Santosh Kurup: November 2017

Friday 3 November 2017

Monitoring the NaMo Bull Market in Stocks: Update as of October 2017

Indian Stock Market Watch

Our estimates show that market capitalisation to GNP is at highest level since Narendra Modi came to power as Prime Minister.

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

India Market Map: A year (well, almost) after demonetisation

Foreign Exchange

The confidence in the rupee remains strong: stronger against the U.S. dollar and Japanese Yen but weaker against the Euro and Pound Sterling. Against a basket of 36 currencies, as of end September (data as of end October is not still available), the rupee was stronger by 2.5% over the preceding eleven months.

Stocks

Indian equities have put in a super performance – the benchmark Sensex is up by more than 20%! Although corporate earnings have been weak on the back of a significant slowdown in the economy, equities have been the best performing asset class. Equities generally factor in expectations of the future, so it seems that the equities market is projecting that demonetisation, GST, and various other measures of the government are going to be net positive for the long term growth of the economy. Or is it just that during this same period U.S. equities have also appreciated by the same magnitude?

Government Bonds

The picture on bonds is interesting. Bond yields have fallen up to 3 years, but risen slightly from 5 to 10 years – so that the yield curve has steepened. This seems to support the view from the equities market that the long term growth of the economy has not been jeopardised by demonetisation and GST. On balance, the bond market has returned a positive return over the last year.

Gold

Gold has generated a negative return as a result of the stronger Rupee (against the U.S. dollar).

Money Market

Policy Rates

RBI continued with its accommodative monetary policy post-demonetisation but then shifted gear to a neutral stance in Fenruary this year.

Bank Deposits

SBI and ICICI Bank – the largest in the public and private sectors – reduced deposit rates, but unlike the government bond market, more in long term deposits than in short term deposits. Significantly, both banks reduced their S.B. account rate by 0.5%, the first such change since deregulation in 2011.