Mr Cool

Small investors keep faith even as the central bank shies of deep cuts, companies default and mutual funds favor borrowers

A crisis tests the will and resolve of policy makers, companies and investors. The first responder is the central bank. How it calibrates the flow and cost of money contributes significantly to the transition to recovery. Its task is becoming increasingly difficult and complex. Following the anemic growth of 6.6% on an average and consumer price index at around 2.5% in CY 2017, slashing the repo rate from the 6% level should have been an automatic response if not for oil crossing US$50 to US$70 in CY 2018, fueling fears of inflation, which had been tamed by the farm output glut, breaking free. GDP growth might not have sunk to a 25-quarter low in the three months ended June 2019 if borrowers could have had money cheap. The Reserve Bank of India’s diffidence was a reaction to the Federal Reserve embarking end December 2015 on hiking lending rates for three years after a decade to cool the heating US economy.  Despite the cautious approach, foreign investors dumped Indian stocks for most part of CY 2018 and CY 2019 to head back home to ride on the booming equity market or to park funds in safe haven gold. US-China trade tension and uncertainty over Britain’s exit from the common European market mellowed the Fed into taking a pause and then paring the discount rate twice by 25 basis points in CY 2019 so far. The move emboldened its Indian counterpart to top its four rate cuts in the year by slicing off a quixotic 35 bps. A hefty dividend using a new benchmark was transferred to the treasury. It signaled its determination to become the fulcrum of the efforts to persuade the economy to pick up speed. At the same time, the hesitation to execute a neat half a percentage cut indicated the bravado might be a one-off instance There is now renewed pressure to follow People’s Bank of China’s aggressive chopping up of the cash to advances requirement so that the rupee can weaken to stay in competition with the yuan. A slump in manufacturing does favor such a posture. The hitch is that any steep trimming might accelerate the outflow of foreign funds as there will not be any more softening by the Fed till end CY 2020 on a strong labor market and incipient inflationary pressure.

If the RBI’s dilemma is how far to go without appearing to be adventurous as well as to remain stubbornly conservative,  the finance ministry appears unable to make  up its mind if the slowdown is cyclical or structural. Credit lines have been opened to HFCs and NBFCs and affordable housing projects. Certain sensitive but safe-from-controversy sectors can have full foreign ownership. Local-sourcing irritation of single-brand retail has been addressed but the multi-brand retail space still remains out of bounds, signalling that the loss of momentum is being attributed to bottlenecks in supplies rather than stemming from lack of consumption. The merger of and capital infusion into public sector banks implies divestment of government stake will be selective rather than across the board.  If the monetary and fiscal authorities are darting between daring and dithering, the corporate sector is a picture of capitulation and confidence. Instead of introspecting about excess capacity and resorting to price hikes to boost the margins, auto makers are seeking concessions to shake off sluggish sales. Companies relying on leverage and preferring to pledge shares to entertain unrelated activities instead of diluting stake are facing the prospect of letting go control to tide over debt defaults. Meanwhile, mutual funds, after taking exposure to unlisted and junk paper to boost NAVs, are siding with borrowers by signing standstill agreements and postponing redemption.

At the other end, biscuit makers are pushing premium products.Personal-care leaders are passing on lower GST rates to push the top line. Brick-and-mortar retailers are opening branches. Cinema operators putting up screens in tier 2 and 3 cities. The order books of infrastructure and capital goods players are bulging. IT solutions providers are making the most of a resurgent US economy and a weak rupee. The surviving airlines are registering record profit and price wars in telecom services are tapering. Promoters are monetizing their holdings to pay off loans as chances of ever-greening are turning slim. Auditors are opting to quit than accede to window-dressing. In the process, balance sheets are becoming cleaner, governance standards improving and raising working and project finance from the market getting easier. In the dust, the small investor stands out for his refusal to succumb to scare-mongering.  IPOs from companies with solid business model are getting oversubscribed and listing with a premium. Inflows into equity mutual funds are steady and into debt funds surging, a testimony to the domestic investor’s faith in the India growth story unlike the fickle foreign investors.

-Mohan Sule