INDIAN PRIVATE SECTOR: TAKE A LEAP OF FAITH

IIP for November 2015 arrived with third quarterly results. CPI for December last year came at 5.60%, still within the RBI target. IIP contracted at 3.2% as Diwali shutdowns occurred in November this year in contrast with October in the previous year. December numbers of IIP will give a better picture of the economy. Global events with Chinese economy as a major catalyst are the driving force for any domestic economy. Crude oil has fallen below $30 and is expected to touch $ 20 according to many analysts. There cannot be a better scenario for fuel importing country like India to bounce back with higher GDP. In the just released IIP numbers, manufacturing sector was the main drawback contracting by 4.4%. Manufacturing sector cannot be pumped up only by the government with restricted public investment as fiscal deficit target has to be met in the current fiscal. Thus the need of the hour is private sector initiative in all major industries creating a ripple effect across the whole economy. But the private sector is holding back with many companies hoarding high cash and marketable liquid assets. What are they waiting for? China to start galloping again, Brazil, Mexico and South Africa to get back to their original currency exchange rates, OPEC to cut production, or even US FED to roll back its interest rate hike. Are they waiting for all these perfect conditions with even GST, bankruptcy and land acquisition bills to be passed in the immediate parliament session? All of this seems highly impossible in the short run. If the domestic private sector does not take risk and move fast in this volatile climate which is going to stay for a pretty long time, foreign investors might take the required initiative and flourish benefiting the Indian population and their own respective domestic economies.

For Indian industry to move forward, private sector has to believe in the strong macro fundamentals and our financial infrastructure. Until and unless they don’t take a leap of faith, Indian economy will not prosper and catch with the biggest economies of the world. 

HOPE FLOATS:  THIRD QUARTER RESULTS OF INDIA INC

As the Chinese conundrum continues, our domestic indices are going through a roller coaster ride on daily basis. BSE Sensex fell 109 points or 0.44% and Nifty 50 declined by 0.49%. This volatility is going to stay. And do we need to fight it. No it has to be dealt with reason, knowledge and information. These are the three main pillars of stability in the present volatile financial scenario. As for the moment, for retail investors in India, global events not only provide opportunities but also lessons for improving their investment decisions. As for now, IIP and inflation data is going to be released later this week and most important, third quarter results have started from today.

Third quarterly results of FY16 will exhibit the so called benefit from declining oil and commodity prices and how much has been passed on to the consumers. Whether rural consumers have started loosening their purse strings or urban population has become the new growth engine especially for FMCG and auto companies. This quarter will let us understand, how much time do we still need to get these green shoots develop into shrubs. In other words has the private sector started spending and how much de-leveraging has been done by infrastructure and energy sector? Last but not the least, the banking sector, especially PSU banks will be scrutinized with respect to their stressed assets. Investors should get ready to identify fundamentally strong stocks to withstand volatility as only Fundamentals Create Wealth.  

BEGGAR THY NEIGHBOUR POLICY: SHORT TERM DOMINO EFFECT

China guided Yuan at a higher rate after its own stock market was roiled on Thursday. Though the stock market crash was partly attributed to circuit breakers placed on 4^th of Jan this year, Yuan’s devaluation with respect to dollar has made obvious things apparent to the global trading community. There can be two reasons as to why Yuan has been deprecating. One theory explains the need to devaluate and integrate it with global economy after Yuan has been included in the IMF's SDR basket. The other theory is that China is following ‘Beggar Thy Neighbor’ Policy which advocates devaluation as recourse for resuscitating flagging domestic economy.

Last year, RBI was accused for not helping Indian exports by devaluing rupee relatively to other currencies. RBI stood its ground against forced deprecation of Indian rupee and favoured market determined exchange rate. This recent Yuan event would have taught a lesson to our economists and bureaucrats alike. Depreciating currency is a short term fix to stimulate economic growth. Falling currency makes exports competitive or cheap and imports expensive for any economy. So even if China tries to boost its exports through devaluation, expensive imports would not be able to stimulate its slowing economy which is in dire need of fast track reforms. We hope China is not following the second theory and has thus fixed a higher peg against the dollar today. Even if it does, it will not be able to pursue it for long term. Being the second largest economy of the world, China is not expected to spread financial distress globally, rest only time will tell. 

UNCERTAINTY THE NEW GLOBAL FINANCIAL FORMULA

While the financial world was still panting over it’s stock market crash, China devalued its currency. To boost exports and fight excess production capacity, China is doing everything to prop up it’s slowing economy. US on the other hand is going to tighten its monetary policy in the current year to stimulate inflation and strengthen dollar further. Next, Europe, also going through the ‘green shoots’ phenomena like us, needs to spoon feed its economy for the next two years. Thus in such divergent economic scenarios, global financial markets are expected to be volatile. Every country is thinking about its currency and fencing its domestic market.

That time is not far, when every country would follow, ‘Beggar Thy Neighbour’ policy. India does stand out with un-manipulated currency and strong forex reserves. Thus when everyone is busy putting barricades in the name of free trade, we should at least protect our domestic industries whether it is steel, copper, iron ore, tyre to name a new. When it comes to currency management, RBI is well equipped to face any kind of volatility pressure on the rupee. Stock market daily movements indicate global uncertainty more than domestic economic performance and thus 1-2% movement of indices have become norm of the day. As for informed investors, volatility means opportunity as only Fundamentals Create Wealth. 

THE CHINESE CONTAGION

‘If China sneezes, rest of the world has cold’, this phrase is so horribly outdated. Chinese markets fell about 6% after its PMI came below 50 indicating contraction of economic activity in December 2015. As for India, BSE Sensex and Nifty 50 declined by almost 2%. There are obvious reasons why China is sneezing these days and decline of their domestic indices is just a side effect of the medicine administered by the Chinese authorities to the economy. To transform an export led economy to a domestic consumption powerhouse is not easy. In addition to that, the Chinese government is strengthening its financial sector & stock market regulations, cracking on corruption & shadow banking etc. And they also have the financial muscle to go through this detoxification process.

What about the rest of the world? Whether it is Europe, or Latin America, Africa, Middle East countries all financial markets tumbled. Not because of China. Chinese slowdown will only add to their specific domestic problems. The best example to explain this is through our own country. FDI & FII flows have declined for India due to slow reform process and slowing China & declining yuan will impact both our industry and currency competitiveness. And can we blame China for fall in our PMI (49.1) for December last year.  We cannot, but we can always fortify our economy by passing GST and other impending bills and attract foreign capital. China will definitely get its act together, as for us, let’s see what happens after 23^rd Feb in Parliament.

2016: YEAR  OF  KARMA FOR  INDIA

Past actions decide our future. I am not talking about any individual but a country of 1.25 crores. The year of 2016 will carry forward the actions of the past years especially the year that just went by. Not passing GST, land acquisition and Bankruptcy bills will make us play defensively in international arena. In the times of 20-20 cricket, time is money, the more we loose it, the more we will bat on the back foot. GST would increase GDP by about 1.5% by simplifying tax structure; land acquisition bill would give the required thrust for investment in infrastructure sector and stuck capital would be freed up for productive assets by passing bankruptcy bill.  Though things would still go on but passing of these legislations last year would have given us the requisite protective gear to face aggressive foreign players in our domestic financial markets.  

Mixed signals such as shrinking core sector and increasing car sales ask for harmonizing economic and legal structure of our economy by passing these impending bills. After eight months of this fiscal (2015-16), tax collections are buoyant with non tax revenues already above 78% of budgeted amount and total tax collections crossing 50%. Fiscal deficit position is also comfortable at 87% of the target without cutting capital spending which was 72.5% of the budgeted plan by November end last year. Forex reserves of $ 352 bn are large enough to cover 11 months imports. As Christine Largarde had said, judging by India’s cricket record, collective efforts of one billion working population can make India fly in the years to come. Thus what we need in 2016, is karma from our elite political class and making the pitch ready for the economic variables to perform without local systematic risk to take its toll and spoil India’s chances of being becoming an important player in the world economy.              

2015: THE YEAR BELONGED  TO RAGHURAM RAJAN

In his first speech as RBI governor, Mr. Raghuram Rajan had reassured that in the present times of global volatility, RBI would be a beacon of stability with transparency and predictability as its major pillars. RBI has always lived up to it and under him, also learnt to surprise the markets with its unpredictable policy actions. 2015 started with a surprise Sankranti gift of 25 basis points cut after fifth bi-monthly december policy in 2014. And then again in 4^th March 2015, another 25 basis cut with repo rate now at 7.5%.  This unpredictable feature quashed volatility in Indian rupee and strengthened it against spillover effects from offshore NDF market and with ample support from lower CAD and fiscal deficit, Indian rupee became one of the best performing currencies among emerging markets.  Though it hurt exports, India became a credible investment destination with a stable currency which couldn’t be messed up.

Reducing repo rate by 125 basis in the last twelve months and prodding banks to transmit this benefit to borrowers was a continuous battle for the governor as our PSU banks started reducing their base rates wholeheartedly only after 50 basis cut in the fourth bi monthly policy 2015. To solve this conundrum once and for all, marginal cost of funds would be adopted by banks to calculate their base rates. Though two universal banking licenses had already been given in 2014, licenses for small and payment banks a major milestone for his tenure were given in 2015, thus fulfilling his agenda of inclusive growth. Last but not the least his hawkish stance on inflation yielded results as CPI fell from 10% in 2013 to 3.78% in July 2015.

Moving on the same path shown by Mr. D Subbarao, Raghuram Rajan too maintained central bank’s independence as being a data driven institution rather than government motivated.  Government too has played its part, acknowledging his merit and accepting RBI’s demands by not curtailing its money market and public debt management functions.  But Mr. Rajan would also be credited with democratizing interest rate policy and reducing RBI’s autonomy. His term ends this November, just nine months to go, it would be hard for the government to find his replacement and the daily pink papers would again become so boring.