Sixth Monetary Policy Committee Meeting

The sixth meeting of the Monetary Policy Committee (MPC), will be held on August 2 and 3, 2017 at the Reserve Bank of India. The MPC shall review the surveys conducted by the Reserve Bank to gauge consumer confidence, households‟ inflation expectations, corporate sector performance, credit conditions, the outlook for the industrial, services and infrastructure sectors, and the projections of professional forecasters. The Committee shall also review in detail staff‟s macroeconomic projections, and alternative scenarios around various risks to the outlook. The decision of the MPC shall be in accordance with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth. In this blog, I shall focus on the above mentioned parameters to access the likely policy action to be taken by the RBI in their monetary policy review scheduled next week.

The current scenario of the policy rates is as follows:

  1. Repo Rate – 6.25%
  2. Reverse Repo – 6%
  3. Marginal Standing Facility – 6.50 % (Being pegged at 25 bps to the repo rate from the last policy review since the volatility of the call rates has significantly reduced)

GLOBAL ECONOMIC OUTLOOK:

The global economic activity has been growing at a modest pace, catalyzed by the emerging economies and some of the advanced economies. US markets have benefited from the wage gain and the industrial production has been steadily improving. However, US continues to face ebbed sales figures at home. The Euro zone continues to struggle in their movement towards growth. The political risk continues. Japan seems to be struggling with the subdued domestic demand and the political instability concerning the removal of Abby. Among the emerging economies, China has shown significant signs of stability, Russia has been witnessing improved recovery in their macro fundamentals while South Africa continues to face the depressing economic conditions. This clearly indicates that the global economic activity has been fairly slowed down and is expected to stay so for the coming 2 quarters as most of the emerging and advanced economies struggle to provide growth impetus.

The air freight and the container throughput have shown increasing trends indicative of strengthening global demand. Crude prices fell to a five month low in early May on higher output from Canada and the US, and remain soft, undermining the OPEC‟s recent efforts to tighten the market by trimming supply. These developments suggest that the inflation outlook is still relatively benign for AEs and EMEs alike.

GLOBAL MONETARY POLICY STANCE:

Since late June central banks of developed markets have suddenly started echoing calls for a sooner-than-anticipated normalization of policy on the back of solid growth despite sluggish inflation.

After Fed’s 25bps of rate hike in June, Bank of Canada has already followed by hiking the policy rate by 25bps, the first hike in 7 years. Meanwhile ECB and BoE, although for different reasons, have also been sounding hawkish. The coordinated policy statements led to a sharp reversal in sentiments, resulting in bear steepening of the yield curves across US and Europe. Japan remains the odd one out, given BoJ’s recent fixed rate bond intervention in order to reinforce its commitment towards massive monetary accommodation. However, lately we have witnessed some reversal in earlier tight rhetoric from Fed members, lack of hawkishness in Fed Chair Janet Yellen’s testimony and some ECB members playing down earlier hawkish comments by ECB’s Mario Draghi.

INFLATION OUTLOOK:

On the domestic front, the recent CPI inflation print of 1.54 per cent is significantly lower than RBI’s already downward revised range of 2-3.5 per cent for first half of FY2018. With another print expected to be a tad below 2 per cent (despite inclusion of 7CPC HRA component), and the sustenance of low food inflation in the pre-monsoon summer months is expected to provide comfort to RBI that at least part of the food disinflation is structural in nature.

The forecast of a favourable monsoon further bodes well for food inflation. Also, the refined core index – core excluding petrol, diesel, gold and silver – a metrics of real underlying price pressures, continues to inch lower, suggesting a slower narrowing of output gap than probably anticipated by RBI.  Overall, given the not-so-adverse global environment and benign inflation trajectory, it will be very difficult for RBI to provide a rationale for not easing in the upcoming policy. The headline inflation is likely to stay at sub-4 per cent till November 2017. Undoubtedly, the June inflation reading marks the trough and we thereafter expect a gradual uptrend through rest of the year. In 2HFY18, inflation may largely range between 3.3-4.5 percentage, mostly in line with MPC’s projections.

GROWTH OUTLOOK:

On the growth front, Index of Industrial Production has shown clear signs of stagnancy so far at 1.7% and the central bank has forecasted that the IIP index may further slow down in the next 2 quarters. Also, the Q1 earnings of most companies have not been satisfactory as compared to the inflated valuations of the markets lately. With IIP slowing down, it might act as a key parameter in deciding the policy actions this time.

BANKING SECTOR:

The banking sector has been facing turmoil because of the rising NPA’s and reduction in the overall increase in the exposures. The public sector banks have seen a sluggish credit growth of 7.26% whereas the private sector banks are clocking a fairly good credit growth rate of 17%. This trend is not new for India although, the public sector lenders have been defensive lately due to increasing bad loans. However, RBI might take some new actions in terms of forcing the public sector lenders to create sophisticated systems in order to perform an efficient credit and risk management and simultaneously clean up the balance sheets. With the probability to reduce interest rates in August 2017, the lingering fear of banks shifting their focus to credit growth from balance sheet clean ups shall continue to persist.

With the average inflation almost close to the comfortable levels of 3%, sluggish demand and higher industrial growth, RBI and the MPC would would closely watch the inflation trends in the near future. However, certain additional structural reforms in order to help banks clean up their NPA loaded balance sheets can be expected.  

I predict, that the RBI will cut the repo rates by 25 bps to 6% from the current rate of 6.25% in order to foster growth, IIP and the sentiments. CRR and SLR will be untouched due to the ample amount of liquidity and money supply in the system. The RBI would also like to ensure that the economy’s ERI  of 1% at least which is currently higher at 1.75%.

However, the forward guidance of the policy will continue to be fairly dovish, reform-driven and a certain push towards a more efficient monetary policy transformation. Although, the MPC will have to ensure that the rate cut does not impact negatively on the ongoing balance sheet clean ups and insolvency declarations with an expansionary policy action this month.

Counters are welcome. Thank you 🙂

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Fifth Bi-Monthly Monetary Policy – Likely Outcome

The Reserve Bank of India will be publishing its fifth and probably the last bi monthly monetary policy for the calendar year 2015. The reason of it being “probably” the last is there are chances of Out of Cycle Policy actions if US Federal Reserves decides to increase its interest rates in their next FOMC meeting which will be held on 15-16 Dec, 2015. Although, looking at the current scenario, its is difficult to predict what the FED might decide in the near future. However, I will focus predominantly on domestic factors in this blog to conclude the likely outcome of the monetary policy. 

Here are a few links for the readers to recap on the scenarios of the entire year:

RBI BI-MONTHLY POLICIES

Lets focus on the domestic factors first. Index of Industrial Productions in the past two months has been on the lower side. The surprising slowdown despite rate cuts does call for a rate cut at a macro level, but the impact has been predominantly due to global growth slowdown. CPI on the other hand, increased to 5.14% in Sept while 5% in October. The sudden increase in CPI is due to the prices of pulses increase heavily in this quarter. WPI, so far has been showing a dis-inflationary path but the wide difference in the two indicators is still a problem for the CSO and the RBI in terms of reliability. The two indicators,namely CPI and WPI, are causing an ambiguity in terms of the inflation figures. The divergence between the two has been increasing lately. The image below might explain as to how these indicators are contradicting each other. However, since RBI has been focusing on taming inflation on a priority basis, the focus will be lower on the slowing IIP figures.

Fullscreen capture 11292015 110453 PM.bmp

On the domestic front, the banking sector still seems to fight the rising NPAs. The part that Dr. Rajan would be worried about apart from that is the deposit growth outpacing the credit growth continuously for the past 12 months. The good part of the bad situation is that the gap between two is reducing gradually.  Although, RBI is doing its bit in uplifting the current conditions of the banks by rolling out timely reforms, a robust solution would always be a pickup in the domestic demand. Till that time, I guess RBI’s hand would be tied up for any further actions. Liquidity conditions as well seem to be comfortable with the call money rates fairly stable and well within the repo window which does not call for any further easing in the near future. 

Fullscreen capture 11292015 110334 PM.bmp

On the global front, the slowdown is deepening and might continue to stay subdued in the near future. China is facing immense distress situation. US on the other hand is waiting for the inflation figures to increase to the expected levels so that they can take a call on hiking the rates. Euro Zone as well is struggling to come out of the dis-inflationary path despite the extended quantitative easing. 

Economic condition in terms of reforms does not look great with hurdles for GST passage persistent. On Dec 5th, the Arvind Subramanian committee will give its recommendation for the GST rate. Winter session will decide the course for the growth rate as well as the market conditions for the Indian stock markets. A pickup in the gold monetization scheme will also be a key metric in determining the fiscal condition in the coming year. 

To conclude, with the CPI, WPI and the food inflation rising, IIP reducing slightly, substantial probability of a US FED hike, the RBI in its fifth bi-monthly monetary policy will maintain a status quo in terms of the repo rate(6.75%) and the CRR (4%). SLR on the other hand will be reduced by 25 bps. SLR will be 21.25% from the current levels of 21.5%. The importance will be on the tone of the speech on Tuesday and the same will tentatively signal RBI’s intentions in the near future. With this action, Dr. Rajan might put the ball in the Govt’s court to roll out the necessary reforms to move the economy forward. It will be important for the Govt, RBI and the CSO to also reach a consensus on the inflation indicator for a much clearer picture in terms of the real conditions in the economy. RBI will be closely watching the inflation figures before they decide to do any further easing. 

Thank you.
🙂

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 🙂   

Dashing Denmark – A Case of Extraordinary Monetary Easing

An unusual way of monetary easing has become a favorite solution of most central bankers in the recent past. Lets take a look at the meaning of the word monetary easing before we discuss on those lines. Monetary Easing can be defined as an “Action by a central bank to reduce interest rates and boost money supply as a means to stimulate economic activity”. Precisely putting it, the actions taken by the RBI in the past few bi monthly meetings can be referred to as monetary easing.However, monetary easing can be bifurcated further into the ordinary(rate cut) based on macro economic indicators and the other being the unusual monetary easing used in adverse situations to get the economy moving. Few examples of unusual monetary easing can be US Quantitative Easing, Japan’s QE(Quantivative Easing) to revive their deflationary scenario and the most recent one being the ECB (European Central Bank) starting the Euro QE to revive its economy which will continue at least till Sept 2015.The move by the US Fed, ECB and Bank of Japan seems to be very similar and been done for very similar reasons but what they missed was the currencies they were dealing with were completely distinct, in value terms.

The best way of easing the monetary policy can be a rate cut. It was most certainly ruled out since Japan, US(0.25%) and Euro zone(0.05%) were all witnessing near zero interest rates from a long time. The measures taken by the above mentioned central banks were thus in the form of printing and putting in more cash in the system to revive the economy since all of them were out of options. But Denmark, decided not to go for QE at the time of slowdown ( although interest were near zero) but instead go for further rate cuts, making it an extraordinary monetary easing scenario.

FIN_2014-05-01_OPI_004_31523630_I1

This move created a problem in the economy instead of boosting growth. So what exactly did the Danish central bank do ? In January, looking at the economic slowdown, the Danish central bank decided to cut rates( which were already hovering near 0%). The central bank, instead of going for a QE, went in for 4 consecutive rate cuts since January thus leading to an interest rate of -0.75% which ultimately brought the bank deposit rates into the negative rate zone. On the other hand, the Govt of Denmark was paying the corporate companies an interest of 1% for advanced tax payments and prepaid tax payments if any. This made the bank deposits less attractive as compared to the tax payments. Companies usually enlist legions of lawyers and even move headquarters to minimize tax payments. In Denmark, they could be better off overpaying them. The companies started holding immense amount of money with the tax authorities since they were paying 1% on their advance payments. This started costing the Govt as well as leading to dilution of transmission effects of the monetary policy. The banks on the other hand were charging their corporate customers to hold cash in banks. This has led to a disastrous situation where the money is being moved out of the real economy which is supposed to be the other way round.

It created high costs for bank because of the low-interest rates in terms of lending business. The loan became cheap and the prices of the real estate started shooting up. All this can be related to the Gold monetization happening in India. If we are struggling to get the already existing gold reserves to the banking system, just imagine what can be the condition if money moving out of real economy is to be brought back in. Customers or general public on the other hand in Denmark are facing what people in India holding gold jewelry have been facing. A person holds gold with the bank on which they wont pay interest but instead take locker charges from them for keeping those safe. In the same context, Denmark citizens are facing similar problems on the cash side of it which is making them move away from the bank deposits. The customers are feeling like the following images in Denmark:

banksstealing-2xtx0ekd9rwrbq3z7lqolm

NIRP

Entire situation has created immense problems for Denmark including the revival, the rising real estate prices, banks taking a hit on their profits and money moving out of the real economy. Although Denmark Govt has taken charge of the situation and are trying to come up with various legislations to make sure the economy can be insulated from these unexpected effects of monetary easing.

To sum up, such actions if continued by various central bankers, will result into tremendous decline in the global growth rate. The economic slowdown in the world, where the world economy is growing by mere 3-4%, is because of the attempt of the monetary policy to be made in such a way that it affects the world instead of having effects. Dr Rajan in his recent press conference gave an immensely important statement,

 ” The world economy can grow in a sustained manner only if the monetary policy of each country is designed with a view of facilitating trade in the entire world economy rather than with a mindset of affecting the various economies because of the mere reason of inter-dependencies”

The conclusion being that each country is different in its various aspects of the economy, which should be respected and the Central bank should work in tandem with the policies of the Central Govt and vice versa. Every Central Banker and the Govt should take lessons from this event that none of the two institutions can run without appropriate guidance from each other. Denmark was a case of non accommodative policy execution more than an extraordinary monetary easing. 

Thank you 🙂

Grexit and Its Effects on the World Economy

The exit of Greece from the Euro Zone, nicknamed as GREXIT, is the currently trending topic of the global economy. Grexit is looking almost inevitable at this point of time as far as the talks between the Greece Ministers and its creditors are considered. Amidst all the events, we will take a look at how the world economy might be affected and how Indian markets might react.

Let us start with a small recap on how this situation of a default by a country actually arose in Greece. Has it happened all of a sudden? Or has it been an effect of a long-term sustained stressed situation? So here is whats been happening in Greece in brief right from 2008, the year popularly known as the year of Sub Prime Crisis. Although it has no direct correlation with the current situation in Greece.

Just when the world was recovering from the global slowdown of 2008, with the fear of default and in the hope of getting assistance, Greece announced that it was understating its deficit burden from quiet a long time. The news came as  a complete surprise to the markets and while analyzing this situation the world started questioning the ability to payback its debt obligations. Greece had a debt to GDP ratio of around 146% by 2010. Due to which the Greece bonds were declared as Junk bonds( precisely non investment grade bonds), which prohibited them from accessing the bond markets.

karikatur für tribüne- skeptische blicke

In this adverse situation, the International Monetary Fund (IMF), the European Central Bank (ECB) and European commission(EC) came to rescue with a proposal for Greece to initiate a revival. IMF, ECB and EC, together popularly known as the Troika, extended a loan of 110 Billion Euros in its first lot, and another pack of 130 Billion Euros. Although this assistance came with certain conditions like cutting down Govt debt, structural reforms and privatization of Govt Assets. These severe austerity measures were not taken well by the public. However, this continued for a year and then finally a premature election was called for in Dec 2014 since the public wanted a new govt to handle the situation. The new Govt in power refused to accept the measures suggested by the Troika for its revival against a huge sum of 240 Billion Euros. From that time onward, there has been immense political uncertainty, which is indicating that the Euro Zone might probably let go off Greece.

Currently Greece is left with two bad choices to make and its been left to them to choose whichever might lead to lesser repercussions. Following image might just give a brief idea of the condition:

grexit-comic

In case if Grexit happens, then the stock markets might see turmoil for at-least a medium term period since many companies in various countries have immense dependency of their revenues from the Euro Zone. Before we look at what would happen to Indian Markets, let take a look at what would happen in general on the event of a default. Grexit would mean distress in the euro zone, depreciating euro against the major currencies. Dollar would strengthen immensely over this event, thus putting further downward pressure over rupee. Apart from currency markets aspect, it might even lead to FIIs outflow since the emerging markets as a whole would become risky and the investors might want to invest in safer assets such as US Treasuries, especially in the short-term. Greece on the other hand might be locked out of the international markets. The crisis doesn’t end there, Greece will have to adopt its old currency, drachma, which will lead to its devaluation on default but the debt will still have to be repaid in terms of Euros, leading to further distress.

Indian Stock Markets on the other hand, might become the favorite destination to invest in the long-term, looking at the simultaneity of Euro Zone crisis, the US showing slow recovery, China showing slowdown, Shanghai Index correcting almost 20% being over valued from the past year and IPOs woes, and all time high forex reserves with RBI to control currency movements. Anyway the markets would not be affected to the extent of correction of 2008 phase since there are not many un-hedged exposures from the corporates. The only issues might be a few companies being exposed to the weak Euro as a part of their revenue generation and the new 30 IPOs lined up to enter the markets. However, in this decisive time it will be interesting to see if Greece handles the situation wisely or will choose to default.

Next up might be something on markets, in case Greece defaults on its 1.5 Billion euro payment to IMF.

Thank you. 🙂

“Bears” in action..”Bulls” seem far-fetched..

bullbear

Bulls and bears are the trends when we speak about the stock markets. Indian stocks markets these days are witnessing a bearish (downward) trend amid various issues. Stock markets have tumbled in the past two weeks because of the weak sentiments and rather weak implementation of reforms. Modi Govt has so far failed to maintain the sentiments of the bulls. Experts and investors are of the view that the Modi Govt has just been words till date. So why are we witnessing this bearish trends?

Indian markets are fairly dependent upon investments by FIIs( Foreign Institutional Investors) and FPIs( Foreign Portfolio Investors), also termed as “Hot Money”, which makes the Indian markets vulnerable to any uncertainties.

Presently, the MAT (Minimum Alternative Tax) issue seems to have reversed the bull run. (Here is a brief idea of what MAT is: It is a minimum tax to be paid by companies making substantial profits but which seem to have no significant income on paper due to deductions and exemptions)

” The hardest thing for a human being to understand is tax laws” – Albert Einstein

MAT as such is only applicable to the companies where the income tax calculated under the IT Act is less than 18.5% of the book profit. Companies coming under the exemption of DTAA(Double taxation Avoidance Agreement), 89 countries out of which 87 treaties are active, continue to enjoy the tax-free income from the capital gains. Roughly, a week ago, the IT Dept sent out notices to around 68 FII and FPIs demanding a tax liability of Rs. 602 Cr. This step created a havoc in the markets regarding the tax reforms in India. Post this, FPIs started pulling out money from Indian markets and thus putting downward pressure on the index. Although the MAT issue has now been resolved for the future years, MAT is still going to be applicable to FY 2014-15 capital gains and we might see a further bearish trend in the coming weeks.

On the domestic side of the economy, Indian steel and tyre industries are in a highly distressed condition. China and Japan who are currently sitting on a huge inventory of steel and tyre produce, are dumping the entire stock in the Indian markets at a price cheaper than persisting indian costs. Frankly, we cannot stop the supply from Japan because of the free trade agreement. China on the other hand can only be restricted by certain import duty changes. MoF needs to take some serious steps in regards to increase import duty on steel. Collectively, it has lead to weak corporate earnings and finally added to the ongoing bearish trend.

On the other side of the globe, Euro Zone has replaced US in investment grades. ECB’s QE(quantitative Easing) seems to have worked in reviving the economy and ending the deflation phase. Although, “Grexit” still remains a key concern in determining the direction of the Euro Zone. US has registered a GDP growth of merely 0.2% in the first quarter thus suggesting a slow progress. Reasons being the abnormally cold weather, cautious consumption and strengthening of the dollar. Fed interest rates hike is thus unlikely till about Sept this year.

In technical analysis jargon,  the index has breached the vital 200 DMA (Day Moving Avg), which indicates further fall from the current levels. The trend can be expected to continue in the same direction if the scenario remains unchanged. In fact, this can be an appropriate opportunity for the aggressive traders to grab the value stocks and gain appreciation of the value in the long run.

Thank you 🙂

The Volatile Oil Prices and the way forward…

We all have always been wondering how exactly do the oil prices react or move based on global sentiments and for what we all say “ye global gyan se oil prices pe kaisa effect padta hai??”.Well this is how it probably does. This is how I am analyzing it to be, the conditions today and the way forward.

Whats currently being going on is the ongoing deal discussions between the US and Iran. Well I will focus on that at the end of this one. Lets talk about what is been happening in the US lately. First and foremost thing is the reduction in the rig counts. Now what does this rig counts mean is the number of drilling rigs actively exploring or extracting oil or natural gas. Note here that Baker Hughes (the US giant which maintains the data on oil production) only counts the active rigs. This reduction in the rigs is the sentiment causing to believe that the oil production in US has slightly come down and that kinda explains the reason why the oil prices have jumped back to “$55 ish” recently. Apart from this the upward pressure is due to the weather conditions in Iran and the violent situation in Libya. Although the price did not suddenly spike up despite rig count reduction, because US was trying to optimally product maximum amount from their most productive wells. But recently Baker Hughes reported another reduction in the rig count, which definitely started affecting the supply and prices started inching up with time. On the other hand, US has its highest inventory of shale oil in the past 33 years, EOG Resources being the largest shale oil producer. Oh and yes we cant forget the invisible shale oil inventory though, estimates are that still companies have left 3000 wells untapped. That is a huge amount of inventory eh?? So we can actually not expect much demand from US for a while I must say.

The reason currently this serious and weirdest upward pressure is also because of the Saudi attacks on Yemen. Although Yemen is not a significant producer of oil, next to it passes the fourth busiest oil shipping bottleneck. Any guesses on that shipping bottleneck?? 😉 Yemen lies on one side of Bab el-Mandeb ( the fourth busiest oil shipping bottleneck I was talking about volume wise)

China, Japan’s recession (waat lag gayi hai boss unki toh) and the Euro Zone all showing slowdown, although ECB Chairman claims that Euro Zone is  revamping and the QE is working for them as such. Naturally the demand from those countries is going to be subdued for at least the following two quarters I suppose. China has just last night reported a GDP growth of 7%, the lowest since 2008.

And what to say about the OPEC countries. (*sigh*). They are in the condition to sell at whatever the hell price they can sell it at so no supply curtailing from them very soon.

Ah finally the most happening thing in the oil markets, the US IRAN nuclear deal. The agreement, which is aimed at curbing Iran’s nuclear program in return for the lifting of economic sanctions on the country, is to be finalized by June 30. If this deal is finalised then Iran is expected to pump up its production by the end of the next quarter thus increasing the supply in the markets again.

The way forward: 

Oil markets has been a game of demand supply dynamics and some absolutely political moves by these middle east countries. But anyway going forward the demand for oil is expected to increase for a month or so since the US maintenance season is going on, rather to be precise US will be back with its refineries producing by May end. Although in the short term we are unlikely to expect a sharp rise in the prices due to oversupply but in the long term oil will likely come back to around $75-80 levels. As far as India is considered, we are having a fantastic time with the oil prices staying low for a while (especially Mr. Finance Minister in meeting in petrol subsidies for the year :P). And I guess that is why MoF is also targeting for the Capital Account Convertibility with oil prices being favourable. Fingers crossed. Every time we have thought of Capital Account Convertibility  a crisis has occurred. Hope RBI and the MoF implement it at the right time and with the most reliable economic conditions in place. 🙂

Thank you.