Vigilant Owl !!

RBI Governor  stands out as is India…

Rarely anyone gets credit for averting a crisis . Create one and douse it with all the drive , is a safer style to get noticed . RBI Gov. has chosen the former to stand out .   By standing firm on interest rate and inflation , he risked sounding hawkish all thro the policy events over last few months . Including this column , many believed that RBI had a lot of  leeway to cut rates in the last policy meeting on falling  inflation and moderating fiscal deficit  . Recovery in monsoon  and crack in commodities added to the chorus for rate cut . Without succumbing to the popular sentiments , RBI stood firm on the rates citing global risks and its fallout on currency . Risks of financial flows ( on Fed rate hike fears and on competitive currency devaluation ) weighed on RBI more than anything else .

Events in last few days have exposed India’s vulnerability to such risks . Fueled by fears of slowing growth in china , stocks slumped and currencies crumbled across emerging markets. With FIIs selling across emerging market basket , Indian markets suffered one of the worst falls of this decade . Rupee wasn’t spared either . Reminiscent of 2013 when taper tantrums  ruined the rupee , markets feared  re-run on rupee ignoring the fact that lot has changed since then. Most among them is the surge in confidence on RBI and its Gov’s ability to stem any crisis , besides improved macro fundamentals on soaring reserves and curtailed current account . This has primarily stemmed from RBI’s silent and sustained work on inflation . Rupee’s relative resilience in this rout is a pointer to ponder in this context . Rand to ringgit are all  at multi year lows while rupee has managed to survive with  much less scars in this savage . Not being clubbed in troubled-ten ( infamous ten emerging market currencies that have been slaughtered in this year’s slump)  in itself is a testimony to its rising strength . It would have been a different story for Rupee if RBI had buckled under pressure and pressed ahead with accelerated cuts .What is ironical is that it has gone largely unnoticed that a major crisis has been averted on the rupee by the prized prudence of RBI Gov .

For RBI , the job is half done . It’s reluctance to cut rates stem from two strain points . First is the price pressures at retail level . Though inflation is on the mend , the role of favorable base effect can’t be discounted in the latest soft numbers that came out  in August . Adjusted for the base effect , the inflation trajectory is still above RBI’s glided path target of 6% ( at CPI level) . Second worry for RBI is on the capital flows . While global markets are preparing for gradual Fed rate hikes starting  Sept –Oct , any unexpected spike in US inflation would force  Fed to move faster and  remove accommodation much more quickly ( raise rates faster) than what the markets are pricing in now . Such an outcome would lead to gush of capital outflows and will have the potential to rock the already ruined emerging markets and their currencies  once again .  Hoping that turmoil  not to touch Indian shores will be ruinous .  Add to these , the transmission issues in the Indian banking system where the earlier rate cuts are yet to percolate down  to the final lending rates  ,  one can see reasons on why  RBI is not in a hurry to cut rates  . Given the rising chorus from Industry and Finance ministry , RBI may provide some breather in its Sept policy ( with marginal cut)   , but sustained cuts are sometime away.  Rajan is firm on his path to win the war on inflation to put India on a long-term sustainable high growth trajectory .

On few counts , India seems to stand out  in the murky global macro . India probably is the only country where both growth  and interest rate cycles are just turning   –  growth is likely to accelerate while  interest rates are likely to inch  lower over time . Skeptics  will argue that India had presented such a rosy scenario many times earlier and rarely lived up to its potential . No prizes for guessing who played the spoil sport in all those cases . It was inflation monster. This is precisely  where , this time is likely to be different . With inflation-hawk at the helm of RBI supported by fiscally restraint Govt. , there is rising hope and confidence on India’s ability to win the inflation war this time . This does not mean that India will be insulated in the ongoing financial contagion , but when the dust settles on flows and investors start differentiating , India is likely to emerge as  one of the few bright spots . On sailing thro’ the short-term turbulence , Vigilant Owl ( not the hawk , nor the dove as famously proclaimed by Rajan) will take India to the shores safely.
ArunaGiri . N


Wealthy Trends !!

India Financials – well poised..

With miniscule household savings invested in equity , India was always a big draw when it came to potential in private banking and wealth management . But so far , it has remained just that , as an elusive promise with little to show on the ground . Back in 2006-07 amid  rising bull market , enthusiastic estimates were pulled  straight out of spreadsheets by scholarly analysts  on changing landscape of household savings in India . Daring projections were made on how household savings will structurally shift from physical to financial assets  .  But surging gold price and rocketing real estate ( coupled with stubborn inflation)  did the damage to their   pompous projections with financial savings nose-diving in the subsequent years  .

Not to take away the credit from those well intentioned analysts , they might still get it right , decade late though . Yes , the elusive wait seems to be ending and the shift is showing up now  . The key difference between then and now is how the ever-green darlings of Indian households have been deflated by precipitous fall in gold prices and punctured property prices.  Worsening outlook for  these asset classes coupled with rising real interest rates ( on falling inflationary pressures) will hasten the shift that analysts have been anxiously waiting for . For the seasoned ones , the early signs of such a shift are spottable . Dazzling domestic retail  flows into equity mutual funds , rising interest in financial savings are the pointers that pundits can ill afford to ignore. For the first time ever , Indian markets held up well  (with minor bruises) during the   carnage that ensued Fed and Greek events this year because of domestic mutual funds support .    Not a small feat for the market that has been dominated by FIIs.  No  surprise that equity mutual funds AUM  has swollen by  50%+  last year to touch  all time high of Rs 3.72 tn . Same is the case with other financial savings like term deposits . Lured by the rising real interest rates , term deposits have surged 55% this fiscal to touch Rs 2.65tn resulting in excess liquidity in the banking system  .


For investors , what are the implications . How does it help to spot the next successful business . Needless to say ,  it is advantage Financials . While private banks will get the slice of the surge , mutual fund distribution and wealth management businesses will get most of the meat. If the interest shown by foreign investors on the financial distribution (wealth management) space is anything to go by , this space will gain traction in the coming months and years . If  Fairfax’s voluntary open offer to acquire significant stake in India Infoline (IIFL) or Kotak Bank’s acquisition of ING Vysya (which has huge private banking franchise) is anything to go by  , the writing on the wall is clear . For the uninitiated , Fairfax is the Berkshire of Canada owned by hugely successful value investor Prem Watsa with thriving business empires  across the globe .

Watch out this space (financial distribution , wealth management , investment and portfolio management businesses etc )  for interesting long-term  investment opportunities to benefit from upside from the structural shift ( from physical to financial assets)  that is underway in the Indian households . Listed space is loaded with such companies that can be put on  the watch list for the right entry !
ArunaGiri . N