Fourth Bi-Monthly Monetary Policy – Expectations v/s Reality

The Reserve Bank of India will be rolling out its fourth monetary policy review for the year on 29th Sept,2015. The opinions so far are mixed in nature about whether RBI will choose to maintain status quo or cut rates for the fourth time in a year. Although, the markets seem to expect a rate cut of 25 bps, Dr. Rajan will have his own judgement of the situation. Let us understand what the various domestic macroeconomic indicators and the global events suggest. We will also briefly discuss about the FOMC meeting held on 16th and 17th Sept and its outcome. We will evaluate the domestic factors such as CPI, WPI, IIP, Credit Growth, Deposit growth, call money rates for liquidity, stability of rupee, global data, and finally ERI (Equilibrium Real Interest being the factor that decides the quantum of a rate cut, if at all there will be one).

For the readers ready reference, the following link will give you an idea as to what we predicted in the third bi-monthly monetary policy:

Third Bi Monthly Policy

The overall signals from the global events indicate that the global growth is slowing down. China being the predominant contributor in the same. Euro zone, is still struggling with the deflationary scenario. ECB, in its recent monetary policy review, kept its rates unchanged at 0.05% and decided to continue with the ongoing monetary stimulus in the form of Quantitative Easing. Federal Reserve, on the other hand, also decided to maintain status quo in their policy review. US Fed briefly decided based on two important factors, namely, unemployment data and retail inflation. The unemployment data was below the 5% target levels of Fed but inflation still showed persistence at near 0% levels. The FOMC implements its policies based on FIT( Flexible Inflation Targeting). With such disappointing data, Fed hence decided not to hike the rates and maintained a status quo at 0-0.25% rates, which indirectly has given a room for a repo cut.

IIP data, published for the month of August, showed a sharp rise to 4.2%, which clearly suggests that a rate cut might not be required when the manufacturing sector has expanded well. IIP was majorly driven by manufacturing, electricity and surprisingly agriculture as well. WPI, on the other hand, continued its downward deflationary trend and stood at -4.95% as compared to near -4% levels last month. Looking at WPI as a stand alone data, its does indicate the required room for a 25bps rate cut. CPI, the retail inflation indicator, which is an indicator that RBI monitors closely before a monetary policy review also eased to 3.66% from 3.69% (july) in August. Although, the CPI seems to be eased, it is suggested by the RBI that the fall was largely due to the base effect, excluding which it would be around 5.5%. Overall, CPI numbers are suggesting a rate cut, but my take is that the base effect will play a major role in deciding the actual values. The trajectory of CPI in the future seems to have upside and if not tamed, RBI might miss its sub 6% inflation targets by Jan 2016.

CPI Inflation Trajectory so far...
                                                            CPI Inflation Trajectory so far…

The banking sector seems to be struggling in its growing NPA numbers and higher cost of funds. Credit growth (9.8%) is still being outpaced by deposit growth (11.56%) which is a cause of worry for the banking business. RBI, with its draft guidelines on moving to Marginal Cost of Funding from the old system of Average Cost of Funding, has suggested the banks to not rely solely on rate cuts for reducing the costs. RBI has also rolled out a few reforms for efficient lending and management of NPAs in the past few months. Recently, to facilitate the corporates, it also liberalized the External Commercial Borrowings norms.

We have to expand the sustainable growth potential. That means continuing to implement reforms that the government and the regulators have announce. That is the only way to get sustainable growth potential up – Dr. Raghuram Rajan

With the call money rates at 7.28%, which are well within the repo window of 6.25% and 8.25%, the liquidity condition seems to be quiet comfortable and certainly rules out any chances for further monetary easing. Rupee in the past two months has depreciated by about 3% amidst yuan devaluation. Maintaining the stability of rupee is a challenge for the RBI and any further easing might lead the rupee to depreciate further. Although, India has fared well against the other countries in the emerging economies group, its is unlikely that the RBI would be comfortable allowing the rupee to depreciate further. On a quantitative note, as I mentioned in previous blogs, RBI is comfortable with an Effective Real Interest rate of 1.75% over and above the average inflation. The average inflation in India for 2015 is at 5.96%. Adding the ERI to the inflation, it is unlikely that there is any room for rate cuts.

While fellow BRICS (Brazil, Russia, China and South Africa) were in distress, India has seemed to be an “Island of Tranquility” – Dr. Rajan

Summarized Parameters
  Summarized Parameter Indications

The parameters, which are predominantly domestic, as mentioned in the above given image suggest that the RBI should probably wait a little longer on their decision to cut rates. Although, the ‘FED’ maintained a status quo, it is likely that they might raise the rates by Dec 2015 if the data is supportive enough. The RBI is likely to maintain a status quo and pass on the next set of triggers on to the Government reforms, since the RBI has indicated that they will focus on long-term inflation targeting rather than quick impatient fixes for the economy. RBI would be happy if the growth path hereon can be spearheaded by the reforms with respect to the GST and its smooth functioning in ease of doing business. However, after analyzing the relevant factors, in terms of magnitude and direction, I predict that the RBI might choose to maintain the status quo at 7.25% in the Fourth Bi-monthly monetary policy. CRR and SLR ratios are also likely to be untouched as the liquidity conditions are surplus. 

Thank you 🙂   

Can Equity Investments act as your Fixed Deposits?

Equity Markets are known for their volatile nature in the world economy. The general perception of the investments into the stock markets is slightly negative in India. I have generally seen people investing into safe havens like fixed or recurring deposits. In this article, I am going to unfold the secret of how one can have a fixed deposit in the stock markets. We will discuss the overall benefits of the investments in to equities (direct and indirect), followed by tax benefits and liquidity and finally returns on equity investments in the long-term which will be based on the movement of nifty from its inception in 1996.

If you wish to invest into equity markets, there are broadly two ways of doing it, namely, direct equity and indirect equity investments. Naturally both are subjected to market risk but there are slight differences in the risk measures in managing the investments.


Following are the points of comparison between Equities and FDs:

  1. Liquidity: Fixed deposits have a lock-in of 5 years for them to reap you tax-free returns. If you liquidate FDs before 5 years, you lose the interest part for the remaining tenor as well as the taxes as per the individual tax slabs, will be applicable. On the other hand, equity investments are no less liquid than the FDs. The investor would not even lose out on the returns on the same. Investor gets the funds within two days post the sell off. The only difference is that equity investments do need some level of planning in investment and redemption part of the portfolio.
  2. Taxation: FDs give you a tax benefit over the gains after you have been invested for 5 years, while the equities provide you the same over a period as short as 1 year.
  3. Returns: The post tax returns on a FD over a horizon of 1 year is as low as 6.5%, which will only reduce your purchasing power or keep it almost the same as last year. But the requirement is to increase your purchasing power, which only medium or high risk assets can provide. Equity, over the long-term, has been giving an averaging return of 14-15% each year. That means, you are beating the persisting inflation by almost 7-8% every year.

I have analysed that the fear persists in the minds about the equity markets because of speculative mindset. A speculative mindset always looks for the opportunity to gain in short-term. That leads to many losses by the end of his/her consecutive trading sessions. Many people think about intra-day gains as well where they play on a certain stock on the daily price movement. Another mistake the investor makes is they think “markets are falling or rising because of what happened”. But the truth is “markets fall or rise because of what is going to happen rather than the past”. In this process, the investors (who wish to make long-term gains) turn into traders in the hope of short-term gains. The markets are always going to be volatile in the short-term. The Volatility Index in short-term ranges from 22-28%. A long-term investor should never try to time the markets.

It is not about timing the markets, it is about the time spent in the markets that matters – Warren Buffett

In India, we can categorize people as investors, speculators and safe haven lovers. Investors always look for long-term gains, speculators play on day-to-day pricing and safe haven lovers are just simply risk averse. Although, I am not a great fan of speculators, they have their own ways of dealing with markets. Whats creates the other two categories of people? Any guesses? There is that one aspect that bifurcates the two. That aspect is PATIENCE. Do we really check our Fixed deposits values everyday? I guess no. But if we invest even 5% of our savings into markets, we tend to check the values everyday without fail. I will not suggest not to check because its ones hard-earned money, but the frequency should be much lesser.

Which side of the device would you like to be?
                            Which side of the device would you like to be?

The image below will show you what PATIENCE can do. But the concept of patience applies to the top companies with extremely good fundamentals. Small caps and mid caps are generally not recommendable for long-term investors. An investor should always diversify. In equities as well, the diversification would be in terms of direct (stocks) and indirect(mutual funds).

                                                      THE POWER OF PATIENCE (Returns in %)

The image above is the returns on nifty in the past 20 years. The green areas indicate positive returns while the red ones indicate negatives. The power of long-term investing is evident here. As the horizon of investment increases, the red areas have vanished and the investments have grown exponentially.

To sum up, put your investments into equity markets. The point to remember is to invest into the right stocks (preferably companies with strong fundamentals). It is important to have your portfolio more into markets to beat the inflation. If you are not able to pick the right stocks, then invest into the equity oriented mutual funds. With increasing age, slowly start diversifying into debt funds and balance out the portfolio to give you optimum returns in the long-term. Have patience, think of the equity investments as fixed deposits and get the best experience of wealth creation. Plan your goals, keep your liquidity stable and invest the surplus in the right assets. Hope this helps you have an insight to the brand new “Equity FDs”. The key is invest in the right assets and forget and always focus on the long- term perspective.

                                                             INVEST IN THE RIGHT STOCKS

Last but not the least, views expressed are my personal opinions. Investments are subject to market risks. Happy investing.

Thank you 🙂

Indian Markets – Back To Square One

The Indian stock markets witnessed a sharp correction in the recent period. There have been various reasons for the continuing sell off which is threatening the bullish stance. The reason of naming this blog as Back To Square One is, the Indian markets have corrected to the tune of almost 15% starting from Jan 2015 which has led to a complete washout of the one year nifty gains. The markets have corrected back to the Aug 2014 levels in the past 9 months. In this blog, we will discuss the reasons of correction, the sharp fall and a bit of prediction of the coming short-term, medium term and long-term expectations.

Markets reached their all time highs during the 2014 period after the NDA govt took over. It was expected to do so in 2015 as well. In Jan 2015, markets were at 9100 levels which was triggered by the first rate cut of the year. But we saw that the markets could not sustain those levels for even a day. The stocks were valued at 24x P/E by that time, which indicated overvalued position  and now they have come down to 16x levels. The correction was expected from that time itself. Apart from this, the corporate earnings growth of Q4 was disappointing for the markets. The parliament monsoon session faced a continuous logjam for the entire period thus making the parliament session unfruitful in terms of reforms. This led to further correction in the markets.

                                             THE PARLIAMENT SESSION OUTCOME SO FAR

While the economy was trying to settle down in April, the Shanghai Index fiasco kicked in. This led to a weak sentiment among the global markets. The Shanghai index corrected sharply by around 30% compared to the past year levels. The Chinese stock market regulator tried everything to curb the outflow post the Grexit fears and hardening of dollar against various currencies, but ultimately failed to recover. China, being one of the fastest growing economy for the past 7 years, started to show signs of slowdown. The FIIs took this as a signal that emerging economies have starting becoming risky because of the high valuations and might correct. With that fear, the FIIs started pulling out hot money from the emerging economies including India. As we know, the Indian markets are driven by FIIs inflows, the outflows starting affecting our index as well. The mutual funds tried supporting the levels of the market by almost equivalent levels of buying, but could not sustain for a long-term period.

Shanghai Index Movement Past Quarter
                        Shanghai Index Movement Past Quarter

The above mentioned facts were for the period up to August 2015. Last two weeks, starting from 22nd August 2015, markets witness tremendous volatility. The volatility was driven by auto sector, IT and Banking. RBI, in the last week of August gave an in-principle nod to 11 payment banks and might declare small bank licenses in the month of September. The payment bank licenses led to the fear of decline in the deposit share of the existing banks. The bank nifty hence corrected heavily with the declaration by RBI. The nifty corrected as well, since banks hold 21% weightage in nifty. The core sector growth on the other hand, slowed down thus indicating that we might have weaker IIP numbers since core sector growth has a weightage of 38% in calculating IIP.

                  NEW PAYMENT BANKS

In August last week, Nifty declined by almost 500 points.Most people took this as a crisis situation. Actually the correction was because of the sell off by brokers. SEBI, in its move towards protecting the investors interest, banned 59 brokers from trading on stock exchanges. They further asked the brokers to square off all the positions in the pre-open session next day. Thus, the markets corrected sharply on a single day. It was not the global woes but also the domestic sell off that led to the correction.

The markets so far have indicated that they are now looking for reforms.  In the short-term, the markets will eye the China woes and domestic indicators and are expected to be volatile. In the medium term, the markets will hope for a rate cut looking at the current conditions and GST Bill passage and might be on a bullish stance in the medium term. In the long-term, the markets are going to be bullish in nature as India might surpass China and become the fastest growing economy. Markets are now looking for a trigger which will take it back on the bullish path. It is waiting for the RBI to cut rates as well as for some reforms in terms of GST Passage. Till then stay invested is the key here.  

Next blog will be an investor education centric article. The question is ” Can your stock picks act as a liquid FD? “. Think about it. Thank you. 🙂