Bank Policy Tuesday: RGR raises rates to 8% on Repo and 7% on Rev Repo

Maintaining the Channel at 1% and the CRR at 4% , the third quarter policy will go down well if markets in credit ( inter bank markets) continue to gravitate to reverse repo rates for borrowing in lieu of improved liquidity. Most hawkish analysts would improve their forecasts of rate hikes basis the new policy implemented in the third quarter. Our day’s review of Urjit Patel recos shows it is unlikely to be in an implementable form for some time and cannot be proposed into active roster during FY15 and probably FY16, but then it is a function of Central politics in 6 months from now

The Macro review admits to a loss of grow momentum. CPI declined as food groups obliged WPI at a four month low and the report notes the mall uptick in Cre inflation which is still very much below a healthy 2%

Hardening prices of services and key intermediates seen in conjunction with rising bank credit, increase in order books, pick-up in capacity utilisation and the decline in inventories of raw materials and finished goods in relation to sales suggests that aggregate demand pressures are still imparting an upside to overall inflation.

Policy stance incorporates the glide path to CPI envisaged in the UPA report in six months

Term repos were conducted in the later weeks of January despite Advance Tax payments to improve liq after Government Balances rose. Trade deficit is down by 25% in nine months. CAD has been forecast below 2.5% in March and CPI(Combined) expected to be ranging 7.5-8.5% at the end of the fiscal and FY15 before the next target of 6% kicks in.

The GDP fan shows a 4-7% range by Q4 FY 15 with expectations of growth from agri included in the RBI prognosis, forgoing their choice of a sticky move in Repo rates north to 8%. However the new Governor does admit this was an on the edge decision leaving further moves to the south probably open if his version of noise in the inflation is rested appropriately further, and improving chances of holding at 8% on the Repo rate and 9% on the MSF. On the whole, post policy action is still likely to raise interest rates in the Indian Economy now prior to the returning of the miracle grow / prodigal (not RGR reference obviously) though banks may not raise lending or deposit rates and Transmission issues remain with Banks using excess liquidity in borrowing from LAF for investments(govt borrowings/adjustment auctions)

Import controls, mostly on Gold brought CAD 1.2% in Q2 and the liquidity measures on Sept 5 , rejuvenating post impact from the currency crisis resulted in inflows of $9.1 Bn in equities and $14.1 Bln outflows in the Debt segment till Mid November (since May) were balanced apparently by $3.8 Bln in inflows in Debt since

MSF rate was only brought down by 150 bp since with elevated inflation expectations resulting in a repo hike of 50 p till now, which is likely achieved objective but still leaves the threat of increasing repo rates out, we would say another 50 b p is ready in the bag assuming yields travel to 8.5% , which would have been stable conditions this policy but are likely to be six months out from here given normal growth henc as yields likely move back to the 9 benchmark in the intervening period

Markets dipped on worries of UPA report making it and the unexpected rate hike before biting the bullet at 6130 levels during the presser.

India Morning Report: A tough hand dealt in the Financial Stability Report

Loan
Loan (Photo credit: LendingMemo)

The Interconnectedness of the Indian Banking system, might have become prioritised for a global caveat emptor learnt but the Indian system has much more downside from our desi PSU style profligacy in SME lending as haircuts on even 50% of that stressed portfolio would take the government out for a long walk in the woods. Delving a little more indepth into our favorite subject, most of the stressed portfolios in India Inc’s first stress tests were found to be in Infra, Mining and Cap goods sectors or our core Infrastructure series components and those would anyway need to be treated differently than Ordinary term loans . Such loans constitue 54% of the Stressed assets identified in the FSR.

However as the Financial Stability Report remarks, there is a fundamental risk to about 60% of the credit stock in the Banking system collapsing banks even as they have primarily not created a laconic lee side for the Ghat monsoons in interbank lending primarily one supposes thru traded CDLOs and real lending on larger accounts  than derivatives without a defined underlying as in the global case. The risk as highlighted in the FSR come from defaults in lending portfolios of Banks skewed to single corporates apparently among other details one has to study from the disregard of concentration risk by lenders with the 20% to single corporate and 25% i think for group key limits to be tightened and enforced duly.

India on the other hand has to grow the Securitisation pie  from here and where the Central Bank would be trying to control INR 1.7 Tln in repayments due till 2017-18 from the next fiscal onwards (FY15->2014-15) , India would indeed face an uphill task the markets would do well to ensure they have factored in. HDFC Bank too never got that approval for added FII investments even as Axis Bank application was cleared last week(to 62%).

Back to the mundane diary of the Indian markets for the day, Markets trade leaving the upside intact as shallow trades characterise the last trading session to 2014, much like last week’s record low of INR 740 Bln in the full day of equities and derivatives trading on the NSE and BSE and Cash volumes are likely to stay below INR 30 Bln (the last week low was INR 50 Bln) probably. US and European Markets are closed on New Years Day including Fixed income markets (at least in the USA) The other thing to highlight from the watchful Fiscal Stability Report is RBI’s worries on the Growth – Inflation dynamics not working out as WPI continues above 7%  which we led with sometime in November.

Net foreign inflows continue to sweeten the deal for India inc into 2014 with a 1.5% CAD (FSR score 1.7% and a FY14 achievement score target of under 3%) and the Fisc even if the virtual spending shutdown (as in the last 4 years) from January will soon find another yawning gap even if FY 2014 indeed perks up reasonably. Hopes of a stable post election scenario have almost been crossed out in case you did not notice in the New Year’s eve  celebrations and the infra pack, high on investment hopes and leadership from IDFC, and a deleveraging trio incl GMR Infra and JP Associates with the Relinfra people facing their first AAM Party audit

Apparently new year’s eve also sees an uptick in Tata Power and Reliance , which one doubts will last esp as Tata Motors is receiving its recognition only for its minute share of the TESCO-Trent JV like in fact here was such when Starbucks burst onto the subcontinent scene. The Starbucks venture is well-defined however, and the ware tastes well, drawing in big crowds in now 3(Three) cities in India

Redesigned logo used from 2011-present.
Redesigned logo used from 2011-present. (Photo credit: Wikipedia)

What probably did not get highlighted but was tried earlier by RBI, also needs to be monitored for results as Foreign Banks continue to skirt the Living Wills issues at Global HQ and continue to rethink their strategy with regard to entering India. Apparently Gross NPAs will start trickling down as we long suggested but Fitch and a few others are still hoping the PSU disaster will play out to bigger stakes and at a faster rate to make a return virtually impossible ( especially if larger Government injections are requird to keep them floating – KV Kamath). However, I would just depend on the investment recovery and the credit growth performance by Private Banks and probably PNB as Deposits finally outpace credit in the last bi monthly reports on the Banking sector in Calendar 2013 and the ICDR hopefully comes back to respectable levels without Banks having to constrain such new lending in India’s recovery phase

Also don’t take me to be a cynic but Torrent and Lupin’s timed leaks about Pharma’s assault on a generic version opportunity for Cymbalta may be better timed but is still probably a few months away from translating into Dollars and one fervently hope ( and cannot claim to otherwise yet concretise) that the generic provides an opportunity to us more than the cookie cutter $200-500 mln with or without first mover advantage.

Bank Policy Wednesday: India stands PAT on rates in December

Even as RBI shows concern about the retail inflation, it has probably factored in the welfare sustenance supply chain requirement that has necessitated a higher tick of Food inflation likely to last till 2015. Even though the jump in core inflation to 2.66% has reached worrying levels, the RGR regime has played it on the level, standing by the current Bank rate at 7.75% . As banks have already moved off the higher MSF lending or the last quarter, banks would anyway be unaffected by the lack of change but the markets can seriously take the impending rally’s mechanics from here .

The FOMC reports later in the India day, closer to midnight when they can , we agree, start with an early taper. However, The Fed meeting is likely to also be a sendoff for Ben Bernanke and so any such major policy announcements may be skipped for Janet Yellen to attend to in February, April or even June 2014 and as the Fed has managed so adroitly, the Taper would not mean tightening. Though the Dollar remains weak, the Taper is unlikely to still avoid the Dollar strengthening into a vise like grip on the US own Economy.

On India’s Policy announcement, the 7.5% mark would have been even better but as noticed concerns on Food and Primary inflation are real and may spill over to Core inflation unless kept in check. The RBI Governor notes that Vegetable prices that jumed 99% in the Friday WPI report may fall sharply.

Yesterday’s Review noted, in the overall scenario

In India, the pick-up in real GDP growth in Q2 of 2013-14, albeit modest, was driven largely by robust growth of agricultural activity, supported by an improvement in net exports. However, the weakness in industrial activity persisting into Q3, still lacklustre lead indicators of services and subdued domestic consumption demand suggest continuing headwinds to growth. Tightening government spending in Q4 to meet budget projections will add to these headwinds. In this context, the revival of stalled investment, especially in the projects cleared by the Cabinet Committee on Investment, will be critical.

Banks have garnered $34 Billion from FCNR Deposits and India’s FX reserves have jumped at a $5 Bln every week from $277 Bln odd at the end of November and now at $291 Bln. RBI continues to flag the negative output gap and even a slowdown in Services

Also factored into the December decision is the virtual shutdown in Spending by the Government from January as revenues remain not so robust, which would strain interbank liquidity (LV?CNBC18)

It is good that RBI has returned to not being overtly reactive to the inflationary economy and GDP in March could have a larger chunk of the good news premium Indian data has been lacking since the year began.

India Morning Report: Banknifty swings up like a monster trade, already semi-retired

RBI head office, Delhi
RBI head office, Delhi (Photo credit: Wikipedia)

Sorry, I’d rather understand why the party for reduction in MSF and INR 17000 cr (INR 170 Bln)  of Borrowing added in 0.25% of the Deposits. The channel to the low repo rate of 7.50% is still 150 points after the cut and the 10 yr yields are not really expected to move south from 8.6% ‘except at the low rate of’ 50 basis points in the next three months it had already proffered before Rajan made the change.

Anyway, markets at least recognize or get their bank spokespersons/contacts to say banks are at ease again so the 5950 mark has come. already on the markets. The Upward potential is truly limited at this juncture, all the media noise budget (DAVP one mite bite) for showing activity in the Economy not making up for the spending cuts to stay in and the investments still a far way off.

However, markets per se are undervalued fundamentally with earnings positive thru the crisis except that they wait on such changes in fundamentals which are India’s bane for moving up while China gets a free look again just for having underperformed as it finds no legs in manufacturing worth reviving the Economy in goods production and of course the stat spin fails to take the big opportunity off the table

Rajan seemingly has made it clear he will be taking the Repo rate up again, and as the October meet approaches, markets will be equally quick to reach the bottom of the 5750 – 6000 range of the markets. the Repo rate at 7.50% already looks steep enough to me esp as trading markets stay idled to a high rate pre Taper.

I rather liked the Welfare flavor of August & September and wonder if it will come back again. At least its things we can do. The exchange rate is no good at 61.77, and hopefully its just waiting to go u to 60 levels as signs of others interested in the breakdown to 77-78 recede.

The inflation rate Formulatonomics of getting to that ratio as differential to ‘PPP’ are rather lost to most with a real India, Economics or Finance background though. You want PPP, you should go for a reference you can live with and that still counts as the Mac or the Pizza probably where we are definitely looking for a rate under 40 instead. Indian inflation would count as facts show as deadbeat deflation at 6% itself, as the Economy at 4% is almost a dead duck in the water ( in India references, it being the flat minimum of National activity)

Related articles

RBI eases short-term rates and liquidity with 50bps MSF cut; small banks gain (dnaindia.com)

India Cuts MSF Rate to Ease Cash Squeeze After Climb in Rupee (bloomberg.com)

Cut in MSF, RBI to monitor CAD and Inflation(WPI)- Bank Policy and Mid Quarter Review (September 2013) (awardz.wordpress.com)

India Morning Report: Crude down, Gold trade dead, MSF cut a real boon?

Boon Lay Extension
Boon Lay Extension (Photo credit: Wikipedia)

Sorry, I’d rather understand why the party for reduction in MSF and INR 170 Bln of Borrowing added in .25% of the Deposits. The channel to the low repo rate of 7.50% is still 150 points after the cut and the 10 yr yields are not really expected to move south from 8.6% ‘except at the low rate of’ 50 basis points in the next three months it had already proffered before Rajan made the change.

Anyway, markets at least recognize or get their bank spokespersons/contacts to say banks are at ease again so the 5950 mark has come. already on the markets. the Upward potential is truly limited at this juncture, all the media noise budget (DAVP one mite bite) for showing activity in the Economy not making up for the spending cuts to stay  in and the investments still a far way off.

Again, however, markets per se are undervalued excpt that they wait on such changes in fundamentals which are India’s bane for moving up while China gets a free look again just for having underperformed as it finds no legs in manufacturing worth reviving the Economy in goods production.

Cabbage Market
Cabbage Market (Photo credit: Wikipedia)

Rajan seemingly has made it clear he will be taking the Repo rate up again, and as the October meet approaches, markets will be equally quick to reach the bottom of the 5750 – 6000 range of the markets. the Reo rate at 7.50% already looks steep enough to me esp as trading markets stay idled to a high rate pre Taper.

I rather liked the Welfare flavor of August & September and wonder if it will come back again. At least its things we can do. The exchange rate is no good at 61.77, and hopefully its just waiting to go u to 60 levels as signs of others interested in the breakdown to 77-78 recede.

The inflation rate Formulatonomics of getting to that ratio as differential to  ‘PPP’ are rather lost to most with a real India, Economics or Finance background though.

You want PPP, you should go for a reference you can live with and that still counts as the Mac or the Pizza probably where we are definitely looking for a rate under 40 instead.

Indian inflation would count as facts show as deadbeat deflation at 6% itself, as the Economy at 4% is almost a dead duck in the water ( in India references, it being the flat minimum of National activity)

India Morning Report: A technical correction to make space in the move

Nevertheless, whether the lost steam of the rally is recovered or if markets correct this series a little more steeply long enough to stem selling by Domestic institutions and some investors, profit taking would have been good for your business last week in both the Rupee and Indian equities (NSE Nifty 50, BSE 30 Sensex/BSE 100 or the MCX SX40). There has apparently been a natural disaster in Hang Seng Exchange ahead of the China data release today (Flash PMI) and next and the exchange is closed because of the Typhoon for two hours before the afternoon session. China’s manufacturing jump has gone up from last months record 50.8 to above 51 this month, but it is unlikely that Copper will indeed respond too positively if you are trading commodities. If it is equities, yes markets outside India incl OECD markets are likely to jump at the news , especially the European session ahead of Nifty’s late afternoon sessions. Doing well in China – Mining an Real Estate s something may well be wrong and come out so before next month but definitely trade data will be up as well for August. That optimism may change the course of the Indian markets mid day itself

 

OECD Countries Blue
OECD Countries Blue (Photo credit: Wikipedia)

 

SGX Nifty however leads the Indian investors correctly for a change ( a Feather in the cap of CME and Nifty teams) and the markets will definitely dip below 6000 before deciding whether banks are strong enough or the rebound before the repo rate increase was justified. A Repo rate to 7.5% upset the rally completely? Surely we are better than that. Banks not being given that vote of confidence could indeed decde the quantum of the down move(two thirds of the reason), as also to the other one third of the reason would be any volatility in he Rupee correcting from 62 levels down instead of continuing the up move to 60 levels. A good sign is if banks get new OI encouraged by build up in Put volumes sold at now definitely amongst the lowest levels for the Banknifty, so the Edelweiss analyss recommendations on ET Now could be right on the money

 

Infy has responded well to the Rupee appreciation, avoiding a reaction still correcting to below 3000 levels, but the HCL trade continues to put the wrong risk takers in the lead as even consolidation of the company with HCL Info is only a face saving device for the hardware business and not value accretion expected in the merger

 

The troubles of Ranbaxy keep the scrip in the spotlight and fortunately it never put the Indian Pharma sector under the wrong spotlight despite their brazen actions and the continuing cascade of FDA actions plant by plant at other suppliers as well fueling the anti-India anti-Quality prejudice traditional in OECD investors

 

Urban India also probaby thinks NaMo’s commmunal licences can be similarily ignored as a quirk and the resultant fractured mandate is not just India’s biggest fallibility bu also sign of the inadequate proficiency of Political Sciences in a land otherwise profuse with globally renowned academics and probably the situation in these arts and sciences is more deficient than the lack of educators in IITs and IIMs

 

The Nifty however may not leave the range of 5950 to a new number on the upside, which is still likely and which may see FNO action by midweek

 

 

India Morning Report: Is 5600 the new 5000? Rupee is holding 65-66

With the  Rajan effect crystallising over the India investor skies, a new definition of India’s winter seems to be up as global liquidity withdrawals accelerate availability of funds from the exodus fro US bonds and a small portion is likely to start trickling back sooner than one would think.

The earlier expected recovery cycle threw up banks, infracos (IDFC, Power NBFCs ), ITC, Bharti  and Bajaj Auto and others in FMCG and Consumer Goods sectors and more or less they will make the bedrock of larger EM portfolios with or without MSCI index dependencies. Metals are good for this cycle and Tata Steel can still make it even if Global demand does not respond the way it is expected to recover in the end

Weightage maintenance is also in play and at 5600 levels that means sizable new buys fr funds that sold just a week back. The volatility till yesterdy will continue to affect timing of new investments and most invstors ahve oodles of time to play out their vaalue and growth leaders in the portfolio .

Now did I hear someone mention Rajan has to perform? Rajan would not be credited with bringing individual accountability to the RBI’s various senior officials but it is happening as we speak and Rajan hmself would know difficulties of thinking of implementing structural reform before May 14 decisions are out for India inc. The rajan effect itself was really areiteration of everyone’s agenda since 2000s , and the currency responding after controls on speculation were lifted is the unnoticed vote of confidence for India as a destination. ECB funding should be proceeding on A+ paper and equity QiPs

 

India Morning Report: Rajan appoints committees for everything, Rupee to discover under 66 levels at open?

The change in Monetary and Fiscal policy stance is fairly well obscured by the need for consensus but with Overseas Direct Investments retained at 400% of Net Worth and removal of hedging restrictions by allowing rebooking for both Exporters (50%) and Importers (25%) or Dollar Swaps at 100bp better rates with the Central Bank for FCNR deposits till November in existing schemes could just be a sign of old policy pieces being consigned to vestigial life, though such reform reaams have come and passed India Inc by for almost millenia, and at last 67 years f independent India. However, these limit relaxations typically let th Rupee sales accelerate into a new orbit usually and that is definitely unlikely

as predicated last week, S&P, Moody’s have been watching these developments only as a fallout of their prognostications of India’s twin deficit weakness and are much reiterating their last assessment when S&P had recommended a negative outlook based on a 1 in 3 chance of downgrade which USA had barely avoided. the Ratings firms are likely to be under pressure to change their ways and the step difference between Asia, Europe and probably from office to office of the agencies which reflects a woefully inaccurate picture in ratings , that are still catching up with munis and structured products n US and Europe and illiquid CDS in Europe and Asia

IMF Economic Counselor and Research Department...
IMF Economic Counselor and Research Department Director Raghuram Rajan briefs the press on the World Economic Outlook on April 13, 2005 at the International Monetary Fund Headquarters (IMF), Washington, D.C. (Photo credit: Wikipedia)

The Land and Food Bills have passed both houses seemingly without riposte and the Pension and Insurance Bills are next. However, back on Rajan’s first day, some other welcome proposals include allowing NBFC Prepaid cards for payments, starting national Gyro payment services (Nachiket Mor -Inclusion)and Rajan himself sitting on the committee to decide stringer  norms for NPAs and concerns on restructuring yielding more NPAs than normal accounts. Banks will be investing lesser in Gilts and SLR rates going down could be still a long drawn process while Branching being freed may be some incentive for Foreign banks also to execute subsidiaries. Most of these proposals will be overseen by various Deputy Directors an ex Governor Jalan will head the committee on  new licenses due soon after Jan 2014 when Anand Sinha leaves.

Markets otherwise keep responding to new signs from metals after a record comeback month in July/August and the banks will show their hands on the policy through their price movements the remaining two days of the week. Liquidity restrictions are still on and India is fighting the worst currency crisis of the last six generations

Indices again moved the entire range crossing 2% from 5340 to 5450 levels by the close and Wall Street enjoyed one of its best jumps overnight n Auto sales data. European PMI cements the days of crises as past though growth is yet patchy and China is the pod the global investors still look to, despite their repeated equity failures in the market

 

Bank Policy Tuesday: Rates are due for a big cut tomorrow..(incl the Mid Term Economic Review FY 13)

IMF Chief Economist Raghuram Rajan at the Worl...
IMF Chief Economist Raghuram Rajan at the World Economic Outlook press conference.WEO Press Conference, Washington DC, IMF Headquarters (Photo credit: Wikipedia)

 

Maybe only 10% can see it well enough to vouch for a bigger CRR cut this morning but the news of Economic bottoming out and the data outlook from infation and IIP could well translate into a big Pre-March boost for the Economy tomorrow. Any boost in the rest of the Financial year is hardly likely to reach the Economic growth of the next very quarter and the RBI Governor has shown earlier that while he is brave enough to hold back if it is still opportune for only inflation led dinosaurs, he is equally brave in rewarding markets with better rates on such a cusp of expectations where the Economy is showing signs of upgrading itself and Credit has been strong and silent as a performer in the background without retail inflation crossing 10% in CPI terms. Also that would leave policy doves and hawks eager and attentive in the remaining three months including the call in February.

The discussions of a bottoming out however , especially in light of the findings presented in the Mid Term Review ( Chief Economic Adviser Raghuram Rajan is on rightnow). However the reduction in the CAD is not on account of Revenue targets ( which are likely lesser by ~20% of the ambitious Target to nr INR 3.1 T ) but from the Divestment Engine that has chugged along after NMDC’s successful completion the same week.

The Mid Term Review also mentions the Fisc is likely to go to 5.3% and the spectre of reduced subsidies is unlikely to engender further instability to the current regime. RBI is expected to go for a 50 BP CRR cut or more likely a 25 BP CRR cut according to the morning polls

 

 

 

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