SMALL  SAVINGS  INTEREST  RATE  CUT: LET’S  MAKE  IT  LARGE

This was in the offing for a long time now. Prodded by RBI and implored by banks for some years now, the current central government has given in. Small savings schemes, most preferred investment choice of the Indian middle class have lost some sheen with slashing of interest rates on PPF, KVP and NSC, post office monthly income and fixed deposits with effect from 1^st April 2016. Interest rates on Public Provident fund have been reduced to 8.1%, KVP and NSC to 7.8% and 8.1% respectively.    

If you want interest rates to go down and home & car loans to become more affordable then take this interest rate cut with a pinch of salt. This is nothing but logic. PPF, KVP, NSC and post office interest rates all above 8% made deposit rates offered by banks in competitive and unrealistic in the current global scenario. This has worked as a double edged sword for the banks especially PSU. Lending rates cannot be reduced as deposit rates need to hover around small savings rate to mobilize the much needed savings deposits. And with higher lending rates, contribution of corporate to the total loan book of banks has diminished as they have started leaning towards bond and CP market for long and short term funds respectively.

The vicious cycle of interest rates which makes the cost of capital high or low in an economy starts with banks. Forcing banks to work on lower margins will reduce their profitability (NII & NIMs) and stability in the long run. Market linked interest rates on small saving schemes reviewed quarterly is the right step towards lower cost of capital and higher productivity. The NDA government has shown the courage to go against populism and favor the much needed financial reforms. Though some so called socialist pundits have already predicted 2018 general elections, they should not forget that fortune favors the brave.

       

MADAM YELLEN KEEPS THE STOCK MARKETS TICKING

Though our budget hangover is still on, Madam Yellen and Sir Draghi have ensured that the party goes on. The stock markets all over the world had already discounted the FED decision a day earlier and thus all the major indices have risen considerably insensitive to prevalent deflationary conditions everywhere. But how long will the dancing stock markets make us feel better. Mr. Kuroda has indicated cutting rates further, even up to minus 0.50% to revive growth and spur inflation. Did John Maynard Keynes recommend negative interest rates. I think he needs to check…. Yes he did ask the governments to borrow and spend to induce growth but he also indicated that demand will increase only when households, businesses and government all go for a spending spree. But is this happening… NO….. At the time of Sir Keynes, the financial world was not so complex with derivatives of all kinds, credit default swaps and of course the financial scandals in almost every country big or small. If Keynes would have foreseen all of this, he would have helped to set up an institution especially for financial scandals like IMF and World Bank with membership on the basis of ineptitude of respective governments.

But we don’t have to worry.. Hamare paas deflation nahi hai….. stagflation bhi nahi hai……. Abb to inflation bhi nahi hai…… So what do we have……. Don’t know… growth is also some 7.6%. Anyways the recent IIP index which has contracted again will now be changed with respect to value added concept similar to GDP and hopefully variations will be less. Exports have contracted at a lower rate and trade deficit has also narrowed further, not to forget the passing of real estate and aadhar bills . With all this in the backdrop and domestic indices prancing everyday, feels like holi has arrived early for us. Hopefully Mr. Rajan will join us and extend the holi celebration till Ugadi. 

MR. DRAGHI YOU ARE PUTTING CART BEFORE THE HORSE

I don’t think it’s too late to write about the recent European monetary policy, the most predictable one till date. The only surprise was that the interest rates will not be cut further and with that reassurance by Mr. Draghi, Euro recovered after falling 1.3%. I don’t know whether that was a warning or a request. Warning that, that is all that we can do and request to the European governments to do something substantial. For the markets, Mr. Draghi unleashed a substantial stimulus package by cutting the rate on cash parked overnight by the banks to negative 0.4% and its benchmark rate to zero. Don’t forget the bond purchases which have been increased to 80 billion euros.  So this was what Mario Draghi meant by ‘Whatever it takes to preserve the EURO’, three years ago. But Sir how long will you keep doing that. The markets also understood that and as a result, Euro depreciated and the stock markets jumped. 

Now what if inflation does not edge towards designated target of 2% which right now is around minus 0.2%  I don’t think they would have solution for this especially with US following completely divergent monetary policy and China slowing down which is hurting European Union’s exports. So there is no guarantee that this stimulus will feed into the real economy fostering growth and though banks will be provided with a series of long term loans, their profitability will be hindered by negative interest rates imposed by ECB. What should be done to avoid getting deeper into deflation, the same solution that even we have to follow, structural changes, overhauling of infrastructure, being business friendly. Even Mr. Draghi has asked respective European governments to take up these challenges as in the long run with double digit unemployment rates, high corruption levels, unstable financial environment, migration issues and cultural clashes even birds of the same feather may not flock together.   

RESILIENT INDIA: NORTH STAR FOR THE WORLD ECONOMY

Looks like our stock markets are on some high energy drink, bournvita or red bull, depends on your own taste and perception. Days of panic and anxiety are gone and solar eclipse is over, so investors are on a buying binge. Supported by optimistic US jobs data and crude outlook for the moment, Indian stock markets are making hay till the global headwinds are favorable. Everybody has forgotten about fiscal deficit, fiscal consolidation, veiled warnings to North block by international rating agencies and of course suggestions by every Tom, Dick and Harry of how to steer the Indian economy through volatile financial environment. So All is Well now till BSE Sensex and Nifty 50 again take a dip in the holy waters of panic and greed in case the Reserve Bank of India does not oblige with a 50 point basis cut on 4^th April.  

But what would have happened if the NDA government would have made a U turn on fiscal deficit and had taken a more contentious means of achieving growth. Nothing much, this rally which we are witnessing right now would have been delayed by few days, markets would have digested the fact that India is prepared to take on global headwinds with higher and faster growth. Actually they have very few options, de-growth in Europe and Japan, slower growth in US and China and rest of the world just going through the motions. So where is all of this headed, when is this rally going to end? Why are we so worried about bottoms and tops if we invest in fundamentally strong stocks…. If whatever laid out in the budget is implemented, we would be having double digit growth in the next 2- 3 years and Sensex would easily cross 40000. But even in utmost optimism remember, only FUNDAMENTALS CREATE WEALTH.

ANNUAL BUDGET FY 16-17: WINS THE ASIA CUP

BSE Sensex and Nifty 50 have rallied up by almost 7% post budget. Our experts and analysts are trying hard to find so many reasons for the recent three day rally, from reverse arbitrage trades to dividend announcements to US job data and of course Madame Yellen’s  and Mr. Draghi’s monetary policy meetings in second week of March. So what it means is that our markets don’t comprehend valid reasons for a bull run. Okay for the moment let’s undertake the last set of pillars as set out in the annual budget to find out some validity for the current stock market behavior. The fourth pillar is ‘Jab tak nahi hogi padhai, kaise karoge kamai’. Central government is trying to improve the current status of higher education, skill development and job creation. For that a higher education financing agency with corpus of Rs.1000 crore will be set up and entrepreneurship education and training will be provided in 2200 colleges, 300 schools and 500 government ITIs through online courses. For stimulating job creation GOI will pay Employee Pension Scheme contribution of 8.33% for all new employees enrolling in EPFO for the first three years with salaries up to Rs. 15000. At least this should incentivize private sector to augment hiring of semi skilled and unskilled persons even with no experience.

The fifth pillar is ‘Transform India from kaccha to pucca roads, highways and ports’ and for this infrastructure sector has been allotted Rs. 2.18 lakh crore which includes both roads and railways for the fiscal 16-17. Road sector individually has been allocated Rs. 55000 crore apart from Rs. 15000 crore to be raised by NHAI through bonds. In addition to all of this Motor Vehicles Act will be amended to facilitate entry of private sector, Public Utilities bill will be introduced to resolve PPP infrastructure disputes and new ceiling price for new gas discoveries.   

But the moment financial sector initiatives were unraveled, volatility index shoot up and markets nosedived for no reason really!!! Great Expectations for the PSU banks nothing else. How can everything be set right in one budget. Coming back to the sixth pillar, major announcements were: new commodity derivative products that will be developed by SEBI, SARFAESI Act will be amended so that sponsor can hold upto 100% stake in the ARC and of course Rs. 25000 crore allocated to the PSU capitalization.

Then comes the most beloved phrase of our government, “Ease of doing business” or in other words “We will make it easy” and it extended from rationalization of human resources in various ministries to Targeted Delivery of Financial and other subsidies, benefits and services bill using Aadhar framework.

And then a sigh of relief by one and all, FISCAL DEFICIT’ is 3.9%. With benefits of declining oil bill not fully passed on to the consumer this was expected and of course cutting wasteful expenditure, it started two years back with combining various ministries and higher level of transparency. Lastly taxes, we can’t do anything about them as Keynes had rightly said, there is certainty for only two things in life, death and taxes. The super rich have to shell out more, middle & upper middle class’s contribution to the tax kitty has also increased through various cesses and service taxes. But before we cringe from paying these taxes let’s think about another class of population completely cut from our ‘Transforming India’ which is also theirs. There are kids who still walk kilometers to reach schools which don’t have toilets or even water. There are families without LPG connections and electricity and have to send their kids to urban areas to join the ever-growing child labour. So think about your basic amenities which are actually a luxury, don’t waste them and of course PAY TAXES.    

  

ANNUAL BUDGET FY 16-17 – THE BEGINNING

After giving 777 points salute to the annual budget, the very next day, BSE Sensex closed 2% higher today. So the budget is completely digested now by the markets and the Bulls are dancing to the tune of our rustic bollywood numbers. Divided into nine pillars, our FM has tried to cover the whole economy starting with agriculture sector and ending with dreadful tax reforms. Agriculture sector has been quite neglected with only 46% of cultivable area being irrigated.  With such dire state of affairs augmented by drought over the last two years, this year’s budget has done justice to the whole farming community. The total allocation for agriculture and farmer’s welfare stood at Rs. 35984 crore. Fast tracking 89 irrigation projects requiring Rs. 86500 crore in the next five years, out of which 23 of these projects will be completed before March 2017. Long term dedicated fund under NABARD will be created with initial corpus of Rs. 20000 crore and at least 5 lakh wells and pits will be dug in rain fed areas under MGNREGA allocations. Other two important announcements were interest subvention allowed to farmers with a provision of Rs. 15000 crore and rural road development. Under Pradhan Mantri Gram Sadak Yojana allocation of Rs. 19000 crore has been announced in the current fiscal.  Crop insurance has also been given Rs.5500 crore for FY16-17.

If you are bored with these figures, you have no idea about the realities of agriculture economy especially when crops fail due to uncontrollable factors or lack of irrigation facilities. So if you want SUVs and tractors to sell along with Fair and Lovely and Maggi, you need to understand why Mr. Jaietly presented an agriculture based budget. Coming back to the agenda, with regard to rural sector, the next pillar, the major breakthrough announcement was Digital Literacy Mission which will cover six crore households within the next three years, 100% electrification of villages by 2018 and Rs. 38500 allocated under MGNREGA. Bringing rural economy within domestic economic fold would have multiplier effect on GDP growth. Social sector and health care, the next pillar focuses on the wellbeing of lower socio economic section of the society. Providing LPG connections to women members of BPL families is a commendable step for their economic upliftment. Lastly health insurance scheme of Rs. 1 lakh per family for economically weaker sections will provide stability to their uncertain future. So right now, our domestic indices may not measure domestic economic activity but can definitely gauge the positive sentiment which can propel India beyond BRICS and into next level of economic hegemony for years to come.  By the way, abhi interval hua hai…… picture abhi baki hai….  ( Rest of the budget highlights in the next blog).