Monitoring the Bull Market in Indian Stocks: Update as of October 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 the market  is cheap or expensive. 

Margin trading investors on the NSE - an update as of Spetember 30, 2015

Indian Stock Market Watch

Please see my earlier blog dated July 7, 2015. Below are the updated numbers. There is nothing major to report in the last three months.

Will margin funded investors get it right on Suzlon this time? An update as of September 30, 2015

Indian Stock Market Watch

Please see my earlier blog on Suzlon dated July 22, 2015. I had then given numbers 

(as of the last day of each month) for Suzlon till June 30, 2015. Below are the updated numbers from the NSE - the bottom line is that Suzlon continued to be among the top five companies in which investors were most heavily invested using margin funding.

 

The value of the Rupee: update as of September 2015

RBI Watch                                                                                                 Indian Rupee   

                                                    

                                       

What a wonderful world: This is 2018 - companies are borrowing at 8.5 %, home buyers get loans are at 9.5% and the Sensex is hovering at 32,500

For the Sensex to be higher significantly some problems that may convert into shocks must abate or India must contain them

Is it realistic to expect the RBI to achieve 4% inflation by end March 2018?  I believe the answer is yes. Why? Here I quote from my last blog:

“Demand conditions in India are weak: capacity utilisation is estimated at 70-72%. The world has suffered a commodity shock, and commodity prices are expected to remain soft. World demand is also very weak.”

Plus the RBI has the right monetary stance – an accommodative monetary policy with real rates under close watch.

In two years, India’s economy will be growing faster – but not likely at a superhot pace, by which I mean a return to the pre 2008 financial crisis growth rate of 9%.  Given the environment as stated above, it is unlikely to create inflationary pressures.

In my last blog I had put forward my projections for the repo rate by end March 2017 and 2018 assuming the RBI achieves its interim and final target for inflation. I reproduce those projections along with ballpark projections of the base rate, one year fixed deposit rate and home loans. The rates today are also below for readers to get a picture of the change that could take place over the next two years.

So in two years’ time, a depositor could be receiving about 6.5% on a one year deposit – about 1.25% less than today.  Businesses should be able to borrow cheaper by 1.5% at about the 8.5% level. Families looking at buying a house could take out home loans about 1% lower in the region of 9.5%.

On balance, we could then be entering a virtuous cycle, with lower rates all round giving another boost to the economy.

It definitely looks like a more cheerful world, but for the depositor. Will depositors move their money into stocks and bonds (via mutual funds)?

Markets typically move in advance of events. Barring a shock – China or emerging market debt or unanticipated Federal Reserve tightening - I feel that savers should take this opportunity to judiciously shift some of their savings to equities – either using an index or picking stocks of companies with strong brands, steady profits, and sustainable competitive advantages.

Equities normally react positively to rate cuts by the central bank. Equity markets have not responded to the already 1.25% cut in RBI’s repo rate, but as the cloud clears on the Indian economy and some of the international uncertainties abate, they will. As investors anticipate another 1% cut by the RBI over the next two years, equity markets could move up significantly higher. A 30% rise in the Sensex over the next two years is a good possibility.

Long term bonds – treasuries – are also likely to give good returns. The price of a bond rises when yield (rate of interest) falls.  In anticipation of a fall in the repo rate, the 10 year treasury bond yield could fall by 1% to about 6.5%. This could lead to total return (price plus coupon) in excess of 20% over the next two years.

On property, I am not so positive. Data on Indian property indices come with considerable lag, so it is difficult to get a good picture on property.  Most places that I visit, I sense that there is considerable property inventory in stock. Of course, this would not apply to a specific location, where some special factors may create an attractive investment opportunity.

Fourth Bi-Monthly Monetary Policy Statement on September 29, 2015 by Governor Rajan: Key takeaways

RBI projects inflation at 5 to 5.5% over the next year

RBI Watch                                                                                    Monetary Policy 2015-16

Governor Rajan announced a 0.5% cut in the repo rate to 6.75%. A cut of 0.25% had been widely expected, so the larger cut was welcomed by borrowers and investors. In my blogs of September 2 and September 18, I had suggested that the RBI should reduce the rate.

Before I go into the key takeaways from the bi-monthly monetary policy statement (MPS), let me recap RBI’s mandate from the government as per the Monetary Policy Framework agreement of February 20, 2015. The RBI’s mandate is to bring CPI inflation down to 6% by January 2016, and then in all subsequent financial years down to 4% with a band of +/- 2%. 

Here are the key takeaways from Rajan’s statement and the media/analyst conference call.

The MPS states RBI’s new interim target in getting to the final target of 4% inflation rate: by end of fiscal 2016-17, the RBI will aim to bring inflation down to 5%. 

  

The RBI has been following a real interest rule of 1.5 to 2%. The question that then arose is which instrument’s interest rate it is looking at to determine whether the rule is being met. For example, is it the 3 month deposit rate or is it the 2 year treasury bond? At the media call, Rajan revealed that the RBI’s bench mark instrument is the rate on the 1 year treasury bill. He indicated that normally this rate is about 0.25% above the repo rate.

Where does RBI see inflation over the next 1 year? RBI’s projected inflation is in the region of 5 to 5.5%. Why? In the MPS, Rajan asserts that after the 0.5% reduction in the repo rate, the 1 year treasury bill rate will be consistent with a real rate of 1.5 to 2%. This means that he expects, all things being equal, for the treasury bill rate to move a little downwards to 7% - 0.25% above the new repo rate of 6.75% - and this would then lead to a real rate of 1.5 to 2%. This leads to a projected inflation rate of 5 to 5.5% over the next one year.

RBI’s one year projected inflation rate also explains why the RBI took the step of cutting the repo rate by 0.5% and not 0.25% as most people had expected. Let’s look at the key factors that support this reduction. Demand conditions in India are weak: capacity utilisation is estimated at 70-72%. The world has suffered a commodity shock, and commodity prices are expected to remain soft. World demand is also very weak.

So if all goes according to plan, I expect no change in the repo rate or at best another 0.5 % cut in the repo rate over the next twelve months. The next cut may well come in the next financial year. 

The RBI will use some of this breathing space to develop better mechanisms to make sure that banks pass on the bulk of the 1.25% cut in the repo rate to its customers. While deposit rates have come down, banks have been reluctant to pass on fully the cut to borrowers –it is estimated that banks till now had passed on only 0.3% of the 0.75% cut in the repo rate before the September 29 MPS. 

One measure that the RBI is considering is forcing banks to price their loans on the basis of marginal cost of funds. I wonder whether this is the right approach. Please see my blog of April 14, 2015 on this subject. Another measure could be to reduce the rates on government’s small savings or rather to get the government to pay interest in line with market rates.

Below are my projections for the repo rate going up to the end of financial year 2017-18. If RBI achieves its target of 4% inflation by March 2018, the repo rate should be in the region of 5.25 to 5.75%. 

Monitoring the Bull Market in Indian Stocks: Update as of September 2015

Indian Stock Market Watch

The estimated total market value of BSE stocks as a percentage of GNP has fallen steadily since February this year, and is now, based on our estimate, at the lowest level since the Modi Government came to power. 

Given the difficulty with estimating macro numbers, one should not rely too much on the accuracy of a number. At the same time, the larger message appears quite clear: the NaMo bull market is faltering. 

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