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 🙂

“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.