The value of the Rupee: update as of July 2015

RBI Watch                                                                                               Indian Rupee

Monetary Policy Committee: interpreting Governor Rajan’s recent remarks on the power of veto

Rajan should also articulate his views on whether RBI should have majority representation on the MPC

RBI Watch                                                                                    Monetary Policy 2015-16

In the meeting with media, after the release of the bimonthly monetary policy statement on August 4, the first question put to Governor Rajan enquired whether the RBI Governor should have the power of veto or casting vote on the Monetary Policy Committee (MPC), that is being proposed to replace the solely Governor-determined rate setting process currently in place in India.

This is what he had to say: “Currently, the situation is the Governor has the veto, i.e., effectively all advice is only advice; ultimately, the decision is the Governor’s. So if we continue to retain a veto, it does not change the current situation, it maintains the status quo. So that is something to keep in mind.”

Earlier before opening the conference to questions he took time out to speak specifically on the MPC. He made it clear that the RBI is in favour of the committee approach to determining policy and enumerated its many advantages

In an interview with the Economic Times (August 5, 2015), Rajan had this to say: “ Now, if you undermine the committee by insisting that the governor has a veto.... there are places where there is veto for the governor, but it is rarely used. If that's the kind of veto, then that is not a bad thing, but, then, if the veto gets used often, that would be no different from the current system.”

It appears that Rajan is not in favour of the power of veto – certainly not on every occasion the MPC takes a round of votes. It seems he could be in favour of a veto as an exception, e.g. once every financial year. Or is this his way of saying the Governor should have a casting vote?

It is perhaps best not to speculate. Let’s wait out the Government’s decision on the MPC.

What about whether the majority of the members of the MPC should be from the RBI? Rajan should articulate his stand on this point. He will enhance his position by doing so, just as he has done by articulating his stand on the committee approach to setting monetary policy.

My views on this are that there should an equal number of members from the RBI and from outside. The Governor should have an additional vote in the event of a tie. 

Third Bi-Monthly Monetary Policy Statement on August 4 , 2015 by Governor Rajan: outlook unchanged, repo rate on hold

Some differentiated bank licenses could be announced this month

RBI Watch                                                                                    Monetary Policy 2015-16

Given no significant change in its economic outlook for 2015-16, national output growth at 7.6% and inflation by January – March 2016 at about 6%, the RBI made no change in the repo rate.

The table below gives the RBI’s key monetary rates and ratios as of August 4, 2015, and the changes over the last one year. 

A 0.75% fall in the repo rate – the rate at which banks borrow from the RBI – and a 1% fall in the statutory liquidity ratio – the compulsory investment by banks in government securities - are the highlights of the last one year. Monetary policy is in an easing mode: the RBI has been making borrowing money cheaper, and encouraging banks to lend more.

In the meeting with media, Governor Rjan revealed his thoughts on the Monetary Policy Committee - more on this in a separate blog, which will come out shortly.

On RBI’s new initiative of Small Finance Banks and Payments Banks, Rajan revealed that he hopes to announce one set of licenses (Payment Bank or Small Finance Banks or both?) by the end of this month. Another positive development was his announcement that RBI and Government are working on a Medium Term Framework regarding the investments by Foreign Portfolio Investors in the bond market.

Monitoring the Bull Market in Indian Stocks: Update as of July 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. 

Monetary Policy Committee: Both the Government and RBI have got it wrong

With the RBI and Government tugging at extremes, the middle ground is better

 RBI Watch                                                                                    Monetary Policy 2015-16

I had written on this subject on October 22, 2014. Please read this blog to get the full picture.

I place below the relevant section.

"What should be the process for deciding the course of monetary policy?

The Urjit Patel Committee suggested moving the responsibility from the Governor of the RBI to a Monetary Policy Committee (MPC). This makes sense.

The Committee suggested that the MPC should consist of the Governor, a Deputy Governor, an Executive Director of RBI, and two external members picked by the RBI. My view is that to start with, we need a small MPC of four members consisting equally of internal and external members. I suggest two external members, both persons of independent standing with experience in fields such as of banking, finance, industry (agriculture or manufacturing) and sociology. Government should pick these members in consultation with the Governor.  The two internal members will be the Governor and a Deputy Governor in charge of monetary policy at the RBI. In the event of a tie, the Governor should cast one additional vote.”

Last week the government released a revised version of the draft Indian Financial Code. Clause 256 page 122 covers the detail regarding the composition and voting by members of the MPC. The clause indicates that the MPC would consist of seven members - four appointed by Government and three from the RBI. The MPC will determine the policy rate by majority vote.

I hold to my view, which is that the MPC should consist of an equal number of members from within and outside the RBI. 

Why should the RBI have a majority in the MPC? Surely, there are people with expertise outside the RBI on monetary policy, and it makes for better decision making if such members are equally represented on the MPC. On the flip side, what justification does government have for the MPC to have a majority of government appointed members? I do not see any grounds for this, irrespective of the yardstick that is used – expertise or responsibility. It is the MPC's function and not the government's to set the policy rate.

I do believe, at this juncture, that the Governor (the IFC refers to a new title: chairperson!) of the RBI should be given an enhanced power to cast an additional vote in case of a tie in the votes, i.e all four members vote, and should there be a tie, then the Governor casts his additional vote.

Why? The intricacies of inflation targeting is in its infancy in India, the concept of an independent committee setting interest rates is yet to be institutionalised, and expertise in both monetary policy and markets is scarce to find. In this scenario, I would argue that the Governor, an individual picked for his/her superior expertise on monetary matters and professional integrity – whose performance, all said and done, will be judged by whether he or she achieves the inflation target, although it is the MPC which is formally responsible - should be given an enhanced voting power at the MPC. 

Can the same argument not be used to give the Governor the power of veto? I believe this is not the right governance in a public institution of high standing consisting of experts. If the Governor is in a minority in one particular round of voting at the MPC, then it is only fair for the Governor to accept his position.

A further look at company level information on margin funding on the NSE: will margin funded investors get it right on Suzlon this time?

Indian Stock Market Watch

I thought I would dig a little deeper into margin trading with data at a stock level released by the National Stock Exchange (India’s dominant exchange). In this context, please refer to my blog of July 7 titled “Margin trading investors seem less enthusiastic with the current bull market, which showed the current level of margin funding by brokers and its trend over the last ten years, using NSE data.                                                              

As of the end of last month, June 30, 2015, the five companies in which investors were most heavily invested using margin funding on the NSE are shown below.

Three of these are large caps - SBI, ICICI and Tech Mahindra. Suzlon is a mid cap, and Raj TV, is a small cap. SBI has consistently ranked number one for most of the period since the start of 2011. Raj TV is an interesting one. But I have little knowledge about this company, and so I will not even start thinking about why investors would want to leverage and buy this stock.

As I have been following Suzlon and am a cash investor in Suzlon, my focus will be on this stock. For the majority of time since 2011 it has been among the top twenty stocks leveraged by investors using margin funding.  Yet it is a stock that fell in price by 85% in value since the start of 2011, and only since mid 2013 has rebounded in value to the current level of 22, but is still 50% below its price in January 2011!

The graph below compares the stock price of Suzlon with the margin funding outstanding.

The picture above suggests that a set of investors using margin funding have been consistently positive on Suzlon - their exposure to Suzlon did fall as the share price fell, but after taking a break in the second half of 2014, they once again took to investing in Suzlon.

The graph below compares the share price with the rank of Suzlon among the top margin funded stocks.

Apart from a nine month period from July 2013, Suzlon has ranked among the top twenty stocks traded using margin debt. 

A look at NSE data for the last week ended July 17, 2015 showed that Suzlon's position was first!

Suzlon is a company that got just about everything wrong since 2007: overexpansion, excess borrowing and a nasty external environment after the financial crisis of 2008 was followed by part default, debt restructuring, lack of working capital, and shrinking sales. 

However, over the last one year the company seems to have put the building blocks of its survival and growth in place: Suzlon,with no other option, sold its prize asset, Senvion, to pay off long term debt, converted some debt into equity, brought on board Dilip Sanghvi, the promoter of Sun Pharma, arguably India's most successful pharma company as a significant investor, and refocussed its strategy on the Indian market.

This time around it looks like margin funded investors in Suzlon stock may have got it right.

The value of the Rupee: monthly update

RBI Watch                                                                                               Indian Rupee