The wait is over: Nasdaq sets a new record after fifteen years

S&P 500 Watch

I refer to my blog of February 20, 2015 titled "Forget the S&P 500, watch the NASDAQ Composite".

Yesterday, the NASDAQ composite closed at 5056 to finally break its high set in March 2000 at the height of the dot com boom.

Please read this story in the FT to get a succinct perspective on the tech market then and now.

The value of the rupee: A look at the numbers for the year 2014 - 15

RBI Watch                                                                                               Indian Rupee

Over the last one year, the rupee appreciation against a representative basket of currencies appears significant in real terms  - about 9% measured by the Real Effective Exchange Rate (REER). The rupee was close to fair value - at the start of the financial year, but with REER rising to 113.23 it appears significantly overvalued. REER  is the value of the rupee versus a basket of currencies adjusted for inflation between India and the countries in the basket.

In nominal terms, the rupee has also appreciated against a basket of 36 currencies by about 7% as measured by the Net Effective Exchange rate. To give readers a flavour of how this could have happened, the second table shows the rupee movement against some of the world's major currencies. While the rupee fell by 4% against the US dollar, it rose, for example, against the pound by 8%, and 22% against the euro.

The difference between the gain in the rupee  in real and nominal terms is explained by the higher inflation at home compared to the inflation abroad (the 36 countries in the basket used for comparison purposes by the RBI).

The rupee has lost some competitiveness in the last one year from a trade perspective. On the other hand, rupee assets - such as stocks and bonds - for investors from countries such as the Euro area, the UK and Japan have turned out to be attractive given the strengthening rupee. Even against the dollar, the rupee's depreciation has been mild, keeping rupee assets attractive.

The RBI does not target a nominal rate for the rupee. Its intervention in the foreign exchange markets is generally to prevent excessive volatility in the rupee.  

First , April 7 , 2015, Bi-Monthly Monetary Policy Statement by Governor Rajan: Is RBI moving towards micromanaging the pricing of loans and deposits?

RBI Watch                                                                                    Monetary Policy 2015-16

The monetary policy cycle for the new financial year , 2015-16, has started with no change in the monetary policy stance of the RBI. 

A quick recap on monetary policy in the last financial year, 2014-15: RBI started the year with the policy repo rate at 8%, then moved it lower in two steps ( between scheduled bi-monthly statements) to 7.5% in January and March; RBI reduced the SLR in small steps (0.5% each time) in June, August and December to 21.5%.

The real story of this start to the year is the extreme unhappiness of the RBI at the unwillingness of banks to reduce their lending rates despite the reduction in the repo rate by the RBI - an accommodating move that arguably started even earlier with the reduction in the statutory liquidity ratio (SLR) of banks. So much so that Rajan has stated that a key factor in the next interest rate move (presumably downwards) will be the extent of the follow through by banks to reduce their lending rates.

I had in my first blog on monetary policy on April 16 last year devoted a section to this issue titled "Transmission of Monetary Policy to lending rates is a problem" . Later in my blog of December 31 last year, I concluded that given the liquidity position of banks then, they could reduce lending rates without waiting for the RBI to reduce the policy rate. I suggest a reading of both these blogs.

Now things have really come to a head between the RBI and the banks. Rajan has announced that banks will soon need to move to a marginal-cost-of-funds- based determination of the base rate, the benchmark minimum lending rate of banks. 

I believe this is the wrong move. RBI should not end up unwittingly micromanaging the pricing of loans and deposits. India's banks are by and large well run, and some of them are world class. Base rates based on the average cost of funds make as much sense as their determination by the marginal cost of funds. Banks as commercial enterprises should be free to determine their approach to pricing loans and deposits. The important point should be that pricing must be consistent, transparent, and fair. Consistency, and transparency would enable customers to make the best decisions in their interest, and fairness would make it equitable, both in terms of large and small customers and new and old customers of the banks.

Instead, RBI needs to hasten the pace of development of deeper money and bond markets. This will make accessing bank loans and the markets equally attractive for customers, and force banks to be more responsive. Also, RBI needs to continue to reduce the mandatory investment in government securities by banks by reducing the SLR still further and in bigger steps.

Note, in another move that was initiated last year by the RBI, Financial Benchmarks India Private Ltd, has been set up, and will become operational soon. The idea is that this enterprise will develop independent benchmarks to facilitate the pricing of deposits and loans, and RBI will encourage banks to use these benchmarks.

Finally, a word on the path of inflation this year. From RBI's point of view, inflation will further fall to as low as 4% by August, but then rise to close to 6% by end of the year. RBI's message is clear to my mind: transitory falls in inflation will not warrant a further reduction in the policy repo rate. So expect a cut in the repo rate only if inflation falls unexpectedly and on a sustained basis below 4% after August. 

Monitoring the NaMo Bull Market in Stocks: Update as of March 2015

Indian Stock Market Watch

Please refer to my blog of July 9, 2014 for the original note on using TMV/GNP ratio to gauge whether market is cheap or expensive.