Rupee decline remain the focus of the week and its continuing slide has caused jitters in the market. Investors are also keeping a close eye on unfolding drama in National Stock Exchange Ltd (NSEL), promoted by Financial Technologies (FTIL), which also owns 26% in MCX, nation’s leading commodity exchange. Sensex and Nifty went down by 2% each, while CNX Midcap gained 0.3% this week.
Monday - Sensex up by 0.1%, Nifty up by 0.1%, Midcap up by 0.3%
Markets pared the early gains made during the day as HSBC survey indicated that private manufacturing activity in the country has contracted for the first time in four years. The HSBC India composite index covers both services and manufacturing activities, declined to 48.4 in July from 50.9 in June. The tough investment climate in the country is taking its toll on business activity as investors are losing confidence in India story.
Tuesday - Sensex down by 2.3%, Nifty down by 2.5%, Midcap down by 2.5%
Sensex went down by 450 points as rupee hit a fresh low of 61.80 against the US dollar. RBI’s rescue plans are looking more like prayers than plan (stole a line from Andy Mukherjee).
Wednesday - Sensex down by 0.4%, Nifty down by 0.4%, Midcap up by 1.3%
Markets continued to weigh down by ongoing slide in rupee value against the dollar. Investors are worried that rupee might hit 64 in the near term and will cause more pain to already weak Indian economy.
Thursday - Sensex up by 0.7%, Nifty up by 0.8%, Midcap up by 1.2%
Indian markets bounced back after recent sell-offs owing to declining rupee value against the dollar. Ranbaxy Laboratories jumped 28% after good showing in US business sales. Maruti jumped 4% after there were news that Indian govt may cut excise duties on vehicles to revive falling demand.
Friday – Eid Holiday
Friday, August 9, 2013
Sunday, August 4, 2013
RBI Analyst Conference Call Summary
Headline
RBI kept all the policy rates unchanged; the repo rate, the reverse repo rate and the CRR. The MSF rate too stayed at 10.25% with a mark-up of 300 basis points above the repo rate.
Two key things on RBI's mind while drafting this policy: external sector concerns, especially those stemming from global financial markets over the last 10 weeks (read Fed stimulus tapering plans); the second was the standard concern of any central bank of maintaining growth and inflation balance.
On Growth
On the domestic front, the silver lining is that the monsoon so far has been above long term average. However, industrial production is lower than what RBI thought it was and services sector activity is subdued in part because of because of tepid global demand.
Keeping all this mind, RBI revised its FY14 GDP growth projections downwards from 5.7% to 5.5%.
On Inflation
The biggest risk to inflation is from the depreciation of the rupee and the any pass-through from there. RBI’s recent study shows that the coefficient of pass-through has increased and now every 10% depreciation results in a 1.2% increase in inflation vs. 1.1% earlier.
Vulnerabilities
RBI discussed four risk factors in which biggest is vulnerability in the external sector, in particular sudden stop and reversal of capital flows seen over the last 10 weeks.
The second risk factor is the large CAD, which has stayed above the sustainable level for 3 years in a row and has affected external payment situation. Most external vulnerability indicators have deteriorated indicating that the economy’s resilience to external shocks is eroded.
The third risk factor is the continuing weak investment environment which remains weak because of a number of factors such as cost and time overruns, high leverage, deteriorating cash flows, erosion of asset quality and muted credit confidence.
The final risk factor is something that has sort of stuck, which is the supply constraints in the economy. There are a number of supply constraints especially in the food and infrastructure sectors which affect growth and inflation.
Guidance
RBI is caught in a classic ‘impossible trinity’ trilemma (more about it here). It has to forfeit economy’s growth inflation dynamic, informed monetary policy stance, in order to take care of external concerns.
RBI will roll back liquidity-tightening measures in a calibrated manner as forex markets stabilizes.
Q&A
Kaushik Das (DB): Hi, my question is regarding India’s reserve adequacy. As per the latest data, reserves can still cover about 6-7-months of imports but particularly worrying is the sharp increase in the short-term external debt on a residual maturity basis, which has touched $172 billion odd. So how concerned is RBI about this reserve adequacy position of India, especially when reserves are down further due to FX intervention?
The second question is regarding the potential growth rate of economy. Last year the expectation was that the potential growth rate has come down to about 6.5 to 7%. Does RBI think that the potential growth rate has fallen further in the wake of the developments of the last few months?
Dr. Urjit Patel (Dy. Guv): We actually feel that our reserves are adequate; 6.5 to 7-month of import cover is good, our short-term debt has increased but the short-term debt has been comfortably rolled over and refinanced over the last 3 years despite the high CAD. Even IMF, by the criteria they use, feels that our reserve position is adequate and comfortable.
On the potential growth, the RBI’s calculations and models suggest that it is about 7% now.
Sonal Varma (Nomura): I wanted to ask what is the risk that these tightening measures can precipitate into a bigger problem for the banking system, because of asset quality stress. What is the RBI’s view on that?
Dr. K. C. Chakrabarty: Anyhow, RBI will not be able to protect banks’ asset quality. Suppose, if you allow the exchange rate to depreciate, then the corporates, who have gone for ECB borrowings will default and banks asset quality will deteriorate. And if the rate has gone up then definitely because of the portfolio depreciation, they will be affected. We feel that HTM is more manageable because banks must understand the risk and we allow lot of amount to be put in the HTM category so this is a better option, which is our assessment.
Simon Flint (Dymon Asia Capital): Governor, you suggested that because of the large current account deficit, the rupee depreciation in some senses would be warranted. On the other hand, you do have some economists, I think including some in the Ministry of Finance who have argued that if you compare the present value of the rupee to the real effective exchange rate (REER), let us say which prevailed over 2004-2005, then the rupee is actually overshooting and is now undervalued. So I guess can you give us a sense of where you see rupee today relative to its fair value.
Dr. D. Subbarao: My answer to your very well argued question is quite short, that the RBI does not take a position on the level of the exchange rate. The depreciation of the currency has costs for the economy, but that is a different matter. We do not take a position on the exchange rate; there are various ways of calculating it including the way that you have indicated from the Ministry of Finance. All we said yesterday was that because of the current account deficit, the rupee would have depreciated and that has not happened because we have been able to finance it, and now that there is capital flow issues, those strains are coming into play, and the rupee is depreciating.
Rajeev Malik (CLSA): RBI has consistently maintained that it does not target any particular level and it is really only concerned with the volatility. The government on the other hand, every time the rupee slips, begins to get palpitations partly although not entirely, because of the impact on the fiscal front. How do you marry the two? At the end of the day a lot of that worsening because of rupee depreciation also has a feedback loop into how monetary policy is being conducted.
Dr. D. Subbarao: Both the government and the RBI are really on the same page as far as larger objective is concerned which is to control volatility. Neither the government nor the Reserve Bank is targeting any particular rate. And that is the message I think everybody listening in must take away.
RBI kept all the policy rates unchanged; the repo rate, the reverse repo rate and the CRR. The MSF rate too stayed at 10.25% with a mark-up of 300 basis points above the repo rate.
Two key things on RBI's mind while drafting this policy: external sector concerns, especially those stemming from global financial markets over the last 10 weeks (read Fed stimulus tapering plans); the second was the standard concern of any central bank of maintaining growth and inflation balance.
On Growth
On the domestic front, the silver lining is that the monsoon so far has been above long term average. However, industrial production is lower than what RBI thought it was and services sector activity is subdued in part because of because of tepid global demand.
Keeping all this mind, RBI revised its FY14 GDP growth projections downwards from 5.7% to 5.5%.
On Inflation
The biggest risk to inflation is from the depreciation of the rupee and the any pass-through from there. RBI’s recent study shows that the coefficient of pass-through has increased and now every 10% depreciation results in a 1.2% increase in inflation vs. 1.1% earlier.
Vulnerabilities
RBI discussed four risk factors in which biggest is vulnerability in the external sector, in particular sudden stop and reversal of capital flows seen over the last 10 weeks.
The second risk factor is the large CAD, which has stayed above the sustainable level for 3 years in a row and has affected external payment situation. Most external vulnerability indicators have deteriorated indicating that the economy’s resilience to external shocks is eroded.
The third risk factor is the continuing weak investment environment which remains weak because of a number of factors such as cost and time overruns, high leverage, deteriorating cash flows, erosion of asset quality and muted credit confidence.
The final risk factor is something that has sort of stuck, which is the supply constraints in the economy. There are a number of supply constraints especially in the food and infrastructure sectors which affect growth and inflation.
Guidance
RBI is caught in a classic ‘impossible trinity’ trilemma (more about it here). It has to forfeit economy’s growth inflation dynamic, informed monetary policy stance, in order to take care of external concerns.
RBI will roll back liquidity-tightening measures in a calibrated manner as forex markets stabilizes.
Q&A
Kaushik Das (DB): Hi, my question is regarding India’s reserve adequacy. As per the latest data, reserves can still cover about 6-7-months of imports but particularly worrying is the sharp increase in the short-term external debt on a residual maturity basis, which has touched $172 billion odd. So how concerned is RBI about this reserve adequacy position of India, especially when reserves are down further due to FX intervention?
The second question is regarding the potential growth rate of economy. Last year the expectation was that the potential growth rate has come down to about 6.5 to 7%. Does RBI think that the potential growth rate has fallen further in the wake of the developments of the last few months?
Dr. Urjit Patel (Dy. Guv): We actually feel that our reserves are adequate; 6.5 to 7-month of import cover is good, our short-term debt has increased but the short-term debt has been comfortably rolled over and refinanced over the last 3 years despite the high CAD. Even IMF, by the criteria they use, feels that our reserve position is adequate and comfortable.
On the potential growth, the RBI’s calculations and models suggest that it is about 7% now.
Sonal Varma (Nomura): I wanted to ask what is the risk that these tightening measures can precipitate into a bigger problem for the banking system, because of asset quality stress. What is the RBI’s view on that?
Dr. K. C. Chakrabarty: Anyhow, RBI will not be able to protect banks’ asset quality. Suppose, if you allow the exchange rate to depreciate, then the corporates, who have gone for ECB borrowings will default and banks asset quality will deteriorate. And if the rate has gone up then definitely because of the portfolio depreciation, they will be affected. We feel that HTM is more manageable because banks must understand the risk and we allow lot of amount to be put in the HTM category so this is a better option, which is our assessment.
Simon Flint (Dymon Asia Capital): Governor, you suggested that because of the large current account deficit, the rupee depreciation in some senses would be warranted. On the other hand, you do have some economists, I think including some in the Ministry of Finance who have argued that if you compare the present value of the rupee to the real effective exchange rate (REER), let us say which prevailed over 2004-2005, then the rupee is actually overshooting and is now undervalued. So I guess can you give us a sense of where you see rupee today relative to its fair value.
Dr. D. Subbarao: My answer to your very well argued question is quite short, that the RBI does not take a position on the level of the exchange rate. The depreciation of the currency has costs for the economy, but that is a different matter. We do not take a position on the exchange rate; there are various ways of calculating it including the way that you have indicated from the Ministry of Finance. All we said yesterday was that because of the current account deficit, the rupee would have depreciated and that has not happened because we have been able to finance it, and now that there is capital flow issues, those strains are coming into play, and the rupee is depreciating.
Rajeev Malik (CLSA): RBI has consistently maintained that it does not target any particular level and it is really only concerned with the volatility. The government on the other hand, every time the rupee slips, begins to get palpitations partly although not entirely, because of the impact on the fiscal front. How do you marry the two? At the end of the day a lot of that worsening because of rupee depreciation also has a feedback loop into how monetary policy is being conducted.
Dr. D. Subbarao: Both the government and the RBI are really on the same page as far as larger objective is concerned which is to control volatility. Neither the government nor the Reserve Bank is targeting any particular rate. And that is the message I think everybody listening in must take away.
Saturday, August 3, 2013
Weekly Market Commentary - Jul 29 - Aug 2, 2013
Markets continued to weigh down by RBI policy actions, which have raised the cost of doing business on the country. Banks, realty, metals, all rates sensitive stocks, were badly hit this week. RBI’s battle against the falling rupee has been futile as currency is back at 61 against the dollar. Sensex was down 3%, Nifty was down 3.5% and CNX Midcap 5.9% this week.
Monday - Sensex down by 0.8%, Nifty down by 0.9%, Midcap down by 1.3%
Markets continued their downward trend with investors acing cautious ahead of RBI meeting on Tuesday. RBI has tightened liquidity environment in a bid to save rupee from falling further. Many investors are nervous wondering whether RBI will continue its stance and increase the rates to make rupee investment attractive for FIIs, as SBI chairman suggested. Investors are also anticipating announcement related to sovereign debt offering country might plan to plug the deficit gap.
Tuesday - Sensex down by 1.3%, Nifty down by 1.3%, Midcap down by 2.4%
In its policy announcement, RBI kept all key rates unchanged (repo rate at 7.25%, CRR at 4%), but revised the country’s GDP growth projection for FY14 downwards from 5.5% to 5.7%. RBI also indicated its reservation about issuing of sovereign debt, calling the timing now not right. Markets plunged after the policy announcement and rupee tumbled down to 61 mark.
Wednesday - Sensex down by 0.0%, Nifty down by 0.2%, Midcap up by 0.2%
Sensex ended up flat after falling almost 220 points in its initial sessions. FM who indicated more liberalization policies are under consideration and encouraged PSUs to borrow from abroad saved the markets. Govt is also considering raising import duty on non-essential luxury items to contain CAD.
Bharti Airtel was among the top gainer, with the company showing growth signs in its ARPUs, which increased, to INR200 for 1Q14, +16 y-o-y, EBITDA margin increased to 32.3% from 29.6% a year back.
Thursday - Sensex down by 0.1%, Nifty down by 0.2%, Midcap down by 1.4%
Indian markets rallied during their early sessions with their Asian peers as China reported better than expected PMI data while US GDP growth also beating street estimates. However, later in the day, weaker manufacturing data put the brakes on the rally and drag down the markets back in the red zone.
Financial Technologies, promoter of MCX, leading commodity exchange of the country, tanked by 65% today as govt asked its National Spot Exchange to not to launch new products, following with firm (NSEL) decided to suspend trading and postponed settlement of all 1 day forward contracts.
Friday - Sensex down by 0.8%, Nifty down by 0.9%, Midcap down by 1.1%
Markets saw heavy selling across metals, power, realty and PSUs as concerns over rise in cost of operations in tight monetary environment has made investors bearish over these counters.
Financial Technologies fell another 23% as crisis over National Spot Exchange has dealt to commodity investors sentiments. Power Grid Corp fell 11% after firm announced plans to dilute equity to fund its investment plans.
Monday - Sensex down by 0.8%, Nifty down by 0.9%, Midcap down by 1.3%
Markets continued their downward trend with investors acing cautious ahead of RBI meeting on Tuesday. RBI has tightened liquidity environment in a bid to save rupee from falling further. Many investors are nervous wondering whether RBI will continue its stance and increase the rates to make rupee investment attractive for FIIs, as SBI chairman suggested. Investors are also anticipating announcement related to sovereign debt offering country might plan to plug the deficit gap.
Tuesday - Sensex down by 1.3%, Nifty down by 1.3%, Midcap down by 2.4%
In its policy announcement, RBI kept all key rates unchanged (repo rate at 7.25%, CRR at 4%), but revised the country’s GDP growth projection for FY14 downwards from 5.5% to 5.7%. RBI also indicated its reservation about issuing of sovereign debt, calling the timing now not right. Markets plunged after the policy announcement and rupee tumbled down to 61 mark.
Wednesday - Sensex down by 0.0%, Nifty down by 0.2%, Midcap up by 0.2%
Sensex ended up flat after falling almost 220 points in its initial sessions. FM who indicated more liberalization policies are under consideration and encouraged PSUs to borrow from abroad saved the markets. Govt is also considering raising import duty on non-essential luxury items to contain CAD.
Bharti Airtel was among the top gainer, with the company showing growth signs in its ARPUs, which increased, to INR200 for 1Q14, +16 y-o-y, EBITDA margin increased to 32.3% from 29.6% a year back.
Thursday - Sensex down by 0.1%, Nifty down by 0.2%, Midcap down by 1.4%
Indian markets rallied during their early sessions with their Asian peers as China reported better than expected PMI data while US GDP growth also beating street estimates. However, later in the day, weaker manufacturing data put the brakes on the rally and drag down the markets back in the red zone.
Financial Technologies, promoter of MCX, leading commodity exchange of the country, tanked by 65% today as govt asked its National Spot Exchange to not to launch new products, following with firm (NSEL) decided to suspend trading and postponed settlement of all 1 day forward contracts.
Friday - Sensex down by 0.8%, Nifty down by 0.9%, Midcap down by 1.1%
Markets saw heavy selling across metals, power, realty and PSUs as concerns over rise in cost of operations in tight monetary environment has made investors bearish over these counters.
Financial Technologies fell another 23% as crisis over National Spot Exchange has dealt to commodity investors sentiments. Power Grid Corp fell 11% after firm announced plans to dilute equity to fund its investment plans.
Wednesday, July 31, 2013
RBI's Trilemmas: What the fuss is all about?
Every economist and newspaper is talking about Impossible Trinity (aka Trilemma) these days. What is all this hoo-ha all about? Let’s find out.
Wikipedia defines Impossible Trinity as “a trilemma in international economics which states that it is impossible to have all three of the following at the same time: A fixed exchange rate; free capital movement (absence of capital controls) and; an independent monetary policy.
In simple words, an economy cannot have an independent monetary authority (i.e. independent of external influence) if it tries to play its hand in managing its exchange rate in order to (or not just to) control the fund flows.
Maximum, you can choose any two of these three options.
Let’s say a nation adopts fixed exchange rate mechanism (presumably low, to achieve export competitiveness) and opens up its capital account to foreign flow. This will eventually lead to more forex earnings and surge in central bank’s reserves in the short term. To maintain the required exchange rate, a central bank has to buy local currency (reduce money supply aka monetary tightening) via bond purchases, increasing bank’s regulatory/statutory reserves with central bank (CRR) etc etc. If continue using this strategy, then over the period of time, its official forex reserves will come under stress, and the central bank has to devalue the currency (or let go off its control on the exchange rate) to reduce the excess demand for foreign currency
.
In India’s case, this surge in demand for monetary tightening arose after US Fed statement regarding tapering of stimulus measures led to increase in US bond yields, which in turn led to foreign investors fleeing Indian debt. Rupee has declined by more than 12% since Fed announcement.
Our RBI got into action, setting aside its earlier focus on inflation, and started tightening its monetary policy by depriving the banks of funds available and sucking out the “excess” liquidity from the system via its bond purchases (which ominously auctioned at max yield of ~11%).
Now, rupee after moving up for some time against the dollar is back again at the level pre-RBI measures and not to say, we are few millions short on foreign reserves. I have already highlighted in my earlier post that RBI is playing with fire. If RBI insisted on targeting exchange rate by curtailing the funds available to the banks, its actions will have serious implications for India’s growth story. And, let’s just not talk about employment levels.
RBI should just STOP its "rupee stabilizing" measures right now. And let the currency find its own ground.
Wikipedia defines Impossible Trinity as “a trilemma in international economics which states that it is impossible to have all three of the following at the same time: A fixed exchange rate; free capital movement (absence of capital controls) and; an independent monetary policy.
In simple words, an economy cannot have an independent monetary authority (i.e. independent of external influence) if it tries to play its hand in managing its exchange rate in order to (or not just to) control the fund flows.
Maximum, you can choose any two of these three options.
Let’s say a nation adopts fixed exchange rate mechanism (presumably low, to achieve export competitiveness) and opens up its capital account to foreign flow. This will eventually lead to more forex earnings and surge in central bank’s reserves in the short term. To maintain the required exchange rate, a central bank has to buy local currency (reduce money supply aka monetary tightening) via bond purchases, increasing bank’s regulatory/statutory reserves with central bank (CRR) etc etc. If continue using this strategy, then over the period of time, its official forex reserves will come under stress, and the central bank has to devalue the currency (or let go off its control on the exchange rate) to reduce the excess demand for foreign currency
.
In India’s case, this surge in demand for monetary tightening arose after US Fed statement regarding tapering of stimulus measures led to increase in US bond yields, which in turn led to foreign investors fleeing Indian debt. Rupee has declined by more than 12% since Fed announcement.
Our RBI got into action, setting aside its earlier focus on inflation, and started tightening its monetary policy by depriving the banks of funds available and sucking out the “excess” liquidity from the system via its bond purchases (which ominously auctioned at max yield of ~11%).
Now, rupee after moving up for some time against the dollar is back again at the level pre-RBI measures and not to say, we are few millions short on foreign reserves. I have already highlighted in my earlier post that RBI is playing with fire. If RBI insisted on targeting exchange rate by curtailing the funds available to the banks, its actions will have serious implications for India’s growth story. And, let’s just not talk about employment levels.
RBI should just STOP its "rupee stabilizing" measures right now. And let the currency find its own ground.
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