An eventful week it was with markets first scaling a new all time high last week and then appearing to give up all at once.
That said weakness in breadth indicators like the A/D ratio was indicating of a correction going on in stocks. Nifty hold better due to rotation in stocks.
By the end of the week we are done with the RBI pausing on rate cuts. Yes that even surprised me cause in the face of the worst economic data they had an opportunity to do more. but his own argument is valid that only 35 basis points of the 135 done were passed on. So almost 100 basis points more need to go through before yields and rates align. A lot more work need to be done on rate transmission but steps in that direction are missing.
So can I say that finally the market forces are greater than the RBI? Without larger OMOs that would be the case. This takes us back to a forecast that EWI often makes for rates based on the bond market. They note that the bond market leads the FED policy. In short it is the market that decides the direction of rates. In our case that means that the market is not willing to accept lower interest rates unless forced upon them.
We have reached the point where interest rate policy stops working, and the RBI clearly stated that it has to work in coordination with the government and they may have to stimulate the economy further in national interest. This sets the tone for what lies ahead
The news item that has followed below reflects on what Robert Prechter noted in his 2002 book Conquer the Crash. He said that a deflation gets aggrevated by negative social mood. Lenders do not lend in fear of making bad loans slowing down credit growth further and making the deflation even worse. Social mood works backwards and becomes the root cause of the slowdown. This resonates with statements out of Uday Kotak over the last few years on 'Animal Spirits' that need to be revived. Our banking system is freezing because of fears that the PM is now trying to address below in his statement to bankers.
What is important here is that we recognise the problem. Meaning we are past the point where the economic winter was a future problem but one that is actively being dealt with economic policy. This changes everything and requires us to pay close attention to policy direction to understand where markets go from here. The importance of the role of government is back on the table.
That is why this next statement that has followed the RBI statement that they need to work with government is also important. He added that more could happen in the budget and so he is pausing on interest rates. Yesterday the FM spoke the following to the Media. The speculation on personal taxes is over, a major reform is on the way.
The December Long Short report discusses how these policy changes reflect a global movement toward more fiscal intervention and what it means for equities commodities currencies and bond markets. What sectors benefit the most and asset classes to keep an eye on to stay on the right side of markets. This changing narrative is what might shape markets from here. After the worst crash in stocks on the back of the effect of an economic winter in India we are now taking steps to deal with it. The final impact on growth and debt will only be understood later but this buys us time before the next crisis creating opportunities in the interim.
The Truth About the Markets
Rohit Srivastava
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