produce would be much more valuable than the cost incurred.

The census is even more critical, if we consider some very points raised by Yi Fuxian in his latest article “China and India Have Fewer People Than the UN Thinks”.

Yi argues that UN’s World Population Prospects (WPP) data about the population of India and China, relied upon by most global agencies, states and businesses, may be far from accurate. As per Yi, “India’s development indicators have improved markedly since its previous census. From 2011 to 2021, the country’s infant mortality rate fell from 44 deaths per 1,000 live births to 27. The secondary-education gross enrollment rate rose from 66% to 78%, and the mean years of schooling among adults aged 20 and older increased from 5.8 to 7.2 years. The contraceptive prevalence rate rose sharply from 54% in 2013-15 to 67% in 2017-19. Consequently, India’s fertility rate may be as low as 1.6-1.7 in 2024, with its population ranging between 1.37 to 1.39 billion, compared to the 1.44 billion projected by the UN.” Accordingly, the UN might be wrong in declaring India as the most populous country.

Yi highlights that the fertility rate of Indians living in countries such as Singapore and Malaysia etc., is similar to the Chinese population living there. Therefore, with social indicators continuing to improve at the current pace, it might be erroneous to believe that Indians will have fertility rate different from Chinese. As per Yi, it is likely that India’s fertility rate will drop below 1.2 by 2050, and its population will peak below 1.5 billion, rather than the 1.7 billion projected by the WPP. Fast-forward to the dawn of the twenty-second century, and the numbers paint an even bleaker picture. While the UN report estimates that India’s population will reach 1.5 billion by 2100, the country’s population could actually fall below a billion.”

It is important to note that “The WPP’s projections of Chinese demographic trends are even more exaggerated. For example, the 1992 WPP estimated that China’s population will reach 1.54 billion by 2025. While the 2022 report revised this figure down to 1.42 billion, the actual figure will likely be closer to 1.27 billion.”

The latest episode of political squabble over raising the limits within which the US government could borrow to meet its fiscal deficit, reminded of this inspiring fable. In the past two decades we have seen multiple “debt ceiling crisis” in the US. In the 15 years period from 2001 to 2016, the US Congress raised the debt ceiling 14 times. During President Obama’s tenure of 8 years, the debt ceiling was raised 11 times. Prior to that President Bush’s tenure saw 7 hikes in the debt ceiling. It is also pertinent to note that in the past 100 years, the debt ceiling has only been increased. It has never been reduced, even when the US public debt was reduced.

It is important to clarify that the Gephardt rule, as per which passing of the budget was deemed as an automatic hike in the debt ceiling to meet the approved deficit, was repealed by the Congress in 1995. Since then, appropriation in the budget and means to fund such appropriations are voted separately by the Congress. If the Congress does not vote to hike the debt ceiling in accordance with the appropriation bill, the government will run out of money to meet its interest, salary, social security and other obligations. A default on debt service would inevitably entail a rating downgrade and hike in interest rates that could impact US bond holding of all investors; besides resulting in overall higher interest rate burden on the economy.

Prior to almost every hike in the debt ceiling there had been intense politicking and aggressive posturing by both the parties. The president and treasury secretary contend that not hiking the limit may result in total collapse of the global financial system; while the majority in Congress seeks multiple assurances and concessions before agreeing to the demands.

Going with the tradition, the treasury secretary Janet Yellen has recently stated that “Waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States”. She further added, “In fact, we have already seen Treasury’s borrowing costs increase substantially for securities maturing in early June.” Also, there has been usual “huge cost to American Public” and “risk of global financial instability” rhetoric being played from the Capitol Hill.

In the past, markets would usually take these warnings seriously and turn jittery. This time however, markets appear relatively much calmer; as if calling the bluff of the politicians. The collective wisdom of the market appears believing that like every previous instance, both the parties would agree to hike the debt ceiling before the 1^st June deadline. Few traders seem to be taking the customary warnings being issued by rating agencies like Moody’s; investment bankers like Jamie Dimon; and Democrat leadership.

The point is whether wolves will actually come this time and eat the complacent traders? Hard to imagine, given the historical context. But would you continue to assign a zero probability to this 8-Sigma event? More on this next week.

The narrative presented by these so-called finfluencers is clearly oblivious of the fact that there are not more than a hundred companies in India that have operationally performed consistently for more than a decade. Number of companies that become redundant in each business and market cycle is very high.

There are numerous research reports and messages which rely on “low per capita consumption in India” and “moat” in India. Based on this many “new businesses” (and some established businesses) are given astronomical valuations. In this context, it would be pertinent to note the following:

In the early 1990s, the number of Indian citizens using air transport for travelling purposes was extremely low. There was only one public sector civil airline, viz., Indian Airlines. Then the civil aviation business was opened to private competition. Within a span of 2yr several private airlines started business, e.g., Sahara, NEPC, Damania, East West, Modiluft etc. All these ended as bankrupt in less than a decade. In the second tranche, some more private airlines started business, e.g., Jet Airways, Kingfisher, Deccan Airlines etc. Soon they became very popular with Jet Airways acquiring more than 50% market share (“moat”). These also ended bankrupt, along with Indian Airlines (later Air India).

Similar has been the story with private banks and telecom operators. Many first-generation private banks (Global Trust Bank, Time Bank, Bank of Punjab, Centurion Bank etc.) ended up merging with larger banks. Numerous telecom operators and ISPs ended shutting the shop in less than a decade. This all happened in spite of very low telecom density and poor financial inclusion.

Steel and power sectors have been another anti-thesis for this “moat” and “low per capita consumption”. India still ranks amongst the lowest per capita consumers of steel and power. If we carefully analyze the banking sector crises during the 1990s and 2010s, these two sectors have been largely responsible for huge credit costs to the banks. There have been numerous bankruptcies and debt restructuring in these sectors in the past four decades. Even the sector leaders like SAIL and Tata Steel have been responsible for massive investors’ wealth destruction multiple times in these four decades. Power producers like JP Power, Reliance Power, Lanco, ended bankrupt, while the leaders like NTPC and Tata Power have not yielded any noteworthy return over the past two decades.

I would not be surprised if many of the new age digital businesses also wind up in the next one decade, despite huge scope for growth in businesses like ecommerce, fintech, food delivery, etc.

The point is that arguments like “per capita consumption” and “moat” may not necessarily work in a country where about 60% of the population is dependent on government support for necessities like food, cooking fuel, primary healthcare, education, and transport; and government is constitutionally mandated to keep policy framework largely socialist.

Investors accordingly need to adjust the denominator (total population) appropriately to calculate a realistic per capita number. The “moat” premium should be assigned to a business only after applying appropriate policy risk discount. On the positive side, per capita income for the total addressable market will also be much higher than the official number.

In particular, notwithstanding the finfluencers claims, the investors must consider the following while evaluating a company for investment:

1.    It is not sufficient to only evaluate the debt servicing capabilities of the company. The ability to pay the cost of other factors of production (e.g., wages, rent, dividend, plant and technology upgrade etc.) must also be evaluated.

2.    It is important to assess the dependence of the company on the global economy, especially the stressed developed economy consumers and over regulated Chinese businesses.

3.    Policy risk, especially related to “sin consumption”; competition; business with the government; and economic offences, etc.

4.    Risk of obsolescence of products, technology and IPRs.

Indian IT: Precariously Placed (Jefferies Research)

An unexpected decline in revenues: During 4QFY23, aggregate revenues for Top-5 IT firms declined by 0.8% QoQcc - first QoQ decline in 11 quarters - the key disappointment. While revenues in 4Q were especially impacted by sequential decline in Communication and Tech verticals, growth across verticals moderated sequentially. In local currency terms, Americas and Europe both witnessed de-growth, indicating weakness in both regions. Aggregate growth for mid-sized firms was a bit better than large IT firms though they all disappointed in 4Q. TCS and Coforge disappointed the least while Infosys' reported the weakest results.

... derails margin recovery: Aggregate margins for our coverage universe contracted by 20bps QoQ and were 40bps below our expectation, mainly due to revenue miss. Employee cost (-120bps) weighed on margins due to muted growth, while Subcontracting costs (+50bps) and others overheads (+40bps) supported margins. Margin contraction was due to a 40bps compression in margins for large sized firms, partly offset by 100bps margin expansion for mid-sized firms. All large IT firms disappointed on margins, with TechM and Infosys being the weakest. LTIM drove aggregate margin expansion for mid-sized firms.

Intensifying pain in the sector: IT firms continued with cautious commentary on demand environment, highlighting a cut in discretionary IT spends. While bookings were supported by cost takeout and efficiency deals, revenue growth is being impacted by project deferrals, delayed ramp-ups and project cancellations. While Europe seems to be holding better than muted expectations, the worsening sentiment in America (~60% of aggregate revenues) was the key negative. Furthermore, IT firms have turned more cautious on the pricing environment.

Among verticals, IT firms highlighted weakness in Communication, Tech, BFSI, Retail and Mfg verticals.

Slower growth remains a risk: Aggregate headcount for IT firms declined by 8k in 4Q – the second straight quarter of decline - similar to the decline seen in 2020 during Covid. Declining headcount along with a pricing outlook suggests sharp moderation in FY24 - also evident from the FY24 revenue growth guidance given by Infosys/HCL Tech/LTIM. Additionally, IT firms expect a soft 1H, also evident from Wipro's guidance for 1QFY24 of -3 to -1% QoQcc.

A weak exit and a soft 1H implies a tougher ask for 2HFY24, which would necessitate large deal wins/ramp-ups - the absence of which could drive disappointments to consensus US$ revenue growth expectations of 7% in FY24. Our aggregate FY24 revenue growth is 110bps below consensus.

Stay Selective: A weak 4Q and heightened caution led to a 1-6% cut in FY24/25 consensus EPS estimates. The back-ended growth implies further risks to consensus estimates, which could drive further derating. Our FY24/25 EPS estimates are 1-11% below consensus and with the sector still trading at 8% premium to its 10-yr average and 13% premium to Nifty, we remain selective 

Three make-or-break crises impacting the US (ING Bank)

There is a thread running between the three crises being felt in the US right now. The inflation crisis was borne from the pandemic, a politically toxic one. The looming debt ceiling crisis stems from politicking that is more aggravated than ever. And the third crisis is a banking one, in part brought on by a Fed reacting to the inflation crisis. Where now?

Banking crisis development as measured by the Regional Bank Index and FRA / OIS – risky but tolerable

There are a number of indicators that we can track to help assess where we are and where we are likely to get to. Let’s start with the banking story, and the small and regional bank stress on deposits in particular. Here the US Regional Bank Index tracks sentiment. It was at 120 a couple of months back. It’s now at 80. In the rear view mirror the pandemic took it down to 60. Before that, the Great Financial Crisis saw it dip to 40. That’s the potential doom leap, from 80 to 40 ahead. The question is, will it?

So far the answer is probably not. We look here at the 3mth FRA / OIS spread for guidance. It essentially measures the premium that banks impliedly need to pay over risk free rates in forward space. Currently the 3mth FRA / OIS spread is at about 40bp. It spiked to 60bp when Silicon Valley Bank went down. Having journeyed back down to the low 20’s bp, the crescendo in the First Republic story saw it re-edge higher. As the Great Financial Crisis broke some 15 year ago the FRA/OIS spread quickly got up to 70bp, and then gapped to over 150bp.

We’re nowhere near that. The simple reference of neutrality would be the 20’s bp. We are practically double this right now. Troubling, but not discounting a collapse of the system or anything like that.

Inflation crisis resolution as measure by market breakeven inflation rates – reasonably optimistic

The genesis of bank stresses in part reflects the switch in the stance of Fed policy to tightening on mounting inflation concern. Such concern has eased but has not gone away – latest core PCE readings still identify the US as a “5% inflation” economy.

But there is some good news coming from market inflation break-evens, as derived from the difference between conventional Treasury yields and real yields on inflation protected securities. These inflation break-evens not only have 2% handles right along the curve, but moreover are far closer to a big figure 2% than 3%.

In fact, the 2yr breakeven has just this week dipped below 2%. If that’s what gets delivered, the Fed’s hiking job is done and dusted, and indeed the ground is laid to rationalise future cuts. While interest rate cuts likely coincide with higher consumer delinquencies and corporate defaults, and there is a feedback loop to the stresses in the banking system, where pressure in the commercial real estate sector remains under immediate scrutiny. This would become further acute should these inflation expectations not be realised, making in more difficult for the Fed to execute those cushioning cuts.

Debt ceiling crisis as measure by US sovereign Credit Default Swaps – Concerning but fixable

And as we navigate this course, we face into a debt ceiling dilemma laced with political menace that is so intense as to risk a default. Just one missed interest rate payment would imply a default. Market concern on this front is quite elevated, with 5yr Credit Default Swaps now in the 75bp area. This is the highest since the Great Financial Crisis, and is at the widest spread over core eurozone, ever. While there is no cross default in Treasuries, where one defaulted bond pulls the rest into a defaulted state, there would still be a material tarnishing of the Treasury product even if just one interest payment were missed.

Many players would not want to take on the risk of having a defaulted bond on  their books, and the collateral value of Treasuries would come under scrutiny. One default should not take down the system if holders are immediately made whole through a swift resolution of the debt ceiling. But at this same time things could unravel quite quickly and uncontrollably. In essence the entire global financial system is at threat. Note though that while US CDS is indeed elevated, it’s also far from discounting an actual default, it’s just playing the (mild) probability of default.

India strategy: Improved macro, unchanged micro (Kotak Securities)

The market has lapped up the recent improvement in India’s macro—(1) peaking interest rates and (2) better external position (BoP). We hope that the improved macro percolates into better micro over the next few months. 4QFY23 results and management commentary underscored subdued domestic demand in consumption and weak global demand in the outsourcing (IT) sectors. We expect a gradual recovery in domestic consumption over the next 2-4 quarters. Valuations are at risk without a quick recovery.

Improving outlook on global inflation, but muted growth outlook: The global inflation outlook has improved in recent months, as a result of monetary tightening across major DMs, although core inflation has stayed high (see Exhibits 1-2). The progress on inflation has allowed the US Fed to pause its rate hike cycle, but bond markets are pricing in cuts after a brief pause.

We believe the growth outlook may weaken as DM central banks will likely keep rates at peak levels for an extended period of time. Economic conditions are still fairly strong in most DMs.

India’s macroeconomic outlook has improved: India’s macroeconomic outlook has improved with (1) peaking inflation and comfortable inflation trajectory and (2) an improving external sector outlook.

The country’s interest rates may have peaked in the current cycle, which may address concerns about the negative impact of higher interest rates on housing demand. The RBI had already paused its rate hike cycle at its April meeting on expectations of moderation in inflation.

Micro outlook remains muted: Domestic micro remains subdued, with 4QFY23 earnings slightly ahead of our muted expectations. The beat is largely because of lower-than-expected tax rate in the case of RIL. In fact, both consumer and IT companies reported weak results.

We note continued weakness across most consumption categories in 4QFY23), although lending remained robust. Outsourcing companies were impacted by a weak global demand environment.

We expect moderate earnings growth over FY2024-25 (see Exhibit 13), with low scope for earnings upgrades across sectors. We would not rule out earnings downgrades in the consumer discretionary space, as the underlying factors for the current spell of weak demand may sustain for another 2-3 quarters.

‘Rich’ valuations of ‘growth’ stocks may result in further de-rating: The Indian market is trading at reasonable valuations compared with recent history and bond yields after lackluster returns over the past 18-20 months. However, most ‘growth’ stocks, especially in the consumption, investment and outsourcing space, are trading at expensive valuations, despite increasing near-term demand issues and medium-term risks of disruption. Financials remain reasonably valued and appear attractive in the context of a likely healthy credit cycle over the next 1-2 years.

India: Credit offtake remains robust in April’23

Credit offtake rose by 15.9% year on year (y-o-y) for the fortnight ending April 21, 2023. In absolute terms, credit offtake expanded by Rs.19 lakh crore to Rs.138.6 lakh as of April 21, 2023. The growth has continued to be driven by personal loans, NBFCs, and higher working capital requirements.

•      Deposit witnessed a slower growth at 10.2% y-o-y compared to credit for the fortnight ended April 21, 2023. The short-term Weighted Average Call Rate (WACR) has reached 6.70% (as of April 28, 2023) from 3.63% as of April 29, 2022, due to a rise in policy rates and lower liquidity in the system.

•      The Credit to Deposit (CD) Ratio as of April 21, 2023, rose sequentially to 75.7% from 75.0% in the previous fortnight due to incremental credit offtake at Rs 0.1 lakh crore compared to a fall in incremental deposit at Rs 1.4 lakh crore.

India Steel: Healthy spreads despite recent price cut (ICICI Securities)

Major steel companies have pruned their HRC list price by Rs2,000-3,000/te in order to restore the parity wrt imports. Traders were anticipating a price cut in May23’ over the last few weeks, resulting in domestic HRC price progressively reducing by Rs1,000/te in the month of Apr23’. HRC export price from India was down sharply by US$40/te last week, tracking China’s FOB price. Spot HRC spread, however, continues to remain healthy. Factoring in the latest price cut, it is still at Rs33,000/te (Q4FY23: 26,375/te). Hence, we expect profitability of steel companies to improve in Q2FY24.

In China, the focus is shifting from demand revival to possible production cuts in H2CY23 which might undermine global iron ore prices further, but may lead to lower exports. That said, in their respective Q1CY23 result commentaries, global players have indicated an improving demand environment with higher margins in Q2CY23. We maintain our positive outlook on ferrous space led by higher spot spreads; we would keep a close tab on exports from China.

India Chemical: Export witnessing revival, demand stability maintained (SMIFS)

Our chemical channel checks suggest that pickup of demand is gathering with most factories operating at 60-65% utilization up from 35% and expect it to gather pace because supply channel inventory is minimum & demand is witnessing uptick. Majority of commodity chemical prices are witnessing a rebound from the bottom on anticipation of strong demand in the coming months.

Despite global headwinds, India remains on a strong footing in chemicals led by increasing interest of global companies to source from India to de-risk their supply chain, increasing share of speciality chemicals in overall product mix and robust capex aligned by chemical companies to capture future growth. For Indian chemical companies, the coming quarter i.e Q4FY23 is witnessing improvement in margins sequentially owing to rebound in exports volumes and domestic demand firming up. The full recovery in margins should be visible in Q1FY24.

Pharma segment is witnessing rebound in demand & correction of major API prices seems to be over. Agrochemicals demand is steady owing to higher crop prices, though high channel inventory could impact sales in the near term. Shipping rates and container availability have reached pre covid levels. Currently, crude oil prices are trading in a narrow band which will provide stability in downstream chemical prices of basic chemicals which will aide margins in the coming quarters. Valuations of most chemical companies seems reasonable factoring in largely the pain gone by & seems ripe for bottom fishing opportunities for those investors who wish to play on the recovery cycle going ahead. The cautious approach in chemicals is the impact of the global slowdown amid lingering recession worries which remains a watchful factor.

India Building Materials: A stampede to paint the town? (Investec)

Building material proxies have sought to widen Total Addressable Market (TAM) citing variety of reasons. We highlight moat for each category is different and often beyond demand push vs. brand pull. Bundling, store economics and business to applicator to take centre stage going forward and only few winners to emerge. Our new trademark / ROC database highlights more entrants into attractive paints category and concur with house view on increasing competitive intensity here.

Chasing TAM – push or pull: BM names have sought to widen TAM by venturing into multiple categories and have cited rationale of a) growth optionality, b) channel synergies, c) connect with influencers, d) connect with applicators, e) better capital deployment (vs higher pay-outs) and e) incremental RoCE. Based on our checks with channel/ influencers, the mantra is simple, brand pull works where products are visible post installation (faucetware, paints, even tanks); if not, applicator/ store economics (bundling) dictate push. We cite companies with healthy B/S have resorted to cash burn or chase volumes at cost of quality, not the best proposition.

TAM isn’t enough, need enablers to execute same: While cumulative TAM for BM categories (paints, construction chemicals, adhesives, consumer durables, bathware, ceramics, plumbing, wood+) is at $30b+ and headline growth rates/economics attractive, we find underlying enablers often lagging. For e.g., we cite ceramic plays who forayed into bathware ~7-8years back, and despite strong brand/distribution have achieved little (<Rs3b revenues p.a.).

We cite multiple reasons for disappointment in above case: a) Applicator: mason doesn’t fix a faucet, it’s a plumber (i.e., mason isn’t a plumber and DIY is still some time away), b) Ceramics is a dead product vs. faucet, a live product. Hence, after-sales is key, c) Channel’s willingness to cross-sell: Despite bathware potentially offering better margins and return ratios, selling bathware implies more hassle (vs. ceramics), given after-sales and number of parts.

Trademark/ROC checks: Based on our new proprietary database, we find several new players ready to foray into paints as a category, which is large attractive segment with incrementally high competitive intensity. We find Pidilite (brand: Haisha), Adani (into TiO2), Hyderabad Industries (HIL IN, NR), Wonder Cement as potential entrants, besides, known ones like Grasim.

Few winners: Several coverage plays have ventured into the paints category, and we expect only a few to thrive.

From recent interactions with the market participants, I conclude that the recent ~8% rally in the benchmark Nifty50 has materially obliterated the fear of major correction in stock prices from their minds. Of course, most of them are conscious of the factors like financial sector crisis in the developed markets, especially the US; recession like conditions in some of the major global economies; and high real rates impeding the global growth that may have serious repercussions for the Indian economy and businesses. They also seem to be mostly ignoring the unusual weather conditions and possibility of a serious slowdown in exports, and acceleration in FPI outflows if the credit conditions continue to tighten further in the developed economies.

It may be pertinent to note that banks in the US are tightening credit in response to fed rate hikes, economic uncertainty, and money supply contraction. Historically this has led to a marked slowdown in growth, deflation, rise in employment; large number of bankruptcies and significant sell off in global risk assets.

Average 30yr fixed rate mortgage in the US is at ~6.5% and 5yr auto loans rates at ~7.5% are close to the highest in two decades. Might be this time it is different, but it would be imprudent to completely ignore the risk.

Besides hiking the policy repo rate, RBI also enforced correction in banking system liquidity to check the demand side pressures on inflation. The banking system liquidity that was running in excess of rupees eight trillion a year ago, has been completely neutralized.

Impact of monetary tightening

It is very difficult to assess the direct impact of the RBI’s monetary policy action and its consequences. Nonetheless, it is pertinent to note how various sub segments of the economy have moved in the past one year. This movement could have been caused by a variety of factors, RBI tightening being one of them.

Inflation

The Consumer Price Index Inflation (CPI) has eased from 7.04% (yoy) in May 2022 to 5.66% (yoy) in March 2023. After mostly staying above the RBI tolerance band of 4% to 6% for more than 15%, the latest inflation reading is within the band, though still closer to the upper bound. If we adjust it for high base effect, material easing in global commodity prices, and significant improvement in supply chains, in the past one year, the direct impact of RBI policy on demand side pressure may not be material. Besides, given the chances of a below par monsoon due to development of El Nino in the Pacific Ocean, the food inflation may spike again challenging the sustainability of the recent fall in CPI inflation.

Money supply and credit

In the past one-year broader money supply (M3) in India has grown at a higher pace than the trend seen in the past one decade; and currently stands at INR227.8trillion.

The commercial banks have not passed on the entire 250bps hike in the policy repo rate to the borrowers. On average lending rates have risen 130 to 150bps. It is pertinent to note that movement in lending rates in India is mostly not in tandem with the policy repo rates. Lenders were also slow in cutting the rates while RBI was in easing mode. Regardless, now since the RBI has already signaled a pause, the probability of material rise in lending rates from the current level is low; implying that the policy rates are more of a signaling tool rather than a driving force for the commercial rates. The commercial rates are more of a function of demand and supply.

In FY23, the overall bank credit grew from Rs118.9trillion to Rs136.8trn, registering a growth of 15%, highest since 2014. Though some moderation in credit growth has been seen in the past one quarter.

The fastest growing segments of the bank credit in the past one year have been personal loans (especially unsecured loans) and financing to NBFCs, (much of this could also be consumer financing related). This clearly suggests that higher rates may not have deterred the demand much.

Growth

There is little evidence to show that the tighter monetary policy of the RBI in the past one year may have directly impacted the economic growth materially. Nonetheless, the growth momentum has definitely slowed down and is not seen picking up from the present low levels in any significant manner over the next 12months. Though the RBI has forecasted FY24 real GDP to grow at 6.4%; most private forecasters estimate the growth to remain slightly below 6%. Declining global growth and poor weather conditions could be the two major factors in the lower trajectory of growth.

Yield curve

The benchmark 10yr bond yields in India are now at the same level as these were a year ago. The short to mid-term yields (30days to 5yr) have risen sharply in the past one year. In the past six month in particular, the overall yield curve has moved down noticeably, except in the 30days to 1yr timeframe where the yields are still higher. Apparently, the poor liquidity in the banking system has resulted in higher near term rates, without impacting the demand materially – more of a lose-lose situation.

To conclude, I would believe that the aggressive tightening by RBI in the past one year, was more of a reaction to the global trend, ostensibly to preempt the outflows and pressure on INR, rather than to stabilize prices and calibrate demand. Given that USDINR has weakened by over 7% in the past one year; and foreign investors have been net sellers in the past twelve months, it could be concluded that RBI would have been better pursuing an independent monetary policy commensurate with the assessment of local conditions and requirements.

I understand the “not for this, things could have been much worse” argument fully and will reply to that some other time.