Global slowdown & RBI credit policy status quo

Advent of New Year witnessed fresh reporting of heavy losses by financial majors resulting in more than 10% fall in global equity indices. US Fed, focused on heading off a recession once again succumbed to the demand of financial market by cutting their target for the overnight lending rate by half a percentage point. The action was in addition to the surprise 75 basis points reduction in the third week of January. Fed has so far cut the benchmark rate by 225 basis points since Sept’2008 down from 5.25% to 3%. It is to be noted that policy action has come with a caveat that the downside risk to growth remain signaling further rate cuts in future

Fed Fund futures are already discounting further rate cut of 75 basis points by July’08. However its pertinent to note that inflation number in US is not benign at above 4%. In case the fear of confirmed recession in US economy is unfounded or signs of recovery are seen, it may lead to sudden reversal in Fed action on accommodative policy

Unchanged local interest regime:
Amidst increasing monetary easing by central banks in developed markets to assuage concerns of economic slowdown and credit crunch, Indian Central Bank has stuck to its domestic theme. RBI in its January policy has maintained status quo in terms of policy direction and highlighted liquidity management, upward inflationary risk and growth moderation in certain industrial segments

Recent months witnessed liquidity tightness due to repetitive CRR hikes, MSS auction, and outflow on account of IPOs. This led to RBI infusing liquidity through Repo auctions. So fare RBI has been successful to moderate inflation and credit off-take without affecting growth rate. Recent sharp rate cuts announced overseas and dovish views expressed by ministry officials had infused the rate cut expectations among a segment of market. Against this background, policy seems to be a dampener for exuberance exhibited in debt market over last one month

Interest differential & growth exhaustion:
Interest rate differential is expected to attract additional capital flows, however risk aversion could temper the momentum. Fresh inflows would augment trouble for Central Bank in balancing exchange rate and liquidity, requiring interventions

There has been no signal in change of RBI preference for inflation containment and it maintains growth being good in India. However, RBI falls short in recognizing explicitly that slowdown is underway. Slowdown in consumer durable segment and lower index of industrial production indicates the exhaustion in growth of economy

RBI has clearly stated that policymaking is driven purely by domestic factors and is not depending on global developments. However, undertone remains cautious due to global uncertainty and possible inflationary pressures on account of global commodity and food prices

Expectation:
Developed markets are expected to under perform the emerging markets while triggering the correction in asset prices globally. Rally in precious metals appears stretched and is expected to witness corrections

Its likely that Central bank maintains a neutral policy stance and interest rates to have a downward bias. Whether RBI cuts rates in coming weeks would depend on softening of base metal and crude prices. Going ahead country is expected to have a softer interest rate regime and interest rates are expected to move downwards over coming quarters

"Soft landing, Decoupling to Re-coupling of markets, Re-pricing of risk"

Advent of New Year 2008 has started giving clear evidence of a soft landing under way for Indian economy and most of the overheating concerns appear behind us. Inflation numbers if not too benign, appear to be in comfortable range. Index of Industrial production for November grew just 5.3% as against 12%. Slower credit off take and reduced housing loans are showing the impact of repeated money tightening measures of central bank

Liquidity conditions turned comfortable as the RBI reversed the spree of unwinding bonds under the Market stabilization scheme (MSS). RBI nearly unwound Rs 18,000 crore bonds during November and December while sold nearly Rs 8,000 worth bonds in first week of January, indicating the return of easy liquidity conditions

Recent spurt in MSS indicates improvement in liquidity, which the central bank is mopping up. Though there is not a significant pick up in foreign direct investments as against the hyped anticipation for January, this time of the year, there tends to be sizeable provident fund inflow in the system

So far central bank has lapped up forex inflows worth $ 76 bn (nearly Rs 2,18,775 crore). Outstanding MSS amount to nearly Rs 1,77,838 crore against Rs 62,000 crore in April’07

Continuous release of deteriorating US economic data strengthens the expectation of US Fed rate cut. Fed futures discount nearly 1% rate cut by June’07. European and England central banks have held their rates unchanged and may see a cut in second half of the year

It has been extensively debated that emerging markets are decoupled and would sustain unabated growth. Its true that any rate cut is good news for emerging markets including India as the funds flow gets directed to them

However, the exuberance may be short lived as US goes into recession. The problem occurs not because of direct economy linkages but because of financial market linkages. As US economy goes in recession, magnitude of re-pricing would matter, as it will be unidirectional for a prolonged period

Developed markets are expected to under perform the emerging markets while triggering the correction in asset prices globally. Liquidity and risk aversion will continue to push precious metals to higher levels with intermediate corrections

Given sizeable funds targeted from Middle East (e.g. shariat fund), and expected rate cuts in US, India is expected to see huge inflows in coming weeks. This would add to the conundrum of RBI while balancing the interest and currency rates. Economic data would compel RBI to maintain a cautious stand with a softening bias leading to softening of yields

Life the Sahir way

"Main zindagi ka saath nibhata chala gaya,

Har fikr ko dhuye mein udata chala gaya.

Barbadiyon ka sog manana fizool tha,

Barbadiyon ka jashn manata chala gaya.

Jo mil gaya usi ko muqaddar samajh liya,

Jo kho gaya main usko bhulata chala gaya.

Gham aur khushi mein fark na mehsoos ho jahaan,

Main dil ko uss makaam pe lata chala gaya."

- Sahir Ludhiyanvi

Story of global meltdown, Capital Inflows & Liquidity

News wires have been glut with news related to weak US economy data; newer sub prime delinquencies and unwinding of carry trades and among all increasing Indian stock market index

No wonder there has been excesses perpetrated by US market. At the time when the US Federal bank should have tightened the economy, allowed those free money and result was subprime balloon to burst today. Today the same central bank is resorting to allow further free money to manage a crisis. (Note: US Fed cut the benchmark rates twice to 4.50%)

No wonder, tightness in liquidity and slow down in economy is visible in fall of asset prices. US, UK and Japan stock markets are trading below their 14 months low levels. Once a poster currency, USD has been battered against all major currencies and woes doesn’t seem to fade away. USD is currently trading at all time lows against Sterling, Euro and Swiss Franc

Ensuing weak data and tight liquidity bolster the expectation of further cut in US rates. Rate cuts increased the flow to emerging markets resulting in higher volatility and surge in asset prices. Cut in interest rates have also fueled the commodity prices to higher levels. As a hedge against slowdown and weaker USD precious metals have touched all time highs. Gold is trading above USD 800 per ounce

In the wake of higher crude oil prices and tight liquidity there are clear worrying signals for global economy

While Indian diaspora continues to be in growth trajectory, regulator faces the conundrum of balancing capital inflows, exchange rate and price stability. Recent measures including CRR hike, regulation of capital flows, ban on participatory notes and routine forex interventions have left market groping in dark about the future policy action

Indian capital market attracted nearly USD 16 bn during Apr'07-Nov'07. Foreign Exchange reserves as of Nov 02’2007 increased to USD 266.5 bn as against USD 199.17 bn as on March 31’ 2007. During the same period Indian INR appreciated nearly 10% against USD

Inflation (WPI) has shown a decreasing trend over the period of last five months and is largely due to higher base effect of previous year. Inflation for the week ended Oct 27th stood at 2.97%. The base effect appears fading in coming months and inflation appears to be in the vicinity of more than 4% by March’07

Globally crude oil prices have risen by more than 30% over the period of five months. Further to it, the fuel as a component in WPI has shown a negative inflation as against overall WPI number. This is noticeable in the context of not passing of fuel price hike to the consumer. It is estimated that increase in fuel prices alone would push inflation up by nearly 1%. Considering this inflation is expected to be in the range of 5% by March 2007

As a cost free tool RBI resorted to repetitive increases in Cash reserve requirements. RBI raised CRR for the third time during the year and increased by 1.25% so far to 7.5%

In a surprise move most of the banks have reduced deposit rates across maturities and this has been mostly aimed to counter increased pool cost on account of increased CRR requirement. In spite of festival season and slew of measures to boost retail demand, slow down in credit off take has not shown any sign of reversal. The YOY credit growth for the fortnight ending Oct 26th slipped to 22.47% as against near 28% at the beginning of FY’07


Further corrections in global asset prices can not be ruled out. However, emerging markets would continue to see higher valuations on account of further rate cuts in developed economies and better return on investments.

Slower credit off-take would provide ground for lower interest rate regime but this moderation seems unlikely till the clarity on capital inflows emerges. Given huge inflows and higher prices, RBI would be right to maintain a tough stance. The direction of near term interest rates would be critically dependent on RBI policy targeting the liquidity conditions

Indian equity market story remains intact and any developed country loss is India's gain. Its right the global turmoil would be contagious but in near term India stays insulated. Any investor requires greener pastures and india and other emerging markets provide the same. As long as cheaper money trade off available India money would keep flowing into emerging markets. However, while we wallow in this borrowed pleasure, caution cant be unwarranted

Marvels

Little acts of emotion
eases out the comotion

Gentle pat on the shoulder
an infallible moral booster

One small genuine sorry
makes belittled any folly

Flash of a sweet smile
Crashes distance of mile

A firm clasp of Palm
Soothens like a balm

Warm hug does wonder
Exuberates the beholder

Unbridled little gesture
Lets loose the Rapture

Elation...

Soft & soothing tap like balm
Caressess and mood goes calm

Moves away felt so coy
lonely corner craves the joy

Lips still, hands clutched
Eyes sparkle & heart touched

Feelings flow, moments perish

Serenity reigns as spirits relish

The Crevice !!!

A ray of hope every morning,

gives boost to the yearning

Dreaming to rule the world,

turning the stones unfurled

Knocked the door once, knocked the door twice,

Knocking & knocking until it breaks the ice

The passage is shut while the problems galore,

nothing shaping as attempts come to the fore

Life appears meagre with fading vigour,

But passion keeps pushing newer endeavour

Day leaves the traces of learning,

Ignites the latent desire burning

World you crave, right there exists,

Till the irreplaceble spark persists

A ray of hope every morning,

Giving boost to the yearning

The Devil Inside

While travelling one morning, happens to see a man falling from his cycle, the reaction, felt bad for him. While few go and give him a helping hand, a kid seeing him falling starts laughing. What an oxymoron, same action draws a different reaction. A child whose heart is so pure, laughs at this. What is this, a devil inside?

Battle between good and bad or say good and devil has continued since ages. A kid, whose mind is a clean slate can laugh on someone's pain only when the devil is uncontrolled. Gives a sense as if demon the basic nature of a person. Devilish is the first feeling often comes to the mind. A kid is so pure that expresses, and he grows up tuning the mind and filter the feelings. The reactions no longer remain unbridled but are trained ones

In essence, the good and devil co-exist, it be heart or a society. The importance of good is because there exist something bad. Relevance of fair complexioned skin is because there is one with dark skin. Positive is so 'coz there is a negative. Sum up all and its a zero sum game. Little pondering shows these to be extreme words and in reality don't exist other than semantics. A good man is good as long as some better man is not identified. A lady is beautiful until some prettier one comes in picture. Nothing actually is perfect or eternal. Its just a matter of relativity, importance is only till the options are not sighted

How dull the life would have been if the feeling of being wicked never existed. The naughty kids breaking windows, eve teasing, giving excuses for the sins, flirting, adultery, stealing, frauds are all a relative forms of devil and just vary in the impact. A devil less world would have turned into a land of saints and could have even hurdled the growth of population

What differentiates a human from other human, or a civilization from a civilization is ability to decipher things or balance the feelings or say devils. Actions and reactions of grown ups based on sheer desires without foreseeing the consequences could be disastrous for oneself or others

The emotions by nature are so 'coz dont carry any logic but the actions are in the hands of an individual. A controlled devil is dangerous as it refuses to be suppressed. Need is to make devil a good friend. Know the devil, understand him and channelise him. Its exisitence makes ground for the good to prolifer. A little devil adds charms to life, makes it enjoyable

Next time when embrace the goodness, give a peck on cheek of the devil inside. The life just gets spiced up!!!!

Monday Blues

The beautiful musical guitar sound echoes in the room, but today it appears too noisy. Hands move on and suffocate the apparent screeching alarm. Finally after an hour long struggle between the desire and running time, I get up to move on. Its bad, very bad Monday morning after a kool two days weekend

With the jaws open to grab a deep breath, I yawn endlessly in the office chair. Opened excel file just shows the busy status though the eyes see nothing. End up struggling, I take the newspaper and start reading. Oh still eyes going shut and the phone ring awakes me to add to the woes, the review meeting with director gets preponed

Given the sense of urgency, I splashed water on the face and get ready to give a charged up image. In the active environment meeting proceeds with participation from me and everybody. I thought, I was active until I am asked an opinion. Alas! I had ushered in sleepy state with open eyes. Two hour long meeting finally gets over with no apparent embarrassments

The sumptuous lunch starts putting further pressure on struggling eye lashes. The day appears like never ending soap opera of star plus channel, and every passing minute looks like ages. Finally I decide to go home early instead of sitting unproductive. The clock ticks four in the evening. Still making the plans to catch a beautful nap after reaching home, bosses summon some critical information. Somehow, corporates are bitten by a culture of asking deliverables in the late evening and all is supposed to be provided yesterday. Sleeps gets buried, mind goes hyper and fingers move actively on key board

Its 8 in the evening, I am still working with no one around. The ordeal of being sleepy does not exist anymore. By the time, I get into my cozy bed, clock already shows midnight. Mind is tired, eyes are open, the elusive sleep takes time to grab me. As the moment comes at a slow pace, falling appears fun, material world carrying no meanings, I fall in dreams. Hours fly away like minutes, the night seems too short in the sedative arms of goddess of sleep

The mad gold Rush

Contours of his personality tell he is simple, hard working, bows to the orders. Barely went to school upto class 10th and drives his bosses's luxury sedans or a taxi or work elsewhere to earn a humble living. Living a life that is as normal as almost all of lower income people in a metro

Lived in a small chawl in a room having six family members adjacent to a luxurious commercial complex making them feel inferior every morning when the sunlight gets blocked by the glass walls of buildings. Not tired of the hardships of life, he goes to work with usual aspiration of getting permanent in his job as a driver

Never dreamt of the commerical value of his vicinty, gets an offer from opportunistic builder to buy the small chawls at a price that would make jealous, his over qualified top honchos at work place. The builder acquire all the nearly 400 chawls at an average price of Rs 10 mn. Overwhelmed by the offer, poor man rushes to his qualified seniors in the company to test veracity. The offer was genuine and the guy had turned an overnight millionaire and becomes a point of jealous debate. He moves out from the dingy location, buys a bigger house in a distant suburb and continues working on his humble job with a healthy residual bank balance

The story is not of just one guy but resembles to thousands staying in slums in a metro. Over night many have turned far richer than who these were subservient to. Is it destiny, pot luck or a well deserved money? Was this actually over night or destiny was waiting for long time to strike? Many of us study to get qualified and command a reputed jobs in pursuit of respectable life and stiking gold at some point of time

Forgetting the miseries the poor men would have gone before, the cozy life I have lived all along, overjealous, still working twelve hours a day in anticipation of striking gold one day. But if I do, will it give an everlasting smile?