Wednesday, August 2, 2017

much ado about almost nothing

Bi-monthly credit policy by RBI is just over.  A 25 bps repo rate cut, in line with expectation, no change in stance which is a disappointment for the market (read equity market) participants and barely any mention of strong rupee. Verdict out.

There have been so many factors to consider - encouraging inflation numbers but the vegetable prices were rotting the basket. Internal consumption and capex needed a push making a case for a deeper cut while most other central banks are talking of going north. If Rupee strength warranted lower interest rate (to help exporters), nothing much could be done about Dollar weakness in global scenario. Add to it the impact of GST, hike in HRA, farm loan waiver, monsoon, Current Account Deficit and global financial markets. There is a whole big maze out there.

Is there a black box that takes into consideration all the factors and pushes out a recommendation after complex computation? or do they put all the factors in a jar, give it a good shake and do a lucky draw? Do MPC members give an explanation as to why do they think 25 is better than a 50 or zero?

On a serious note, RBI decides what it decides with the aid of it's think tanks and ear to the ground. They have cut 25 bps and said that they maintain neutral policy stance with focus on inflation. No doves and no hawks. Slam, clank, done!

Who were waiting with bird feed in their palms to feed the doves?

Banks - who hardly ever pass on the benefit to those who will contribute to consumption and growth

Equity market (players) - sentiment sentiment sentiment! Low interest rate is good for corporates and consumers and that "sentiment" is good for index. AND healthy index is good for my investment portfolio.  We need to see a bit of euphoria - here and now! The actual impact on corporate profits and real economy - Let that wait, please! For now, we are busy counting our chickens before they are hatched.

Sometimes what we (market) expect is a dose of steroid. All that our economy maybe suffering is a common cold.
"You want steroid to be administered, why?"
"I want the patient to sing and dance in tomorrow's party."
"Ok, but I am the doctor here" said RBI.


Thursday, July 20, 2017

Tamper, Temper, Taper - Tantrums?

Subprime crisis, Lehman Brothers, sub-zero interest climate, QE – we will soon be celebrating 10th anniversary of this historical financial fiasco.  In the last decade or so, market has been flushed with money; all those papers printed mainly by major central banks found their way largely into equities. To get a perspective, currently MSCI’s broadest index of Asia Pacific Shares (outside Japan) is nearly at a 9.5 years high. Don’t you personally feel richer in the last 10 years?

Years of low interest and QE, let’s assume, helped the market survive mother of all crisis (I didn’t say grandmother doesn’t exist). Central Banks pumped unimaginable sums into markets and kept all the too-big-to-fail giants breathing.  I am not questioning this approach, as I have no better alternative to suggest; cant help reminding myself though, survival of the fittest is only for the jungle and not for civilised societies.

QE made risky assets attractive, carry currencies the flavour of the season and generally the world felt like Jane Austen’s society. Then the word “taper” entered the financial dictionary thanks to the then FED Chair Ben Bernanke. Whatever else they do or don’t, Fed Chairs say potent words that move the market and are etched in financial history.  Alan Greenspan’s Irrational Exuberance (to describe red hot stock markets) is case in point too.  I am digressing here! So after Bernanke pronounced possibilities of “taper”ing in May 2015, markets went on a tailspin.  The new buzzword/phenomenon/fear caught on and drove markets crazy.  Around this time, Dollar index was at 84 and Euro at 1.29.

Financial markets in the US have since been off ventilator and out of the ICU, though the effect of strong drugs is yet to wear off. QE stopped, interest rates northbound, lo and behold markets adjusted to a new normal. Reasons to rejoice shifted from easy money to strong economy (relatively speaking).  Before the Brexit shock hit the financial markets Dollar index moved up to 96 and Euro down to 1.11. Post Brexit and the all drama associated with it AND FOMC staying on course on rate hike - Dollar index climbed comfortably to 102 while the Euro got dumped touching close to 1.04.

Now the Taper Tantrum begins again but in another region.  ECB has been at it and the Euro is on a roll.  Is the single currency also secretly rejoicing the mess that Britons have landed themselves into?  Is there more upside to this strange animal as ECB tapers QE?  What happens to the pair EUR/USD if FED is on track hiking rates and ECB continues to taper? Which of the two will play out stronger? If you are looking to find answers here, you may want to stop reading now.

Few months ago, I was watching surfers at Gold Coast.  They swim in, catch on to a wave, ride it, reach the shore, swim again and repeat.  They don’t / can’t ride every wave that they catch on but they take that in their stride.  It is the most calming sight and got me reflecting. Market operators (read markets, collectively) are like surfers. Some are seasoned and many novices (and some just philosophize).  We may discuss the waves and techniques till cows come home, but the key is in riding the current wave.  That is all there is to it. And most of us reach the shore, don’t we?

Enjoy the ride!

Wednesday, July 5, 2017

mein seeress toh nahin (and all that gyaan)

In this week, I have been asked often my view on INR.  It’s an occupational hazard but this week it’s been more than usual.  In my opinion, it is a sign (not from up above but from the market). When the pair gets whacked around, it is another story.  However when it’s been in a tight range for fairly long and people begin to worry instead of slipping into complacency, that should tell you something.

I did a quick analysis of USD/INR movement in the last one year. Apr-Jun quarter has been the quietest, trading in a range of less than 1.5%. In the preceding two quarters INR has moved in the range of 3.5% and 5% and one-year range (Jul ’16 - Jun ’17) has been close to 7% (68.76 and 64.05).

With dollar index doing it’s own number and EUR and GBP showing rare resilience, we are likely to breakout of this tight range that Rupee has been hovering in, fairly soon. While I would peg the next range to 64-66, who is to say where it would be tomorrow, leave alone 6 months down the line?

Given the nature of the beast and current low volatility, those with exposure to USD should look to hedge. Both exporters and importers should take note that forward premium settled around 4.5% (from a 1 year range of 3.75% - 6%), makes it accessible and fairly attractive for both sides.  

For instance, 3 months imports would cost close to 65.50 and 1year exports would fetch 67.75.  For the purposes of hedging, both the above seem safe to me. I haven’t seen very many importers hedging longer than 3 months and the forward rate today isn’t prohibitive at all.  From my personal experience, shorting dollars for 1year (or longer) has not been a loss-making proposition. Also reasonable carry that is available, helps bring down the overall cost of borrowing. 

Going back to the start, I don’t know where the Rupee will be – tomorrow, next quarter or next year.  The only reality is it’s a risky business and monkeying around never helps. Identify risk and manage it proactively – is the only way to do it.

I am reading Mark Twain currently, so will leave you with one of his gems:
“Prophecy is a good line of business, but it is full of risks”