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First, Bond markets have been way ahead of the RBI so far. And they are now
showing signs of rates bottoming out. Dont believe me? See the graph below:
Policy Repo Rate
(%)
10yr Govi
9.50
9.00
8.50
8.00
7.50
Mar-15
Feb-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
7.00
10-yr bond yields peaked in April 2015 at 9.12%. From there on they have been on
the downslide 8 months before RBI cut its repo rate in January 2015! 10-yr yields
had fallen 120bps by the time the RBI cut its policy repo rate by 25bps. Interestingly
10-yr yields have stabilised around the 7.75% mark ever since. So its quite possible
that even as the RBI cuts repo rates, the bond market ignores it and continues to
lead rather than follow the RBI.
Second, inflation as measured by CPI Combined (ie rural + urban) actually bottomed
out in November 2014 and has been rising ever since. CPI declined 5.3 percentage
points from 8.6% in Jan 14 to 3.3% in Nov 14. Of that 5.3ppt decline, Food
products contributed to 3.5ppt or 66% of the decline.
Random Musings
Show me the money
Components of Inflation
Food
Tobacco
Clothing
Housing
Others
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
Cereals
Milk
Vegetables
Others
Others
5%
4%
3%
2%
1%
0%
-1%
Feb-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Feb-14
Mar-14
Jan-14
Feb-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Mar-14
Feb-14
Jan-14
-2%
Now given the recent freak weather rains & hailstorm which have destroyed
standing crop, it is quite possible that we could see a 25% jump in vegetable & fruit
prices over the coming months. These two items carry a combined weight of 9% in
the CPI. That alone would add 2.3ppt to inflation without counting any compounding
effects. CPI inflation which is currently at 5.4% could easily rise to 7.7% by June
2015!
Is a 25% jump in vegetable prices a reasonable assumption? I think so. Vegetable
inflation in February was 13%, up from -17% in Nov 14. Look at it this way, a 25%
rise in vegetable prices would take them back to the levels in October 2014
nothing too dramatic.
Random Musings
Show me the money
Loans/GDP
35%
60%
30%
55%
25%
50%
20%
45%
15%
40%
10%
FY16 BE
FY15 RE
FY14
FY13
FY12
FY11
FY10
FY09
FY08
30%
FY07
0%
FY06
35%
FY05
5%
That puts incremental loan demand from private sector at Rs 9,128 bn.
A clarification: The private sector loan demand is calculated separately to avoid
double counting with the PSU borrowing estimated in the Budget. PSUs have
typically accounted for around 7% - 8% of the banking sectors loans. This number
has been declining over the last few years, but as a thumb rule we can safely say
that 7.6% of the loan book is lending to PSUs.
Thus the total demand for credit in FY16 will be Rs 14,890 bn, broken up as follows:
(Rs bn)
Govt of India Mkt loans
Public Sector (see Annexure)
Private Sector loan demand
Total Demand for Domestic Credit
FY12
4,362
703
6,930
11,995
FY13
4,674
733
6,490
11,896
FY14
4,536
614
7,333
12,482
FY15 RE
4,469
614
5,682
10,765
FY16 BE
4,564
1,176
9,128
14,868
8,611
(3,384)
10,359
(1,537)
11,214
(1,269)
11,043
278
?
?
13%
14%
13%
11%
14%
7.99%
8.57%
10 yr yield at start of the fiscal
8.57%
7.95%
10 yr yield at end of the fiscal
58
(62)
Change during the year (bps)
Source: Budget Papers, Min. of Finance, Govt of India & RBI
7.95%
8.84%
89
8.84%
7.70%
(114)
7.70%
?
?
M3 growth YoY
Random Musings
Show me the money
To meet this demand of Rs 14,868 bn, Broad Money (M3) will need to grow 14% if
interest rates have to stay stable. For interest rates to fall, it would have to grow
even faster.
In addition to the above, there are multiple global factors like the US Fed, ECB, BoJ
etc on which I have a view (just like any of us), but no particular insight. My view is
that the US Fed.s decision on raising rates is a question of When and not If.
So the call one needs to make is: will the RBI allow M3 growth to accelerate to 14%
15% against the backdrop of inflationary pressures and Fed tightening. We will
know that in a few weeks when RBI comes out with its April policy statement.
Until then, I dont think the RBI will oblige. Hence my view is that interest rates are
set to rise. If the RBI does oblige, then inflation pressures will likely rise and that
may cap any fall in rates. Either way, 10-yr yields seem to be close to their bottom.
So what does it mean for equities?
On one hand, rising interest rates would imply that economic activity has resumed.
On the other, there are a whole lot (30%+ as per some bankers) of stressed loans
on banks books. Rising rates are unlikely to help that resolution and banks will be
constrained to lend.
My strategy is to buy Nifty Dec 2015 Puts and exit high beta, leveraged & value
propositions. Whats yours?
Random Musings
Show me the money
Annexure
(Rs bn)
Department of
Atomic Energy
Nuclear Power
Corp (NPCIL)
Ministry of Coal
Neyveli Lignite
Corp (NLC)
Min. of IT &
Communications
Bharat Broadband
Network Ltd
BSNL
Min. of Housing
and Urban Poverty
Alleviation
HUDCO
Min. of Petroleum
& Natural Gas
BPCL
IOC
Ministry of Power
Power Grid Corp
NTPC
Min. of Road
Transport
NHAI
Min. of Railways
Other Ministries
GRAND TOTAL
YoY increase
FY14A
FY15RE
FY16BE
Internal
Domestic
ECB
Others
Total
Internal
Domestic
ECB
Others
Total
Internal
Domestic
ECB
Others
Total
23
33
57
25
39
64
32
60
92
20
76
33
17
10
1
1
54
104
23
73
39
15
16
11
61
115
29
85
60
28
11
89
126
17
25
10
15
25
14
28
42
61
63
(26)
38
184
196
(117)
302
186
52
52
4
(24)
75
95
79
71
(1)
(85)
100
183
99
98
6
6
68
68
74
74
7
7
30
30
82
82
118
118
7
7
145
145
151
151
1,074
36
118
144
60
74
254
110
98
69
30
30
23
-
1,074
36
118
490
200
202
595
26
47
116
40
71
7
7
267
135
87
41
12
6
96
25
66
83
20
34
19
-
726
58
94
498
200
224
585
1
36
172
40
94
7
7
245
130
79
114
47
47
96
30
57
60
10
22
34
-
766
65
104
546
200
230
94
2
80
80
209
0
9
0
80
80
313
3
164
2
30
30
178
0
30
30
342
3
178
2
427
427
406
0
427
427
584
3
1,722
614
102
138
2,576
1,167
614
169
420
2,370
1,180
1,176
235
588
3,179
-32%
0%
65%
204%
-8%
1%
92%
39%
40%
34%