The Markets and RBI Policy

The markets took the RBI policy announcements in stride and reacted in bullish way. While the fact of the matter is that RBI is still thinking (prompted by Govt) that some sectors need kid glove treatment. This should come as a warning signal that all is still not well with economy.

RBI has very skillfully avoided to talk about inflation and that it needs to be controlled by monetary policy initiatives. The governor said that its seasonal effect and will be addressed when increased supply of vegetables and new crops will come in market. Does he not understand that the inflation is calculated in terms of what prices prevailed in corresponding month of last year and now, and therefore seasonal effect does not affect it much.

Now it is certain that at some point in future the excess liquidity will have to be mopped up and that the reckless lending at behest of govt will create some NPAs. This burden will be borne by the public, the tax paying public and the corporates.

The economy will close the year at -7.5% in term of GDP growth but the optimism is held firm thinking that it is not as bad as expected. The next financial year may be flat or slightly positive and that’s also no good news because for the investors it will mean to wait for a whole year before growth happens while the cost of carry will not give any relief.

The banks have been barred from declaring dividends out of earning, this simply means that investors stake is rising and the health of banks is not definitely seen as pink.

Shaktikanta Das expects that next year budgets will be growth oriented but how govt is the going to balance it. It has had to resort to forced borrowings that go in to giving relief to poor masses and for health related expenditure. The corporates will have to bear some brunt.

Banking licences to NBFC is still a far cry however they will be subjected to greater scrutiny.

A patient investor does not pour money in an overly heated market but the FIIs seem to be doing just that. May be it is some kind of manipulation taking place. The long term has never shown any great returns when investments are made at peak levels. If you made an investment at peak level in any period your returns will be meagre only. If you invested at the then peak in Nov 2010 at 6071 of Nifty then you have gained no more than 7% PA. If you invested at the then peak level of 8606 in Aril 2015, your return today is no more than 7% PA. Similarly if you invested at peak in Sept 2018 at 11589 then too your return is no more than 7% PA. If however you invested at peak in Jan 2020 at 12248 then too your return now about 7%. So it is an established fact that returns from peak to peak have never been more than 7%, at least in the last decade.

FIIs might have invested here thinking that 7% is good return for them even though this is a return on riskier investment. It is surely not the case with investors in India, they should never fall for risk return of 7% on risk assets. Investment in equities in secondary market does not create additional capacity for the corporates, raising capital through fresh issues does. When that point will come it will cool down the overheated market and it may tank dreadfully. If however the corporates are not willing to raise fresh capital through issue of debt paper and equity then there is no hope of economy flying high in medium to long term. So wishful investing should be avoided and selective profit booking should be the ‘mantra’.

Have you noticed that there is sector wise flare up in equity prices. At high level the supply of shares increases in the sectors in limelight and then there is pause. It happened first with Pharma, then IT, then Banking and Finance, then Commodity, then Real estate and PSUs, and now every damn sector. Will there be a second round of the same or the smart money will quietly move out. Let us see what unfolds.

I am in process of finding as to which companies have crossed Lakshman Rekha of share prices although the same might be well managed, having high pedigree and fair chances in future.


Krishna Khandelwal

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