In Search of a Silver Line in the Dark Cloud?

Even if you find one, the world is likely to look the other way in the current mood of gloom and doom. But if it is bunch of lines, it becomes hard to ignore, however dark the mood is. India’s macro seems to be in one such a silver spot. The credit goes to our policy makers. We manufactured a crisis much before the pandemic crisis hit the financial world. Ironically, that is coming around to help us now. It may now seem strange that our macro is relatively stronger precisely because we accidently prepared it with self-inflicted blows (credit and NBFC crisis triggered by ILFS) during the boom times when global markets were going through exuberant times. Looking ahead, such manufactured blows (or self-goals as ardent critics of this govt. would like to call them), might ironically soften the pain from the pandemic crisis. Who says, mis-steps always end in misery and mis-fortunes. Sometimes they surprise with positive outcomes. Look to India’s relative macro advantage in this pandemic crisis as a piece of evidence for that.

Let us start with India’s macro position in the earlier crises. Every time India hit a crisis in the past, it faced the crises with a weaker macro in terms of high inflation, high interest rates, low forex cover, high current account deficit etc. Since India was in sync with the global top in the earlier cycles, most of its macro metrics were stretched (economy was overheated) when the crises hit. This is unlike the current pandemic crisis. In this cycle, India did not participate in the global boom by being out-of-sync with the global growth for an extended period of time (two years+) because of self-inflicted pains (or mis-steps). As a result, our macro metrics are more moderate, not overheated or stretched. That gives a lot of elbow room for both fiscal and monetary stimulus. To understand this more, let us go back in time and look at GFC in 2008 (Global Financial Crisis) in particular for few data points:

  • Inflation at CPI level hit a high of 10.45% in Oct 2008, with inflation averaging around 8.8% level in 2008. Current CPI is at much more comfortable level and is hovering around 5%. That points to lot more head room for monetary policy actions for RBI in the current crisis.
  • In 2008 cycle, India’s forex reserves were barely adequate for two years of trade deficit. But now, forex reserves at $475Bn+, can cover over four-and-half years of trade deficit. One reason why Rupee is more resilient in the current crisis compared to peer country currencies is on account of this strength. Currencies like Mexican Peso, Rand (South Africa) and Real (Brazil) have crumbled by over 25%+ in this calendar year (since Ist Jan 2020). In contrast, Rupee, with the fall of just over 7%, is standing tall among its peers.

It may not be out of place to share the chart (below) from Economist which puts India on the top quartile along-with China when it comes to strength of Forex cover i.e. reserves as a percent of external financing needs in a stress scenario. This chart is quite revealing and reflects relative strength of India’s macro in the current pandemic crisis among peers.

BizNotes_May20

So far so good. If one adds crude oil dynamics, the whole macro metrics will get a booster shot. Crude connects all of them through its wide reaching linkages i.e. positive impact on inflation, twin deficits (fiscal and current account), forex cover, interest rates etc. In 2008 during GFC, crude was hovering between 60 to 90 dollars a barrel. Now it is at one third. If this level sustains, it can add another one year to the forex cover (trade deficit cover) discussed above, besides extending a huge headroom for both fiscal and monetary actions (thro’ lower inflation and lower twin deficits). Add to that, Met’s encouraging forecast (initial) for a normal monsoon this year couldn’t have come at a better time.

Going beyond macro, India could also be looking at long-term gains from global push-back on China. If that push-back, in terms of developing alternate supply-chain, gets accelerated, it could help India’s growth immensely even if the small part of diversification flows through India, given the very small and meager base.

To summarize, for anyone who can see beyond few quarters, there is not one silver line, but bunch of lines for India in these dark clouds. It is hard to miss them. This doesn’t mean that India will not have a tough and painful slowdown in FY21 or some hiccups in macro, esp. fiscal stress in Govt.’s budget etc.

Happy Value Investing!!!

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