First, a quick note to Thank you all for the great feedback on my last post. Fantastic comments - all of them, and gives me a lot to think about and write about. I've just been through a quick trip to Jaipur with family and it turns out things get a lot clearer in your had when you get some rest. Obvious, I know, but sometimes I miss the forest for the trees.
Two interesting macro-developments in the last week: Food Inflation and Bank Credit Growth.
Food Inflation - one of the figures that are actually revealed every week - shot up to 17.47% last week, raising fears that prices have gone too high. In a way, they have - dals are now higher than 100 rupees per kg, tomatoes are Rs. 50 per kg. etc. - evidence that I can gather. For me, it's not a huge direct impact: prices of non-veg haven't gone up that much, and fruits and veggies form less than 10% of our monthly budget. It must hurt tremendously, though, for those where the percentage is much larger.
The question is: Is it temporary, or are we seeing a dramatic increase in prices? The bad monsoon means a horrendous crop, the results of which will be higher prices; both from lack of supply and intermediate hoarding. Temporary is good - a solid winter crop will mean the imbalance will ease, and the hoarders will trip on themselves when selling and bring prices down. This cycle could take months, though; inflation, till then, will keep showing an uptick.
Was the base low last time? Not really - inflation last year same time was around 8.4% - fuel prices were cut only on December 5, 2008.
Another data point to look at is the bank credit growth stats. After going to single digits (9.6%) last month, we've gone back up to 10.1% as of November 20. The reason could be a small seasonal blip, or the impact of a slowing 2008 (Nov/Dec 08 wasn't quite great for growth). But it's apparent that the figures in reverse repo have come down from 1.3 trillion (lakh crore) rupees to about 1 trillion, so the remaining money could be going into the regular economy. It's not significant - the RBI might only start worrying after 20% growth - but it could be a sign.
Both these figures - an increasing bank credit growth number and high inflation - prompt people to think that the RBI will attempt to rein in prices by rate increases. The monetary transmission in India - meaning, the funda of increasing interest rates and it's bringing down inflation - is terribly flawed, so there's very little hope of it working in the short term. But it throws a sign - that we're moving from crisis management to controlling growth.
Either ways, I don't know what to think of the 7.9% GDP growth figure. It's partially derived from stimulus and we're still producing like crazy. But are we consuming, and will the story die a quick death once the RBI raises rates or attempts to curb prices?
The 10 year bond has moved to a yield of 7.47% - from an low of 7.18% - in a few days, anticipating that the RBI will take monetary action. With rates at 4.75% I can easily imagine a 0.25% rate hike. That still shouldn't impact the 10 year bond much, even if it happens; but again it's not what they do, but what they are expected to do in the future that counts. 0.25% may not be much; but markets will overreact and start imagining 3% hikes in the next few months. Bond investors are going to be in a soup, I think.
Stocks to watch - Banks, real estate, tea/coffee and agri products. And if it gets bad, watch Auto.
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