RBI Bi-Monthly Policy April 2021. RBI Maintains “Dovish” tone.

Key Points

    Policy repo rate unchanged at 4%, reverse repo at 3.35% and MSF at 4.25%.

      Monetary Policy stance remains “Accommodative – As long as it is necessary to sustain growth on a durable basis and mitigate the impact of COVID-19 on the economy, ensuring that inflation remains within the target”.

        RBI expects inflation projected at 5% for Q4, 5.8% for Q4, 5.2% to 5.2% in Q1 and Q2 FY22, 4.4% in Q3 and 5.1% in Q4 of FY22 with risks broadly balanced.

          Real GDP growth for FY22 projected at 10.5%: 26.2% in Q1, 8.3% in Q2, 5.4% in Q3 and 6.2% in Q4.

            TLTRO – On Tap scheme extended by a period of 6 months up to September 2021.

              Special refinance facilities of ₹75,000 crore to be provided to All India Financial Institutions like NABARD, SIDBI, NHB and EXIM bank during April-August 2021.

                Surplus liquidity conditions in the system to be maintained and sustained.

                  Secondary Market G-Sec acquisition programme of G-SAP 1.0 – ₹ 1Lakh crore of G-secs scheduled to be purchased in Q1.

                    VRRR (Variable rate reverse repo) auctions of longer maturity to be conducted to manage liquidity.

                      Ways and Means Advances (WMA) limit for states and UTs enhanced to ₹47,010 crore.


                        CPI increased to 5% in February after having eased to 4.1% in January 21. While fuel inflation pressures eased somewhat in February, core inflation registered a generalised hardening and increased by 50 basis points to touch 6%.
                        Factors shaping inflation path-

                          Bumper food grains production should soften cereal prices going forward. Incoming Rabi harvest should augment supply which should lead to softening of food prices.

                            Reduction of excise duties and cesses and state level taxes could provide some relief to consumers on top of the recent easing of international crude prices. The impact of high international commodity prices and increased logistics costs needs to be monitored.

                              Inflation expectations of urban households one year ahead showed a marginal increase than over the three months ahead horizon according to the Reserve Bank’s March 2021 survey.

                                Systemic liquidity remained in large surplus in February and March 2021.

                                  Reserve money increased by 14.2% on a Y-o-Y basis (as on March 26, 2021). Banks’ non-food credit growth accelerated by 5.6%. Corporate bond issuances stood at ₹6.8 lakh crore during April-February as against ₹6.1 lakh crore on a YoY basis.

                                    India’s foreign exchange reserves stood at US$ 577 billion on March 31, 2021.
                                    Domestic Growth

                                      GDP growth is estimated at 10.5% during FY22.
                                      Factors that will influence growth.

                                        Outlook factors the uncertainty on account of the recent surge in Covid infections, resilient rural demand and expectation of normalization of activity with the vaccination programme.

                                          Strong support to investment demand and exports expected from increased allocation for capital expenditure under Budget 2021-22, expanded PLI scheme and rising capacity utilisation.

                                            Firms engaged in manufacturing, services and infrastructure polled by the Reserve Bank in March 2021 were optimistic about a pick-up in demand and expansion in business activity into 2021-22.

                                              Consumer confidence, on the other hand, has dipped with the recent surge in COVID infections.
                                              Assessment of Global Growth

                                                Lingering effects of the slowdown in the global economy in Q4 of 2020 have persisted, although recent arrivals of high frequency indicators suggest that a gradual but uneven recovery may be forming.

                                                  World trade activity improved in Q4:2020 and January 2021. There are, however, concerns due to COVID-19-related fresh lockdowns and depressed demand in a few major economies, escalation in shipping charges and container shortages.

                                                    Inflation remains benign in major advanced economies (AEs). Inflation ruling above target in some emerging market economies (EMEs), primarily driven by firming global commodity prices, prompting some of them to raise policy rates.

                                                      Equity and currency markets have been turbulent with the increase in long-term bond yields and the steepening of yield curves. With the bond markets sell-offs, EME assets came under selling pressure and capital outflows imposed depreciating pressures on EME currencies in March.

                                                      All members unanimously voted for keeping the policy repo rate unchanged and continue with the accommodative stance at least during the current financial year and into the next financial year.

                                                      Debt Market View

                                                      Bond markets reacted positively with Benchmark 10-year G-sec rallying 6 bps.

                                                      We recommend allocation in

                                                        The combination of committed GSAP together with the hint of complimentary OMOs should prevent any major flare up in yields hence longer end yields should be well anchored. However, VRRRs would likely put some upside pressure on short end yields.

                                                          The yield curve has become very steep and the current steepness in yield curves provides adequate insurance against any adverse movement in yields and offers an attractive opportunity for investors from roll down strategy.

                                                            For 6 months horizon Arbitrage funds, Money market and floating rate funds appear attractive compared to Liquid and Ultra-Short funds.

                                                              Expected returns for 3-year investor are lower than the past, but still attractive than Bank FDs on post tax basis.

                                                              Disclaimer: This note is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This note does not constitute an offer, invitation or inducement to invest in securities or other investments and Wealth Managers (India) Private Limited is not soliciting any action based upon it. Wealth Managers (India) Private Limited or any employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Mutual Fund Investments are subject to market risks. Past performance is not an indication of future. Please read offer document carefully before investing. For commission disclosure refer to our
                                                              Website www.wealthmanagersindia.com

Value Vs. Growth conundrum

Value style of investing and Growth style of investing are two approaches we often hear in investment circles. The arguments supporting and opposing value and growth style of investing create confusion in minds of many investors.

Let us understand what Growth style and Value style means.

Growth stocks represent companies that have demonstrated better-than-average gains in earnings in recent years and that are expected to continue delivering high levels of profit growth, although there are no guarantees.

Value stock represents companies that have fallen out of favor but still have good fundamentals. The value group may also include stocks of new companies that have yet to be recognized by investors.

As an investor let us consider two scenarios:

Scenario 1 – Company “A” is operating in Industry which is currently having good tail winds and strong demand outlook. Policies are supporting growth in that industries. As a result, the Industry can grow at a faster pace compared to GDP growth rate. In that, “Company A” is having strong “Moat” and is consistently delivering higher growth than its peers.
Companies which are in above scenario generally trade at higher valuation multiples. Generally, Growth companies are having higher P/E and P/B ratios. So, hypothetically, “Company A” intrinsic value is Rs. 100, and company A is delivering 40% growth, investors are willing to pay Rs. 105 or Rs.110 as they believe that growth will continue and hence the intrinsic value will increase from Rs.100 to Rs. 140.
Scenario 2 – Company “B” is operating in Industry which is currently having head winds and weak demand outlook. Environment is not supportive for growth in that industries. As a result, the Industry is growing at a slower pace compared to GDP growth rate. Although, environment is challenging “Company B” is having strong fundamental business franchise and is able to survive in this.
Companies which are in above scenario generally trade at lower valuation multiples. Generally, value companies are having lower P/E and P/B ratios. So, hypothetically, “Company B” intrinsic value (as perceived as analyst/investor) is Rs. 100, and company A is delivering 10% growth, investors are willing to pay Rs. 70 or Rs.80 as they believe that this situation will change as economic and market cycle play out. As a result, company which is currently trading below its intrinsic value will catch up so, in our example stock price will move from Rs. 80 to Rs. 110.
Now, if you observe, thought process involved is different for both the scenarios. For “Company A” bet that company will continue to grow at higher rate is the main part, where as for “Company B” the change in environment in which the company operates is the catalyst.

Growth or value… or both?

Which strategy — growth or value — is likely to produce higher returns over the long term? The battle between growth and value investing has been going on for years, with each side offering statistics to support its arguments. One important point is that both styles will have periods where they underperform and periods where they will outperform. In different cycles different sectors and different stocks will appear either “Value” or “Growth” so it is important What style you are comfortable following and continue following the same.

History shows us that:

Growth stocks, in general, have the potential to perform better when interest rates are falling, and company earnings are rising. However, they may also be the first to be punished when the economy is cooling.
Value stocks, often stocks of cyclical industries, may do well early in an economic recovery but are typically more likely to lag in a sustained bull market.
When investing long term, some individuals combine growth and value stocks or funds for the potential of high returns with less risk. This approach allows investors to, in theory, gain throughout economic cycles in which the general market situations favor either the growth or value investment style, smoothing any returns over time.

Investment Discipline – The SIP way

Twitter is a wonderful source to gather the latest information and news. In late April 2020, I came across a twitter post from Rajya Sabha MP Subramaniam Swamy in which he urged his followers to hone their skills during this lock-down. To emphasize this, he shared the story of Lord Indra and the farmers. 

And this is how the story goes–

Once, Lord Indra got upset with the farmers, he announced that there will be no rain & you won’t be able to produce any crops for the next 12 years.

The farmers got shattered and started begging for clemency. So out of mercy, though reluctantly, Lord Indra gave a solution to their prayers and said, “Rain will be possible only if you could convince Lord Shiva to play his Damru”. But Lord Indra secretly requested Lord Shiva not to agree to these farmers. When farmers reached out to Lord Shiva, he did agree to play the Damru but with an additional clause stating that the Damru will be played only after 12 years, thus keeping Lord Indra’s secret request intact.

Disappointed farmers now had no choice but to wait for 12 years to pass by.

But one farmer was consistently digging, treating and putting manure in the soil, he kept on sowing the seeds on the cursed land inspite of knowing there will be no crops for the next 12 years.

Initially, all the other farmers made fun of him, but he didn’t stop, he kept going on and on. Few months went by, now the others were concerned, they asked him,” why are you wasting your efforts, time and energy, my friend, when you know that it’ll still not rain for the next 12 years?”

To this, he replied “I know my efforts are going in vain, but I’m doing it as a matter of PRACTICE! After 12 years I might forget the process of growing crops and working in the field altogether, so I must keep on brushing up my skills so that I’m fit to produce my crop, the year this curse gets lifted!”

Hearing his argument, Goddess Parvati got impressed and she went and praised his version before Lord Shiva and said, “You may also forget playing the Damru after 12 years!” The innocent Lord Shiva panic-stricken, out of his sheer concern, tried to play the Damru once, just to check if he could….and hearing the sound of Damru, it started to rain heavily, and the farmer who was diligently working on his field persistently, while others were criticizing, got his crop sprouted from the depths of the ground instantly, while the others were left disappointed!

The key learning here is that “The game is won during the practice, not during the performance”.  If you are waiting for a good opportunity before you start practicing, then you have lost the race already!

To draw a parallel in our investment journey, we may be facing bad times at present, but one never knows when good luck might strike, and one must always be ready to grab it. Good luck should not find us wanting. As it is wisely said, “When preparation meets opportunity, luck steps in!” That is why maintaining the right asset allocation is of utmost importance. Do not terminate your SIP if your financial need is yet a few years away.

Thanks to the ‘Mutual Fund sahi hai’ campaign by AMFI. Mutual funds and SIP have become household names in the rising middle-class population. While we all know the direct benefits of SIP vis-a-vis-

  • rupee cost averaging
  • small investments at a time
  • reduce the impact of volatility 
  • beats inflation 
  • diversification benefits  

Though there is another benefit as well which is less talked about – 

  • Discipline

Yes, my dear investor friends, SIP is a great tool that inculcates a habit of saving, pay yourself first, and then spend the remaining amount. We may not be disciplined enough to exercise regularly or stand in a queue at the cinema hall or airport but SIP forces us to maintain this discipline at least in Financial matters.

For those of you who are not fascinated by mythological stories here is an example from the world of Athletics. We all know about Jamaican sprinter Usain Bolt – the fastest man on Earth. Usain Bolt has won 8 gold medals in 3 Olympics, and he only ran for less than 115 seconds (less than 2 minutes) on the track, earning $119 million dollars. But for those 2 flawless minutes, he trained himself for 20 consistent years. If one considers all those training sessions in 20 years as his routine SIP instalments, the rewards have been tremendous. Aren’t they?

India has a population of about 130 crore people of which more than 80 crores inhabit the rural areas. This is comparable to the entire population of Europe

which is close to 75 crores. We have 35 crore middle-class consumers which is more than the entire population of the USA. The share of youth in our population is about 50 crore, which is more than the population of Brazil, Russia, Germany, and the UK combined. Thus, the consumption market in India is equivalent to a few developing and developed economies clubbed together, in terms of population. Our rising middle-class consumers of goods and services are like a freshly baked hot chocolate cake, every company in the world would like a piece of this cake.

So, what will I do? Well, I will maintain financial discipline by means of right asset

allocation and invest in equities via my good friend SIP, continue to sharpen my skills and upgrade my knowledge. I have my eyes set on the chocolate cake and when the time comes, I shall have my portion of it too with a cherry on top.

Till then, Happy investing!

Update on Fixed Income March 2020


Disclaimer: This message is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. It is intended for the recipient, please do not forward.This message does not constitute an offer, invitation or inducement to invest in securities or other investments and Wealth Managers (India) Private Limited is not soliciting any action based upon it. Wealth Managers (India) Private Limited or any employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Mutual Fund Investments are subject to market risks. Past performance is not an indication of future. Please read offer document carefully before investing. For commission disclosure refer to our
Website www.wealthmanagersindia.com

Corona and Investing

Investing in Testing times

“Be fearful when others are greedy, and greedy when others are fearful”

Warren Buffett

Today, it is evident this is easy to preach and difficult to practice. Corona Virus has turned out to be the trigger that has posed serious question mark on continuation of the 11-year old bull market

2008 and the longest Bull market.

In 2008 markets had seen similar panic and had fallen dramatically. The reasons were the sub-prime crisis and collapse of the important financial institutions.   

After the subprime crisis, governments and central banks were forced to act. Synchronized policy actions from central banks across the world led to recovery in markets. Policy makers have since played a role of “Pro-active Doctors”. if they see even some hint of illness, they act fast and swiftly to avoid any spread of infection. But, these “Doctors” are having limited medicines at their disposal. When US Fed first said that they will withdraw the liquidity in the system, global markets collapsed (Taper Tantrum).

We have seen the pendulum swing away from globalization and a rise in nationalism.  This is seen in the election of nationalist leaders and evidenced by Brexit and US-China Trade war. Whenever such swings threatened to derail the markets, but the “Pro-active Doctors” and their medicines (Massive liquidity, easy and market supporting monetary policies) made sure that markets not just remained on track, but zoomed faster.

Indian markets

Period from 2003-08 is described “Mother of all bull markets”. The indices zoomed 5x in 5 years. After the subprime crisis in US, Indian markets also fell in line with Global peers. Indian government and central banks also swung into action and markets recovered within a years’ time. But our macroeconomic situation deteriorated. India was one of the fragile five economies in 2012-13. Since 2013, we saw a decent rally especially in Mid & Small cap segment till January 2018. The valuation excesses in Mid & Small cap segments led to crumbling of the prices. Many structural changes like Demonetization, GST, MF recategorization, Insolvency & Bankruptcy Code, RERA, IL&FS and NBFC crisis led to large erosion in Mid & Small cap segment. In 2019, we saw a polarization in Indian Markets with only a handful of stocks gaining massively, leading Sensex and Nifty to new highs. This was in line with the trends in the global markets. Nasdaq was the leader of the bull run. Even there, a polarization in favor of the Faang stocks was apparent. Most of the global markets were following this lead.

Risk of the Unknown

Like a black swan, the outbreak of the COVID -19 virus has jolted all the global economy. The markets have crashed. The speed of the decline has surprised everyone. This is not a financial event. Nor is it a “normal” occurrence. The incubation period of 2 weeks makes it very difficult to distinguish those who are affected. We describe fast rising trends in other fields by the phrase “becoming viral”.  Now we have experienced what it means in real life. The exponential rate of growth, geographical spread, lack of proven treatment and lead time for developing and testing vaccines mean that the markets are dealing with an unknown risk. They are trying to factor in this through substantially increased risk premium and hence, there has been a stampede for the exit door. Governments across the globe have preferred to lock down economic activity and close their borders to stop the spread. This may appear like an overreaction, but it is important to try and arrest the spread. If there is exponential spread, the healthcare capacities will fall severely short.

Flattening A Pandemic’s Curve

These steps also lead to a shutdown of businesses. Demand destruction followed by supply disruption could mean wiping out the growth for 2 calendar quarters and pushing the global economy into recession.

This could also hurt leveraged businesses. Airlines, hotels, travel and logistics companies will face the brunt. An oil price war between Saudi Arabia and Russia at the same time could push Oil & Energy companies into financial distress. This can extend to their lenders and some financial companies may run into difficulties.

Policy Action

Seeing increasing impact of corona virus on global economic activity, global central banks and governments have sprung into action with various policy measure. They are trying to avoid the impact of stock price erosion on businesses. Special lines of credit will also be opened up for ailing sectors. As the credit ratings of some of the borrowers get downgraded, the spread between sovereign and corporate debt yield would widen. This can create further harm.

Country Quantum of Rate cut New Policy Rate Previous Policy Rate
USA 100 bps 0-0.25% 1-1.25%
Australia 25 bps 0.50% 0.75%
Malaysia 25 bps 2.50% 2.75%
Hong Kong 50 bps 1.50% 2%
Canada 100 bps 0.75% 1.75%
UK 50 bps 0.25% 0.75%
  • China, Hong Kong, South Korea, Malaysia have announced fiscal stimulus measures.
  • Bank of Japan stepped in to buy ETFs worth $940mn
  • ECB President Christine Lagarde pledged readiness to take appropriate and targeted measures to address risks due to the coronavirus outbreak.
  • G7 nations reaffirmed their commitment to adopt all appropriate policy steps to protect the world economy from downside risks posed by the coronavirus.
  • IMF announced $50 billion package for low-income and emerging market countries to help combat the impact of the corona virus epidemic
  • President Trump announced financial package – paid sick leave, aid to struggling industries like airlines, and potentially eliminating payroll taxes for businesses for the rest of the year

Some comforting facts amid falling markets

The price to book value is 2.3x, which is at the lower end of spectrum. The worst readings were seen in 1998 and 2002, which were 1.9x. This tells us that prices are cheap. The prospective 1- and 3-year returns have been attractive, whenever we have seen prices drop to these levels.

Price to Book Value: One of the lowest levels in 11 years

Price to Book Value: One of the lowest levels in 11 years

The sentiment in the markets is lower than the sub-prime crisis in 2008 and also that in the crashes of 1998 and 2004. It is the speed of fall that has damaged the sentiment beyond limits.

Equity Vs. Bond yield 28 February 20

Equity Vs. Bond yield 28 February 20 Source: HDFC AMC

Bond yields have collapsed in March 2020 and earnings yield has gone up. We would need to adjust the prospective earnings estimates for FY21. The slowdown due to demand destruction and supply disruption would pull the earnings lower. Earlier EPS growth expectations in excess of 20% would be moderated to 15%.

Equity earnings yield is inverse of the Nifty P/E ratio—and indicates what equities yield as an asset class. Typically, when bond yield (minus) equity earnings yield gap reduces or turns negative, then equities start to look more attractive (than bonds) from a relative valuation perspective.

It can be seen in the chart above that when the gap has become negative in the past (like in year 2012 beginning, year 2013) then it has offered buying opportunities in equities—as indicated by the Nifty 1 year forward return.

Presently, with the market correction the gap has turned negative (as highlighted in the above chart) and is the biggest gap we have seen since the global financial crisis in 2008-09. This indicates that equities have started to look more attractive on a relative basis.

One of the other major reason for current global market fall is, massive fall in crude oil prices.

Crude oil prices were weak due to Coronavirus concerns, and the recent price-war between Saudi Arabia & Russia has further aggravated the crude price fall

This is beneficial for a net oil importing country like India, where crude oil accounts for a large part of our imports.

India imports ~1.3 billion barrels of crude every year.  $20/barrel fall in crude price will result in an annual savings of ~$26 billion. This will in turn help to reduce our current account deficit. Market estimates indicate that a $10/barrel fall in crude price helps to reduce current account deficit by around 40 bps (0.4%).  This also helps in keeping fiscal deficit and inflation in check.

RBI’s latest inflation forecast had assumed India’s basket crude oil: $62.6 a barrel. The fall in crude oil prices is likely to be disinflationary. This will provide room for RBI to cut rates further.

Bond yields and interest rates have fallen, helping to bring down cost of capital for companies

The 10-year benchmark bond yield has fallen by more than 120 bps (1.2%) over the past year, and RBI has cut interest rates (repo rate) by a cumulative 135 bps (1.35%). RBI has also taken various steps to increase monetary transmission of interest rates & improve liquidity in the system.

This fall in bond yields & interest rates will help to reduce cost of capital (cost of borrowing) for companies, and therefore is beneficial for them.

India’s forex reserves are at an all-time high of ~$480 billion, and provides buffer / stability

India’s forex reserves are at an all-time high of ~$480 billion and provides buffer / stability.

Import coverage ratio (no. of months of imports that forex reserves can cover) stands presently at around 12 months, which is quite healthy. During the Fed taper tantrum of 2013 import coverage ratio had dropped to around 6-7 months

There is likelihood of shift of manufacturing from China to other countries as the firms start diversifying their supply chain. India can welcome those companies to become part of global supply chain. This can support India’s growth for years to come. Samsung, a Korean chaebol contributes 28 % of Vietnamese GDP and generates revenue of $ 62 billion from Vietnam

Fear of the unknown is driving the markets. It is not irrational, as we are fighting with the unknown. History does not repeat, but it rhymes. As the fog lifts on the possible containment of the virus, the markets would view the situation differently. As the spread is contained, and lock down is removed, the current prices could look attractive.

Also, let us see the history of past incidences like SARs, EBOLA, ZICA.  Initially, they understandably created panic. Once scientists were able to find a solution, the economy and the markets stabilized and recovered.

Indian market are attractive from fundamental perspective. It is difficult to catch the bottom and top of markets. Investors will do well to remember that historically, investments made in challenging/volatile times, have generally been rewarding for investors over the next 3 years. Adding patient money in 2 or 3 instalments is recommended.

Corona and Investing in equities


Disclaimer: This message is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. It is intended for the recipient, please do not forward.This message does not constitute an offer, invitation or inducement to invest in securities or other investments and Wealth Managers (India) Private Limited is not soliciting any action based upon it. Wealth Managers (India) Private Limited or any employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Mutual Fund Investments are subject to market risks. Past performance is not an indication of future. Please read offer document carefully before investing. For commission disclosure refer to our
Website www.wealthmanagersindia.com

India’s Growth Slowdown

December 8, 2019

Hot topic of discussion in economic and industry circles currently is the fall in India’s GDP growth rate. In the Quarter ending September 2019 GDP growth rate fell to 4.5%. Questions are being raised whether this is a recession. Scientifically speaking, if an economy contracts for consecutive two quarters, then it is said to be in recession. This means, if economic growth turns negative, then it fits into this definition. According to IMF projections, in the year 2019 global economic growth rate is 3%. Growth rates for developed economies like America, Europe, Japan are projected at 1.7% and of emerging economies are projected on an average at 3.9%. Compared to this India’s 4.5% growth rate is more than average. Hence, one cannot term this as a “Recession”. Average growth rate in India over last 5 years was 7.32%. In comparison, the current fall in growth rates gives a recession-like feeling and it is hard to ignore. What is the reason behind this fall? What are probable solutions? Who has power to correct this? These are some of the questions in peoples’ mind. Is any remedial action being taken? Whether it is effective? When will the actual results be visible? Many will have their own doubts. Fall in auto sales, lower consumption of diesel and electricity, daily news items of this sort increase anxiety for sure.

Monetary and Fiscal Policy

Two main tools to keep maneuver and balance growth and inflation are Monetary and Fiscal Policies. These policies are managed by Reserve Bank and Government respectively. Reserve Bank is an independent institution. How and at what level current rates (Repo rates, CRR, SLR etc.) are to be kept and how money supply is to be maintained is decided by Monetary Policy of the Reserve Bank. In 2016, after changing RBI Act, Monetary policy setting is assigned to Monetary Policy Committee (MPC). MPC consists of 6 members; 3 are Reserve Bank’s officials and remaining 3 are appointed by Government. RBI’s Governor is the Chairman of this committee. This committee was formed based on a report presented by Dr. Urjit Patel. Before Monetary Policy committee’s mandate, the nature of Monetary policy was multidimensional. Along with Inflation control, maintaining growth rates, stability in currency and Forex markets were also part of Monetary policy. After the committee came into existence, Inflation Targeting was kept as the single point agenda. There are 2 indices which are commonly used for tracking inflation. Wholesale Price Index (WPI) and Consumer Price Index (CPI). Committee has been given the mandate to maintain CPI within the desired level. To achieve this, Monetary Policy projects inflation range for coming 12 months and then it decides the level at which interest rates are to be kept and how money supply should be maintained to keep inflation under check. If you reduce interest rates and increase supply of money, then inflation is likely to go up. As a corollary to that, if you increase interest rates and make money supply tight, it helps in reducing inflation. As aim of the monetary policy is to maintain Inflation, maintaining growth rates is not MPC’s responsibility.

Growth Rate and Fiscal Deficit.

Fiscal Policy is an instrument in the Central Government’s hand. Government’s income comes from Tax collections and Capital receipts. Governments spends these for revenue expenses and capital expenditure. If expense is more than income, then that is termed as Fiscal deficit. Government needs to fund this deficit by borrowing money. Globally, government budgets are usually in the deficit. More spending leads to improved growth rates. Hence spending more than earnings is the rule rather than an exception. If growth rate keeps on increasing, it adds to government’s popularity. Hence, elected members have more emphasis on improving growth rates than on keeping inflation in check. Widening Fiscal deficit is likely to result in rising inflation. If fiscal deficit increases beyond control, then hyperinflation like scenario can occur. Because of this, the currency depreciates, imports become dearer and inflation goes out of hand. For exactly this reason, to keep Fiscal deficit under check the Fiscal Responsibility and Budget Management Act (FRBM act) was passed. According to this law, till 2021 Fiscal deficit is to be reduced at 3% of India’s GDP. Government’s attempts to stimulate growth are constrained by this responsibility of keeping Fiscal deficit in check.

It is clear that GDP growth and inflation control are conflicting goals. In balancing such conflicting goals, standoffs often take place between RBI and Government. But this is completely natural and not specific to India. We can see this tug-of-war happening in may developing and developed countries across the world. Due to media limelight, these skirmishes now a days reach the common man. In India, RBI Governor Dr. Raghuram Rajan declining an extension and his successor Dr. Urjit Patel stepping down before his term has given media enough sensational material.

In the period from 2009 to 2014, CPI inflation rate on average was around 9.95%. In the period 2014-2019 it has declined to 4.97%. This may tempt us to conclude that monetary policy has been successful in controlling Inflation. In this context, we should acknowledge that, in our country we cannot control inflation, only by maneuvering monetary policy. Close to 70 % of our energy needs are met by importing Crude oil. If oil prices go up in international markets, then inflation in India heats up. In the year 2013 oil prices had reached level of $111/barrel; but in last 5 years on an average oil prices have remained close to $60/barrel. This has been one of the biggest reasons in maintaining inflation within desired range. Repo rate considered as a proxy for interest rates in India. In last 5 years RBI has changed Repo rate several times. Since the beginning of 2019, Repo rate has been lowered from 6.50% to 5.15%. In every Bi-monthly policy repo rate was reduced by 25 bps, but in October policy repo rate was reduced by 35 bps. In the December 5 MPC meeting, status quo was maintained. At a time when GDP growth rate has hit a low of 4.5%, the decision not to cut rate stating the rising food price inflation took everyone by surprise.  This year, because of excess rains kharif crops were washed out. Hence the MPC has taken a cautious stance. They have also considered the fact that this year Rabbi production will touch an all-time high, and inflation is projected around 4.7-5.1%. This decision reiterates that the single point agenda for Monetary policy is only inflation control.

In a country like India, whether it is right to prepare monetary policy with Inflation being single point agenda is something which being getting increasing attention. There are experts who argue that rather than copying template from Developed countries, we should design more balanced and practical policies. Maintaining a delicate balance between growth and Inflation is required. Sole focus on CPI is also being questioned. In CPI, food, fuel and housing have close to 70% weight. In WPI, industrial produce has higher exposure. WPI has been consistently close to 2% and currently it is close to 0%.

Impact on Consumers?

Do interest rates really have impact on consumers? Do consumers really tend to buy more, if interest rates are reduced? These are some of the questions currently being asked. Impact of interest rates on buying some goods is undisputed. For instance, if you were to avail a housing mortgage loan of Rs.20 Lakhs, and the interest rate is 10%, monthly instalment would be about Rs. 19,300. If interest rate falls by 3%, the EMI falls to Rs. 15,506. This creates the room for an extra Rs. 3,694 for other spending. This can lead to a demand for other items of consumption. But there are some other important factors as well which one needs to consider. Whether consumer income is growing and there is job security, will impact consumption. A lack of confidence about these factors is bound to hamper it. If we consider the last 10 years data, the increment in salary in white collar jobs in the private sector has consistently lagged inflation rate. Even with this, why did we see consumer spending increasing? One reason could be falling savings rate. India’s savings rate has come down from 38% to 30%. Individuals savings rate has dropped from 23% to 18%. This means, while salaries were not growing incremental spending was taking place at the cost of savings. In recessionary environment there is less confidence about jobs. In small and medium enterprises also, events like demonetization, GST and prolonged time for recovery of debtors has shook confidence. This leads to a tightening of the belt and the tendency to save money in every possible manner.

On the other hand, low cost of finance and easily available money supply was also one of the reasons. CIBIL has enabled credit rating for Individuals. Like companies have “Credit Rating”, because of CIBIL score, giving loan to individuals has also became less risky. Taking wholesale discounts from manufacturers and offering optically attractive “0%” interest (But actually high rate schemes) gave encouragement to individuals for spending. Private banks were able to grow their business on such schemes. NBFCs also entered in this competition. NBFC financing was one of the main pillars of this individual spending. In August 2018 IL&FS ran into problems. This company was mainly engaged in Infrastructure financing. It defaulted on interest and principal. This episode exposed weak links in NBFCs.  NBFCs were borrowing for short term (typically 1 year) and lending for long term (typically 10 years).This is called asset-liability mismatch. As panic set in, investors refused to renew short term deposits and many NBFCs were “Run-Out”. This funding squeeze affected many businesses. Many Small and Medium enterprises borrowed from NBFCs despite having higher interest rates because of convenience. It was simpler compared to borrowing from corporate banks. Those companies faced a liquidity crunch and interest rates also went up. These developments had negative impact on business as well on personal spending. When similar situation happened in the USA, Federal reserve drastically cut interest rates, bought stressed bonds and infused liquidity under its TARP program. In India, Repo rate had been hiked 2 times In June and August 2018. In hindsight, this action shows lack of sensitivity. In current year’s budget, it was announced that banks will provide liquidity to NBFCs to the tune of  Rs. 1 Lakh Crore. 5 months have passed since, but how much money has been provided is still not clear. There are also question marks on whether, the recapitalization package worth Rs. 70,000 Crore declared for public sector banks and Rs.25,000 Crore package for Real estate sector have made any progress on ground or are still stuck in red tape.

Limitations on Fiscal Stimulus

Finance Minister has done efforts through Fiscal policy to stimulate GDP growth. Promise made by previous finance minister to reduce corporate tax rate from 35% to 22% was fulfilled by bringing in an amendment. The tax cut means stimulus of Rs. 1,45,000 Cr. For the economy every year. Tax rate for new manufacturing unit is now set at 15% to give boost to manufacturing and the government is hoping to attract large Foreign Direct Investment due to the most competitive tax rate in the region. This tax cut, however, might lead to slippage in Fiscal deficit to the tune of 50 bps to 3.8%. GST collections have remained below Rs. 1 lakh Cr., but they inched up above that mark in the last month. As GST collections are weak due to the sluggishness in the economy, the limitations on inducing growth in the economy through fiscal measures are clearly there.

Interest rate and Growth rate

While discussing about Interest rate and growth rate it is important to understand the “Real Interest Rate” as a concept. When the borrower repays its loan, reduction in purchasing power of rupee because of price rise acts in its favor. For example, if inflation rate is 5%, then value of Rs.100 after 1 year (100/1.05) becomes 95.23. i.e. value is reduced by Rs. 4.77. Suppose if I pay 8% interest, then in real terms, I am paying (8-4.77) only 3.23 out of my pocket. This means, if inflation is higher, I will be more tempted to borrow. In period, 2009-2014, average inflation rate was 9.95%, and deposit rates was on average 8.33%. This effectively means that banks were not required to pay “Real” interest. Today, inflation rate is around 3% and deposit rate is around 6.5%. This means banks now have to pay “real” interest of 3.5%. Governments Small Savings schemes are offering 8% interest so real rate is close to 5%. Individual running a business is facing a bigger problem. If we assume wholesale inflation around 2%, then their product selling price is rising merely by 2%. Interest cost for him is close to 12%.  His loan is growing at “Real rate” of 10%. Today, real interest rates in India are one of the highest globally and that is hurting businesses and impacting growth rates. 

Will reducing Repo rate solve the problem?

Only reduction in Repo rates will not solve this problem. There are two reasons for this. First reason is that the Interest rates on Small Savings schemes, PPF, Provident Fund are in the range of 8-8.65%. Hence, even if Repo Rate comes down, banks cannot cut deposit rates and effectively interest rates on loan. Along with that, if they reduce interest rates on Small savings schemes, then senior citizens and middleclass retirees will find the situation tough. Second reason is, as savings rates have come down. There is a shortfall of funds and it makes it difficult to cut interest rates.

There are possibly other reasons also for current recession-like scenario. Take the Auto industry, for example. Pollution in cities, traffic jams, implementation of BS6 standards, improvement in efficiency of commercial vehicles and the resultant reduction in time because of GST, preference for ride hailing services such as Ola and Uber by younger generation, expectations regarding electric vehicles could be some additional reasons for current slowdown.. Having said that, high “Real” interest rates and low capital availability are undisputed factors in the slowdown.

Global Paradox

The total value of Bonds outstanding globally is close to $23 trillion, out of which, almost $15 trillion worth of Bonds are trading at a yield of 0% or negative rates. India at the same time has a big requirement of funds for building its infrastructure. This could be an opportunity for global investors, who are unable to find productive avenues. Union Budget 2019 had proposed to raise funds through issue of Indian Sovereign Bonds abroad. This was bitterly criticized by taking a myopic view. Instances of countries like Argentina, Venezuela, Zimbabwe were quoted, which had indiscriminately piled up foreign debt. We need to think this through openly. With proper communication, co-ordination and necessary controls in place, this could be one great window of opportunity. India can become a part of the global emerging market bond index; large allocations can come from pension funds and endowments. If we can restrict this Bond program to, say, 0.5% or 1% of GDP, we can raise 15 to 30 billion dollars and we would not be playing with fire. The cost of the funds will not be zero, but will be governed by India’s credit rating and currency depreciation. When we allow Foreign Direct Investment through the equity route, profit perpetually go to foreign countries. Bonds have a maturity and the liability extinguishes on repayment. Our country runs a Current Account Deficit and we need to be cautious in borrowing abroad, but this can be put in place with proper checks and balances. The world is flooded with funds and we face a drought of capital. This is one “River Joining Project” that can create a Win-Win and reignite growth.   


Fifth Bi-monthly Monetary Policy Statement, 2019-20

Wait and Watch for now.

Key Points

  • Policy repo rate unchanged at 5.15%, reverse repo at 4.90% and MSF at 5.40%
  • Monetary Policy stance remains “Accommodative – As long as it is necessary to revive growth, while ensuring that inflation remains within target”.
  • CPI inflation projected at 5.1-4.7% for H2:FY20 and 4-3.8% for H1:FY21, with risks evenly balanced.
  • GDP growth forecast reduced to 5% from 6.1% in FY 19-20, and in the range of 4.9-5.5% for H2:2019-20 and 5.9-6.3% for H1:2020-21 with risks evenly balanced.
  • Liquidity to be Positive.


  • CPI increased sharply to 4.6% in October, propelled by surge in food prices.

Factors shaping inflation path- 

  • Upsurge in prices of Vegetables likely to continue. However, RBI expects pick-up in arrivals from the late Kharif season and imports by government should soften food inflation.
  • Incipient price pressures seen in other food items such as milk, pulses and sugar are likely to be sustained.
  • Both 3-month and 1-year ahead inflation expectations of household have risen.
  • Domestic demand has slowed down, which is being reflected by softening of Core inflation.
  • Increase in telecom tariffs can have some impact on core inflation.
  • Crude oil prices are expected to remain range bound barring any disruption due to geo-political tensions


  • Liquidity in the system was in surplus in October-November 2019 despite expansion of currency in circulation due to festive demand.
  • Reflecting easy liquidity conditions, the weighted average call rate (WACR) traded below the policy repo rate (on an average) by 8 bps in October and by 10 bps in November.

Current Account Deficit and Forex

  • Trade deficit narrowed during September-October 2019.Imports contracted faster than exports.
  • On the financing side, net FDI rose to US$ 20.9 bn in H1:2019-20 from US$ 17 bn a year ago.
  • India’s foreign exchange reserves were at US$ 451.7 billion on December 3, 2019 – an increase of US$ 38.8 billion over end-March 2019.

Domestic Growth outlook cut to 5%

  • Growth in GDP moderated to 4.5% in Q2:2019-20, extending a sequential deceleration to the 6th consecutive quarter.
  • Real GDP growth for 2019-20 is revised downwards from 6.1% in the October policy to 5% – in the range of 4.9-5.5% in H2 and in the range of 5.9-6.3% for H1:2020-21 with risks evenly balanced.

Factors that will influence growth

  • Various high frequency indicators suggest that domestic demand conditions have remained weak.
  • RBI expects several measures initiated by the Government and monetary easing undertaken since February 2019 to revive sentiment and spur demand.
  • The business expectations index of the Reserve Bank’s industrial outlook survey shows marginal pickup in business sentiments in Q4.
  • Quick resolution of global trade tensions.
  • Further slowdown in global economic activity and geo-political tensions

Assessment of Global Growth

  • Since the meeting of the MPC in October 2019, global economic activity has remained subdued, though some signs of resilience are becoming visible.
  • GDP growth in the US picked up in Q3, in Euro area GDP growth remained stable. Japanese economy lost momentum in Q3 while economic activity in the UK accelerated.
  • Among Emerging economies growth in China, South Africa, India decelerated in Q3 whereas growth in Russia and Brazil accelerated.
  • Crude oil prices have remained range bound.
  • Gold prices traded sideways before falling in early November as a revival of risk appetite eased safe haven demand.

All members of the MPC voted in favour of the decision.

Other Key Announcement

  • Draft circular on exposure limits and priority sector lending by primary urban cooperative banks to be released soon
  • Urban cooperative banks with assets of Rs 500 Crs and above to be bought under the Central Repository of Information on Large Credits (CRILC)
  • Facilitation of setting up a self-regulatory body towards development of the secondary market loans

Debt Market View  

  • With growth faltering to 4.5% in the last quarter, it was widely expected that RBI will cut rate in this monetary policy, in absence of that bond markets reacted negatively with Benchmark 10-year paper gaining 14 bps.
  • RBI in its commentary has indicated that economic activity has weakened further and the output gap, which is the difference between actual output and potential output, remains negative and RBI will “Wait and watch” effect of monetary and fiscal measures already taken.  
  • High Real rates continue to make debt an attractive asset class
  • We suggest products having maturity close to investment horizon having highest credit quality and lowest expense for investors having less than 1-year time horizon.
  • For a 3-year investor, we recommend allocation in 1-5-year average maturity segment with high credit quality portfolios mainly focused on accrual. The high-quality PSU and corporate bond spread over G-Sec is attractive

Monthly Commentary October 2019

Market Performance


  • RBI in its Monetary policy cut Repo rate by 25 bps to 5.15%. RBI continues to maintain “Accommodative” stance. GDP growth forecast trimmed sharply to 6.1% from 6.9% in FY-20.
  • Services PMI signalling contraction. Core sector growth also contracted for the month of September declining by -5.2% Vs -0.5% in August. Aug-19 IIP Contracted by 1.1%. The cumulative industrial growth over the Apr-Aug-19 at 2.4%. 15 out of the 23 industry groups in the manufacturing sector showed a decline in output.
  • The cumulative monsoon ended at 10% above the LPA, the highest since 1994.
  • India has jumped 14 places to the 63rd position in the World Bank’s ‘ease of doing business’ rank.

Trade Position

  • Merchandise Trade Exports fell by 6.57%; Imports fell 13.85%; Trade deficit registered 7 months low of US$10.86bn.
  • CAD at 2.0% of GDP; FPI recorded net inflow of US$4.8bn as against an outflow of US$8.1bn in Q1FY-19. An accretion of US$14.0bn to the Forex reserves.


  • CPI increased marginally to 3.99% in September from 3.21% in August, CPI is at 14-month high. WPI eased to 0.33%, its lowest in more than 3 years led by lower inflation in fuel and manufactured goods.


  • At its October meeting, the FOMC of the US Fed cut the target rate to 1.75%.
  • Global Manufacturing PMI remained stagnant; New orders fall as international trade volumes weaken; Business optimism remains low.
  • WTO downgraded its global trade growth forecasts to 1.2% in 2019, down from an April forecast of 2.6%; 2.7% growth for 2020 is predicted on a return to more normal trade relations.
  • IMF downgraded global growth to 3%, its slowest pace since the global financial crisis. The uptick in global growth for 2020 is driven by emerging market and developing economies that are projected to experience a growth rebound to 4.6%.
  • China quarterly economic growth sinks to 26-year low.
  • ECB kept refinancing rate at its record low of 0% and the deposit rate at -0.50%; it maintained status quo on all fronts.

Equity Outlook

  • Expectation of a relief in personal income tax and DDT, progress on privatisation of PSU companies and better-than-expected earnings from frontline companies kept the momentum upbeat. RBI trimming growth forecast and lower growth projections from various institutions dampened the sentiments.
  • We think it is a good time to increase some Risk in portfolio as most of the bad news is already in price.
  • We continue to maintain our stance of having large cap (According SEBI classification Focused and Multicap schemes having large cap bias) schemes over Midcap and small cap schemes as anchor of the portfolio. We had recommended reducing Mid & Small Cap exposure last year. Investors should reallocate to this segment as Mid and Small cap segment have corrected meaningfully and on Valuations they are now at a discount to Large caps.

Debt Outlook

  • 10-year Benchmark 7.26% GOI 2029 rallied 6 bps to close at 6.64% in the month of September. With Government keeping its borrowing plan for the second half of the fiscal year in line with the annual budget estimate and announcement of new 10 year benchmark paper infused fresh demand for spread papers Adding to the momentum, rate cut hopes in the upcoming monetary policy further supported the bond yields.
  • With liquidity in large surplus mode shorter end of the curve looks attractive.
  • For a 3-year investor, we recommend allocation in 1-5-year average maturity segment with high credit quality portfolios mainly focused on accrual. The high-quality PSU and corporate bond spread over G-Sec is attractive.