MacroScope

India share bulls running mainly on hope, well ahead of peers

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Indian stocks have rallied sharply over the last two months, soaring to record highs, although the bull run that began with expectations that Narendra Modi will become the country’s next Prime Minister may soon run out of road.

India’s top equity index, the BSE Sensex, was trading over 24,850 on Tuesday, having shot up over 10 percent since mid-April alone, when polling began, despite economic growth languishing below 5 percent, along with high inflation and interest rates.

With growth at just 4.7 percent, only a marginal improvement from the 10 year low plumbed in the previous financial year, the market could struggle in coming months, especially if the economic data continue to disappoint.

“It’s more about perception now,” said Neeraj Dewan, Director at Quantum Securities. “If you look at earnings, you would sell half the stocks.”

The rally undoubtedly started from anticipation that Modi would lead his Bharatiya Janata Party (BJP) to victory in the Indian general election, and possibly with a majority government.

Shock now clearly trumps transparency in central bank policymaking

The days of guided monetary policy, telegraphed by central banks and priced in by markets in advance, are probably coming to an end if recent decisions around the world are any guide.

From Turkey, which hiked its overnight lending rate by an astonishing 425 basis points in an emergency meeting on Tuesday, to India which delivered a surprise repo rate hike a day earlier, central banks are increasingly looking to “shock and awe” markets into submission with their policy decisions.

A wide sample of economists polled by Reuters on Monday already expected a massive rise of 225 basis points by Turkey’s central bank to stop a sell-off in the lira. Instead it doubled the consensus and opted for the highest forecast.

Why is the Reserve Bank of India so quiet on the rupee?

 

When nobody’s listening, sometimes it pays to shout from the rooftops.

Based on the rupee’s daily pasting, the Reserve Bank of India might do well to look to the European Central Bank’s strong verbal defense of the euro just over a year ago.

In July last year ECB President Mario Draghi declared he would do “whatever it takes” to safeguard the euro’s existence.

That unexpectedly candid comment, uttered at a moment of rising market tension, wasn’t followed by concrete policy action. But markets took heed.

India is in a cloud of economic optimism but its industrial data are in a permanent fog

Optimism the Indian economy will soon recover, despite no sign that it is anywhere near doing so, has increasingly led forecasters to overestimate industrial production growth.

Incessant official revisions to the data, after initial forecasts are proved wrong, also mean investors and companies don’t have a clear and timely view.

This too could be another thing holding back Asia’s third largest economy.

India seeks to entice yield-seeking investors in a tapering world

 

India’s concerted effort to shore up the battered rupee over the past two weeks has had one goal in mind: raising currency-adjusted yields to a level where even investors wary of a withdrawal of cheap money from the U.S. would still buy emerging market assets. The central bank has raised overnight money market rates by more than 300 basis points – a spate of tightening not seen since early 2008 – and sharply inverted the swap and the bond yield curve in less than two weeks.

From an offshore perspective, FX implied yields have jumped from a chunky 6 percent last month to well over 8 percent this week. But the risk-reward has not come cheap. For all the pain caused in the world of domestic interest rates, the Indian rupee has barely edged higher. Part of the reason is the Reserve Bank of India’s sledgehammer steps last week have been offset by other actions taken by the central bank and conflicting talk from government officials assuring lenders – the biggest players in the domestic bond markets – that these measures are temporary.

While New Delhi and Mumbai seem to be at last reading from the same page on communications policy this week, there seem to be two scenarios evolving. The first and more optimistic option is that bond investors give the thumbs up to the RBI’s steps and start shoveling money again into the markets after taking nearly $8 billion out of bonds since June.

Not again, please! Brazil and India more vulnerable now to another crisis

After bad economic news from Germany, China and the United States over the past few weeks, here are two more. Brazil and India, two of the world’s largest emerging economies, are increasingly vulnerable to another crisis or to the eventual end of the ultra-loose monetary policies in developed economies after five years of a severe global slowdown.

Weak demand for Brazil’s exports and the voracious appetite of local consumers for imported goods widened the country’s current account deficit to 2.93 percent of GDP in the 12 months through March, the widest gap in nearly eleven years. In dollar terms, that amounts to $67 billion.

To help fund this gap, Brazil could at first loosen the currency controls adopted in the past few years and let more dollars in. But if the dollar flows change too swiftly, Brazil would find itself with three other options: curb spending by growing less, allow a decline in the foreign exchange rate at the risk of fueling inflation, or burn part of its international reserves – which are large, at $377 billion, but not infinite.

Resurging inflation to put a dampener on India’s festive spend

A perfect storm may be gathering over India’s economy, brought on by a peak in inflation just as the country’s festive season, which is critical to consumer demand, gets under way.

Purse strings are loosened most in India during this season, which began with Navratri on Oct. 15 and will linger on with the festival of lights, Diwali, in a couple of weeks and culminate with Christmas.

Navratri, which roughly translates to “nine nights,” and Diwali shopping in India is as important to the country’s retailers and manufacturers as Thanksgiving and New Year holiday shopping is to those in the U.S.

India inflation consistently tough to pin down

High inflation is a drag on economic growth in the world’s second most populous country and matters immensely to over 400 million people, or over a third of India’s total population, who struggle to earn enough to feed their families three meals a day.

The particularly volatile nature of inflation in India has confounded policymakers and small business owners and has left economists, who are often running complex statistical models based on a dearth of reliable data, with a poor forecasting record.

To be fair, predicting economic data can be pretty tough in a country where collecting and reporting national statistics is still in its infancy stage. Provisional numbers are often completely revised away.

In India, what goes up must keep going up

With a faltering economy, political gridlock, high interest rates, delayed monsoons and an epic power outage that has plunged half its 1.2 billion population into darkness, optimism is a sparse commodity in India.

Just not when it comes to rising house prices.

‘What goes up a lot must keep going up’ was the conclusion from the very first Reuters Indian housing market poll this week. And it sounded very familiar.

Past experience shows that respondents to housing market polls – whether they be independent analysts, mortgage brokers, chartered surveyors – tend to cling to an optimistic tone even as trouble clearly brews below the surface.

from Global Investing:

EM growth is passport out of West’s mess but has a price, says “Mr BRIC”

Anyone worried about Greece and the potential impact of the euro debt crisis on the world economy should have a chat with Jim O'Neill. O'Neill, the head of Goldman Sachs Asset Management ten years ago coined the BRIC acronym to describe the four biggest emerging economies and perhaps understandably, he is not too perturbed by the outcome of the Greek crisis. Speaking at a recent conference, the man who is often called Mr BRIC, pointed out that China's economy is growing by $1 trillion a year  and that means it is adding the equivalent of a Greece every 4 months. And what if the market turns its guns on Italy, a far larger economy than Greece?  Italy's economy was surpassed in size last year by Brazil, another of the BRICs, O'Neill counters, adding:

"How Italy plays out will be important but people should not exaggerate its global importance.  In the next 12 months the four BRICs will create the equivalent of another Italy."

Emerging economies are cooling now after years of turbo-charged growth. But according to O'Neill, even then they are growing enough to allow the global economy to expand at 4-4.5 percent,  a faster clip than much of the past 30 years. Trade data for last year will soon show that Germany for the first time exported more goods to the four BRICs than to neighbouring France, he said.