Will the Rate Cut Usher in Acche Din for India? - The 5 Minute WrapUp by Equitymaster
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Will the Rate Cut Usher in Acche Din for India?

Jan 4, 2017
In this issue:
» The Rate Cut Spree to Boost Credit Growth...
» Rural Areas Still Impacted by Cash Crunch
» Market roundup
» ...and more!
00:00
Madhu Gupta, Research analyst

After the demonetisation pangs of late 2016, the country got a breather at the start of 2017. The government announced a series of measures to reduce the interest burden on the poor and middle class.

These include interest rate subsidies on small ticket loans of up to Rs 1.2 million, a 60-day interest waiver scheme for farmers, and a two-fold increase in the credit guarantee scheme for small and medium enterprises.

In response, SBI slashed lending rates by a whopping 0.9% across all loan products. With this move, SBI's home loan rates fell to six-year lows and unleashed a rate-cut war. The banking major also reintroduced teaser home loans.

A number of other banks including ICICI Bank, Union Bank of India, Punjab National Bank, and IDBI Bank followed suit and pared their lending rates. The deposit surge post demonetisation has played a key role in the big rate cuts by banks.

The move, so eagerly anticipated by India Inc and the government, has finally materialised. But will rate cuts alone be a panacea for the economy? Can low lending rates kickstart investments and put the economy back on the high-growth path?

The prevailing economic conditions do not seem to favor an immediate makeover. The tepid investment climate in the country has, in fact, deteriorated further post the note ban. According to economic think tank CMIE, the last quarter of 2016 witnessed only 404 new investment proposals, the lowest in a decade.

In fact, the number of new projects announced per day has fallen from an average of more than seven to just three post demonetisation. Moreover, projects worth Rs 777 billion were stalled during the quarter due to lack of government clearances.

Faced with low capacity utilisation and a demand slowdown due to the liquidity shortage, cheaper capital alone cannot prod India Inc to invest.

The interest rate cut may promote housing finance. But the continued crash crunch, prospects of job losses in the informal as well as formal sectors, and a general decline in the 'feel-good' factor have added to the growing uncertainty.

Predicting when the economy will normalise is as good as throwing darts. As per Warren Buffett, investors shouldn't base their decisions on macroeconomic events. From the Berkshire Hathaway 1994 annual report:

  • We will continue to ignore political and economic forecasts which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%. But surprise - none of these blockbuster events made even the slightest dent in Ben Graham's investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.

At Equitymaster, we do not attempt to predict how and when macroeconomic developments will unfold. Instead, we focus all our energy on understanding the underlying business strength of companies. The ValuePro team is always on the lookout for all-weather stocks whose fortunes are not tied to economic cycles.

In fact, the team just released a report on safe stocks to consider during turbulent times (Subscription Required).


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------------------------------

03:25 Chart of the Day

A consensus among everyone is that Interest rates are headed lower this year. Some banks have announced a significant cut in their MCLR rates. The MCLR rate is used as a benchmark rate for new loans. Essentially the banks are now aggressive on the rates cut in the hope of riding on some credit growth.

The Reserve Bank of India data suggest a slowdown in India's credit growth. This is languishing at 5.8 percent year on year. Flush with bucket loads of cash in the system which has helped in reducing cost of funds for the banks, some of the banks have in turn reduced their lending rates.

Interest Rates Finally Headed Down South?


The overall impact of this rate cut on stimulating credit growth remains to be seen. However, one important aspect that is over looked by everyone is the impact of chasing growth on the bank's bottom-line. An aggressive cut on the lending rates while keeping the deposit rates relatively higher would impact banks profit margins. The present drive though seems firmly towards boosting credit growth and bringing more business to the banks.

03:45

Only a couple of more days to go!

Vivek will send his petition to the President of India on 6th January 2017. Over 17,000 citizens and counting have signed the petition to end special privileges to political parties. We urge you to make the change happen. Sign The Petition Now!


03:55

Just like Equitymaster strives to recommend stocks that meet our stringent quality standards, our associate company, HelpYourNGO.com works to make donating to NGOs more transparent. With National Girl Child Day just around the corner, HelpYourNGO brings our attention to a worthy NGO supporting the girl child.

It looks like it's time for women to shine in India. 2016 celebrated the talents of athletes like Dipa Karmakar, P.V. Sindhu and Sakshi Malik, ISRO's 'rocket women' scientists like Nandini Harinath and Minal Rohit and many more. Their success is a testament to what women with talent can do when they are given the right support. The Wizard of Omaha Warren Buffet agrees - he's gone on record saying one of the reasons for his success is that he was competing with only half the population!

Warren Buffet is obviously understating his own talents and acumen. Yet his observation - that women don't even get to participate in arenas where they have talents - rings true. In India, Project Nanhi Kali has been working hard to ensure that we don't lose more girls to poverty and illiteracy. A project initiated by the K.C. Mahindra Education Trust, Nanhi Kali provides academic, material and social support for underprivileged girls. Each Nanhi Kali receives after school classes, materials like uniforms, school bags and counselling for their parents and community to help them succeed in school. They have helped 1.2 lakh underprivileged Nanhi Kalis in 10 states stay in school so far. You too can help a Nanhi Kali continue her schooling and realise her true potential. Sponsor a Nanhi Kali for just Rs 3,000 today. Soon, she may be making headlines!

04:20

It is now way past 50 days when government had announced the demonetisation of high value notes. This formed 86 percent of the total high value notes currency in circulation. Sucking this cash out suddenly created a vacuum in the cash dominated society of ours. When we did the math on printing new currency notes. We told you that this problem would take 5-6 months to normalize.

Now, the central bank in a notification has advised the banks to ensure that atleast 40 percent of the supply of cash reaches rural areas. These rural areas are still facing cash crunch. The central bank observed that these rural areas were still not getting commensurate cash and were struggling and hence has had to issue this notification.

The impact of demonetisation has already hit the rural areas more than the urban areas. The first signs of this was a slump in rural sales of discretionary items like durables, autos etc. The challenge for the government will be to restore the cash supply and also public's confidence measure to kick start consumption.

04:45

After opening the day on a flat note, Indian equity markets continued to trade near the dotted line. At the time of writing, BSE Sensex was trading higher by 17 points and NSE-Nifty was trading higher by 11 points. Sectoral indices are trading on a mixed note with stocks in the metal sector and capital goods sector witnessing maximum buying interest.

04:55 Today's Investing Mantra

"You only have to do a very few things right in your life so long as you don't do too many things wrong." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Madhu Gupta (Research Analyst) and Rohan Pinto (Research Analyst).

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Equitymaster requests your view! Post a comment on "Will the Rate Cut Usher in Acche Din for India?". Click here!

1 Responses to "Will the Rate Cut Usher in Acche Din for India?"

sundaravaradan S.

Jan 4, 2017

Hi... I am pained...to see so much of negative news in the media..& Convoluted..!

Low Auto sales (Scooter, Car, Truck etc)..In rural area? Metros? ...Do people pay by Cash only (What %-age), Why can not people by by Check, Card, Net Banking etc...?

Low Sales of durable Discretionary......In rural area? Metros? ...Do people pay by Cash only (What %-age), Why can not people by by Check, Card, Net Banking etc...?

Low sales.... Is it due to other reasons..? Like people were busy with Withdrawal of Cash from Banks ...etc...?

Govt. is dynamically adjusting towards the needs...? 40% cash directed to villages by RBI...
Please think +ve....

Like (1)
  
Equitymaster requests your view! Post a comment on "Will the Rate Cut Usher in Acche Din for India?". Click here!
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