RBI cuts rates!!

I have been tied up a bit - but this rate cut by RBI is very very intriguing. By clearly signaling that they want to keep the window of rate cuts only for the next crisis only a few days ago, the RBI has done an about turn and cut key rates. The cuts are even more baffling considering the comfortable liquidity position of the system and by now it has become pretty clear that interest rate cuts will not lead to increase in lending by banks.

In terms of monetary actions there is nothing that this cut would do unless there is expectation that govt. borrowing would suck out all liquidity from the market. Or more likely is the this a politically forced bailout to stimulate the now dead real estate market.

None of the commentators I have read have called for a rate cut. What is going to happen?

1) A large scale govt. borrowing program
2) Calls for banks to reduce lending rates (whether they lend or not is a different matter). Having recently seen the benefits of the PM s scheme to build local roads I am convinced you are better off putting money into people s hands that way.
3) Rupee under further downward pressure.

Interesting times.

What is the reason for the optimism?

Been traveling and working late the last few days. There seems to be a muted optimism in the markets, almost as if people expect a breakout. I am not very good at this predicting thing, so lets see what has been dished out.

A flurry of positive news
1) We did (will do) 7.1% growth apparently, what grew that much you might want to ask?
2) The Govt. will announce a new stimulus plan on Feb 16th, they have a lot of room to play with the interest rates how far will they go and how soon
3) Implied change in FDI classification, I mean implied because the fine print is what determines the validity of any of these announcements
4) A host of real estate firms have rolled on their debt, falling interest rates hence are making home owners come back
5) The worst is over, Q 3 is possibly one of the worst ever quarter, but you cant really go down on earnings from here

US collapsed yesterday, but India (along withe Asia actually) held pretty strong. Deal flow seems to be pretty good and fund managers seem to be more inclined to listen to stories.

Everybody is a friggin realist now. Bhalue is king.

5 lakh jobless; Stats and wicked stats

Sample size of 2581 units covering 20 centres across 11 states was taken up for the survey. Eight major sectors like textile and garment industry, metals and metal products, Information Technology and BPO, automobiles, gems & jewellery, transportation, construction and mining industries were also included in the survey.

5 lakh? ~0.04% ? Not a chance, must be way higher. Ports are at a standstill, house construction has stopped (when was the last time you heard of someone you know buying a house), auto sales/CV sales are down, bank disbursements are down, industrial productivity is flat, tax collections are down....

This should be seen as to be in the category of the "quick" estimate released by the Central Statistical Organization (they have two revisions from their first numbers - this is the first revision). GDP will still grow spectacularly. Election tactic? Not so sure. Heard that the 'noodle strap' agitation is being done in national interest, if you wear more cloth it will mean more employment in the textile industry. In the same vein the well draped Sushma Swaraj is going to ask all of us to wear more, now that she is not contesting.

Anil Bhai and Mukesh bhai, all their 'refined' and 'power'ful troubles not withstanding are still close the top of the Forbes list... among other news.

All Govts should give Citi money?

City (aka s****y group) split into two and got lots of money from the US govt. Now only the US govt seems to be having fun printing all those currency (their balance sheet has now expanded by more than a trillion) , the world should follow in their foot steps and pay money to the large US banks.

Of course, our nationalist brigade wont like it if we paid to Bank of America you know ( its not a Global Trust Bank you know) but then Citi is different na. They have local arms who employed a lot of people (citi financial in India et all). If these local arms close it would be catastrophic. I mean even Venezuela wont mind up paying for their erstwhile one-stop shop even if the shop resembled a butcher selling groceries (no offense to the poor butcher).

Actually you know what Goldman is probably pitching to foreign govts. on what can be done to bailout the world. According the some sources, now that Goldman has a veto on all important positions in DC they want global domination. And this whole mars methane has got them all excited, They are selling Greenpeace (or was it peas?) backed securities on the impending colonies in Mars. The theory, if not actual construction we are producing enough manure these days to atleast create a Mars farm. The US govt leads in this manure for its companies, some of it can only go to Mars. The world generally follows the US so we are likely to follow suit in creating a lot manure you see.

We should give these companies money from a global stabilization fund, we do not want to give up the comforts of a gargantuan under-regulated global financial system to leave us without financial engineering can we? What will happen to us mortals?

Comment: Getting the facts right!!

Surjit Bhalla writes in Business standard about what the likely growth rates are going to be in FY10 second half FY 09. Cut interest rates, increase fiscal deficits the trade will get better and the focus should be on growth is his general conclusion. And we should grow at healthy growth rates.

Quite unlikely I would think:

1) India has never seen a steady asset price de-growth (if the world is talking about a 20 year asset inflation cycle we are talking 60 + years). Simply put, India has never really been in a recession. About time that corrected.

2) Fiscal space exists but the worry is deflation that too decade long Japan style deflation. Interest rates is possibly the only instrument that the govt. has.

3) Credit Availability: Indian corporates are still unable to avail of credit easily. The situation is better than a couple of months ago, when there was no money, but even now money is available at very high rates - unsustainable for most corporate. Once this changes, we should be in a slightly better shape.

4) The problem of over-capacity: Capacity utilization and productivity are two metrics which would indicate whether we have over built capacity or are we still a long way to go. This is not easy to answer. While we have not built capacity in a lots of areas, in many more we have built spectacular capacities based on specific sectoral domestic consumption/exports. A lot of lenders have taken exposures to this sort of capacity expansion. These guys have a long way to go.

I don't know what the growth number will be, but based on current scenario, 7%+ in FY10 seems unlikely.

India Credit Squeeze: The end is not in sight yet

Even as the RBI is trying to pump in liquidity in the system there seems to be no visible impact at the corporate level. The interest rates that were charged for project financing (read long term) loan s have still not come down. If it was around 12-14% for large corporate houses, the rate is still the same, how it is split has marginally changed. (Syndication/arrangement fees, upfront fees, commission etc). Do banks still fear that they would have to face a capital call? Not anymore.

What they are really worried is about the ability of the Indian corporate to pay back the loan, because quite frankly the demand has disappeared. We seem to be hurtling towards a deflationary environment with almost no end in sight. We should take a look at what the local media is saying, has the willingness to spend disappeared across social/geographical strata or is it a purely urban phenomena. Deflation is the worst case scenario for any banker/policy maker, because your conventional tools fail as a means of spurring demand.

But still, the underlying story for India is slightly different. If we have a bumper agricultural crop this year, there will be spending. Might not be large ticket urban spending, but there will be incremental spending across large part of our population - this demand has not increased because of credit (in fact the availability of micro credit has possibly done a wealth of good for this segment of the population, but then that is another story), it appears only when there is surplus form what is required for the next agricultural season. I think we should start praying to the gods.

Till then, for all that RBI tries bankers are not going to lend, already their books would be 'infested' with NPA s, I doubt anybody would have the guts to venture out further, "where no banker has gone before types " ahem. A friend says that treasury profits have zoomed in this volatile environment, expect the private banks to cash in on this big time. If you cant produce, you can atleast trade.

Deflation, Deflation Deflation it reads as of now. Hopefully it will turn soon.