Tuesday, December 16, 2014

WHY RBI ..DONT FIND RATES CUTS?

Indian markets are the roller coaster ride and many investors are in the grid lock of higher risk and profit appetite. Well this phenomena is not new for the market players but the words which I hear openly in the market is that majority of the focus is now going towards Raghuram Rajan where a huge pile of expectation have been built of reducing the interest rates. Well we are just trying to save the stock market and its earnings in exchange of poor macro economic conditions prevailing and waiting outside the gate in the next year. The Indian stock market correction was bound as valuations and fundamentals have been widening enough so big that hardly anything could justify the same. We are here to find the gaps and make you understand the same.

The biggest reasons behind Rajan not going for an interest rate cut are several. We are just trying to look at one side of the story and not looking over the long term things which are waiting in the wings. In continuation to my last article where I conveyed that where and why manufacturing will find growth is the biggest question.
  • Exporting countries of India are all in the slowdown phase and under intense low consumption level of goods and services. They are more prone to savings. Low crude prices are a boon for any country that is in the category of import but what about the exporting countries. If crude prices fall more slowdown would be stronger for the global economy as exporting countries would be in deep crisis.
  • I told in my last article that one cannot expect a prolonged low crude prices as exporting countries run their economic balance sheet on crude prices. Now with low crude prices budget cuts and slow down of consumption has just began similar over their economies. This adds more mileage to the slowdown of the world economy. So export of India also takes a hit.http://www.ianalysis.co.in/2014/12/why-and-where-manufacturing-would-be.html
  • Now coming back to India-we are not fools in this digital world where we all know that Indian economy despite of its strong growth outlook and various positive vibes is very much dependent on export. If weak global economic indications come into the picture domestic people will also become skeptical in their consumptions. This is what is now happening.  
  • Further profit booking is a part of the game particularly when the cobbler on the street side plans to invest in stock market. High hopes from Rajan to cut down interest rates are going to play a catastrophic effect on the economy in the long term. When sales are going to happen as exports are dried up and struggling then the best way to revive the EPS and PE of stocks is to go for cut down of interest rates which will results small to high level of benefits in earnings.
  • But once the interest rates are be lowered we will find companies making a beeline for re-adjustment of their current debts and interest payments which will create pressure on the banks books and also on the economy in the long term. It’s something like Tax payers money will go for wild toss where corporate would make money at the cost of that segment. Further Basell III norms will be implemented across the globe where liquidity flow will be affected. I covered this aspect also in my previous articles.
  • Further it cannot happen that FII’s will be only doing investments and will not be booking periodic profits. If we make a comparison of the FII’s inflow with other economies we will find a simple answere about the long term trust they have in our markets. Remember the current global economic condition gives them negligible scope for investments in other economies /markets where they can get a healthy ROI. India is the best bet for investments but for long term.
  • Under Basel III the massive capital support required to meet capital adequacy norms cannot be funded by budgetary support alone. That’s why the Union Cabinet last week allowed public sector banks to raise up to Rs 1.6trn from markets by selling down the Govt. stake to 52% in a phased manner. Of the 27 PSU banks, the Govt. directly controls 22, while SBI is a majority holder in the remaining 5.
  • These norms come into effect from 31 March 2019 and require banks to maintain minimum Tier-1 capital of 7% and another 2.5% of common equity as Capital Conservation Buffer. Accordingly, public sector banks would require total equity capital of Rs 2.4trn by 2018.  Now if interest rates go down then NPA will shoot up or the loan re-adjustment books of the banks would swell up. This will make the banks as well as the investors to be less attractive for investments.
  • What we are asking Rajan to do is that create an economic bubble like US where low borrowing cost would push up consumption and revenue which will not last for a long time. In this digital economy no one is fool.Political pressure might get the work done but long term would be quite dark.
  • As exports are not going to pick up in the nearby, adjustment of books would not fetch much return to the economy except to the Stock Market in the short term. Don’t forget that our tax payers money have been used to liquidate the banks whereas the corporate played their dirty game of re-adjustment of loan books and converting into will full NPA. In the last four years, the Govt. has provided total budgetary support of Rs 586.3bn with the current fiscal’s target pegged at Rs 112bn.
  • The government can pressurize to go for rate cut but that would only lead to short term respite. If global slowdown becomes prolonged then at that point of time rate cut could be the appropriate at that point of time. Credit off take easy but getting results from the capital is the toughest things which are now very much prominent.
The best way to avoid this type of sudden profit booking or slowdown based crisis is maintain the asset allocation and often book profits which results to rebalancing your portfolio. We often ignore these things and the same I have also covered in my previous article.

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