Global Investing

This is a reference when the People’s Bank of China makes big decisions.

If local data is reliable enough, we should use local data.

Source: Flikr creative commons

Problems are found at a local level too, however. While the current system sets local government officials’ bonuses for better GDP growth, there is no penalty for supplying incorrect data, neither are local government officials assessed on the jobs they create but via a points system. Instead local governments have ‘soft’ and ‘hard’ targets to attain, according to the panellists, some of which include environmental targets.

Then there is the issue of language. Some say data is more detailed in the Chinese language than in English, though official translations help bridge this gap. Quandaries remain, the resolution is still far from clear.

What a difference a few months have made for Indian markets.

The rupee is 8 percent up from last summer’s record lows. Foreigners have ploughed $17 billion into Indian stocks and bonds since Sept 2012 and foreign ownership of Indian shares is at a record high 22.7 percent, Morgan Stanley reckons.  And all it has taken to change the mood has been the announcement of a few reforms (allowing foreign direct investment into retail, some fuel and rail price hikes and raising FDI limits in some sectors). A controversial double taxation law has been pushed back.  The government has sold some stakes in state-run companies (it offloaded 10 percent of Oil India last week, netting $585 million).  If the measures continue, the central bank may cut interest rates further.

Above all, there have been promises-a-plenty on fiscal consolidation.

The promises are not new. Only this time, investors appear to believe Finance Minister P. Chidambaram.

Chidambaram who was on a four-city roadshow to promote India to investors, pledged in a Reuters interview last week not to cross the “red line” of a 5.3 percent deficit for this year in the Feb 28 budget. Standard Chartered, one of the banks that organised Chidambaram’s roadshow, sent out a note entitled: “The finance minister means business”.

So India has not joined emerging central banks’ rate-cutting spree .  After recent rate cuts in Brazil, South Korea, South Africa, Philippines and Colombia, and others signalling their worries over the state of economic growth,  hawks are in short supply among the world’s increasingly dovish central banks. But the Reserve Bank of India is one.

With GDP growth slowing to  10-year lows, the RBI would dearly love to follow other central banks in cutting rates.  But its pointed warning on inflation on the eve of today’s policy meeting practically sealed the meeting’s outcome. Interest rates have duly been kept on hold, though in a nod to the tough conditions, the RBI did ease banks’ statutory liquidity ratio. The move will free up some more cash for lending.

What is more significant is that the RBI has revised up its inflation forecast for the coming year by half a  percentage point, and in a post-meeting statement said rate cuts at this stage would do little to boost flagging growth. That, to many analysts, is a signal the bank will provide little monetary accommodation in coming months. and may force  markets to pedal back on their expectation of 100 basis points of rate cuts in the next 12 months.  Anubhuti Sahay at Standard Chartered in Mumbai says:

Last week the U.S. Federal Reserve may have lit a small fire under the emerging bonds market. Already boasting double-digit returns this year, bonds from the developing world are the hot ticket this year, contrasting with the lacklustre performance on stocks or commodities.

The Fed’s move is likely to increase this divergence in returns.

Essentially the Fed has decided it will reinvest proceeds from its maturing mortgage investments back into Treasury bonds, thus keeping market liquidity levels high and signalling to the world its belief that the U.S. economy is still weak enough to need financial stimulus.  Its action also leaves  investors staring at the prospect of near-zero interest rates in the United States and the industrialised world for another year or so.

Such monetary stimulus is usually a godsend for stocks — something investors such as Phil Poole of HSBC Asset Management liken to a “comfort blanket” for investors. In 2009 for instance emerging stocks  jumped 80 percent as global central banks unleashed torrents of liquidity onto world markets.  But this year investors have been wary of boosting allocations to stocks — fearing that robust growth in emerging markets will not shield their export-oriented companies from the impact of a U.S. slowdown.