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Urjit Patel... A Surprising Yet Most 'Natural Selection'

Aug 22, 2016

In this issue:
» Affordable housing gaining traction
» Aluminium prices under pressure?
» Market roundup
» ...and more!
Richa Agarwal, Research analyst

Speculation over who would don the mantle of next RBI governor has come to rest. It's Urjit Patel - the man who once suggested that rather than a hawk or a dove, the RBI is an owl - ever vigilant.

He isn't too media savvy. You've probably never even seen a picture of him until now. In that way, Urijit Patel, who will finish his tenure as RBI deputy governor before taking the top spot, is unlike his predecessor Mr Rajan. And yet, his succession brings relief. Because when it comes to what matters, the two are like peas in a pod.

The best insights into his mind and objectives come from his past work. The most significant of which is the Urijit Patel Commission Report, released in January 2014.

The report was path-breaking in a lot of ways. Instead of the wholesale price index (WPI), the report suggested India use a consumer price index to measure inflation, making such policies more realistic and relevant to common person. The report recommended a target inflation rate of 4% plus or minus 2%. And it managed expectations by insisting that monetary policy alone cannot be the tool to steer the economy - fiscal corrections are important for economic stability.

Amid clamorous support for growth from politicians, economists, and corporates, the report took an unequivocal stand for stability. It drew criticism from some quarters. But as time has told, the RBI's focus on inflation was critical for whatever optimism one has for the Indian economy today.

Despite the perceived tug of war between stability (inflation control) and growth, the fact is the two are not mutually exclusive. For any sustainable growth, we need to have stability. Else what seems like growth may burst in a bubble. Instead of spatting and sparring, the country would be better served if the respective sides focused on their jobs - the RBI, on stability; the government, on reforms to facilitate growth.

We believe Mr Patel's appointment is a step in the right direction. But there are miles to go yet. While there is comfort on inflation control front, other questions do come to mind:

  • Will Mr Patel will as aggressive about cleaning up the banking sector as Mr Rajan?
  • Will he be as communicative as Mr Rajan when it comes to speaking his mind on issues and policies?
  • Will the RBI be as independent under his reign as it was under Mr Rajan's?

I highly recommend you read this latest note by Vivek Kaul: The Biggest Challenge for the New RBI Governor Urjit Patel is... to get some interesting insights.

02:45 Chart of the day

As per the recent report by real estate consultancy Cushman & Wakefield, the affordable housing segment has seen a substantial increase in new launches in the first half of 2016. This massive surge is close to 100% compared to the first half of 2015. The highest supply of affordable housing was recorded in Pune followed by Bengaluru.

Affordable Housing Segment Gaining Traction

Mid- range segment saw the highest number of launches in the first half of 2016 and grew by 10% YoY. Rs 5 million to Rs 12 million range houses are classified under mid-rang housing (Whereas in Mumbai and Delhi, Rs 7 million to Rs 20 million ranged houses come under mid segment). High-end residential units saw a decline in the total number of units launched and declined by about 30% YoY.

With India's high growth in population and massive migration from small towns and cities to metros, affordable housing has assumed a significant place. Increasing middle class, Increasing urbanisation, a renewed focus on the sector by the government and rising income & aspirations are all key demand drivers in the affordable housing story.

But is it a good time to invest in Real-estate companies? Despite good prospects, investing in real estate companies is dicey. Debt-ridden balance sheets, an uncertain regulatory environment, and project delays create uncertainty. We believe there is an indirect and relatively safer way to bet on the sector. Earlier this year, The India Letter team recommended a housing finance company that is set to ride on urbanisation Megatrend. Similarly, the regulatory and demographic tailwinds are set to strengthen this Megatrend in the coming years. Click here for more details...


Moving to metal Sector, the first half of 2016 remained considerably favourable for aluminium. Aluminium prices are up by about 15% since February 2016 levels. This was primarily due to some supply-side discipline shown by Chinese companies and strong aluminum demand in China. Similarly, Chinese aluminium exports have fallen approximately by about 7% YoY in the first seven months of 2016.

It's important to note that aluminium demand has been growing at a decent rate. This is on the back of increased usage of aluminium and its alloys in the automobile sector. Aluminium is replacing heavier parts in automobiles due to the metal's improved ability to reduce emissions. Similarly, steady demand from sectors such as machinery, packaging, construction, power & electronics are expected to boost demand for the metal in the long term.

However, the aluminium industry has been plagued by a massive oversupply that has put pressure on prices. With the rising aluminium prices, we can expect growing supply in the coming months with the restarting of idle Chinese smelters and addition of new capacities. Not to mention, global uncertainty on the back of Britain's unexpected exit from the European Union, the inability of advanced economies such as Japan, US to stimulate aggregate demand and the inability of OPEC to stabilize crude oil production continues to be a cause of worry.

Therefore, going forward, aluminium prices could come under pressure.


After opening the day flat, the Indian stock markets fell below the dotted line. At the time of writing, the BSE-Sensex was trading lower by about 111 points (down 0.4%), while the NSE Nifty was trading lower by 38 points (down 0.44%). Sectoral indices were trading mixed with Auto and Banking stocks bearing the brunt of the selling pressure.

04:50 Today's investing Mantra

"Bull markets are born on pessimism, grow on scepticism, mature on optimism and die of euphoria." - John Templeton

This edition of The 5 Minute WrapUp is authored by Richa Agarwal (Research Analyst) and Sarvajeet Bodas (Research Analyst).

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