Has India reined over the monster of inflation? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Has India reined over the monster of inflation? 

A  A  A
In this issue:
» For long term gain, India is happy to embrace short term pain!
» Why is money flying out of China?
» NHAI bonds gearing up for a bumper listing
» Will RBI pare 40% priority sector target for commercial banks?
» ...and more!

---------------------------------------------------- Free WebSummit ----------------------------------------------------

Asad Dossani reveals The Top Derivative Trading Ideas For 2012 at the Equitymaster WebSummit.

Register Now! (To Be Held Today, 3rd Feb. At 5:30 PM)


While 2011 had a dismal year for the Indian stock markets, the year 2012 has opened on a pretty positive note. And though investors are not imagining too rosy a picture, the fear and the negativity have certainly subsided. So what has suddenly changed in the last couple of months to augur this change of sentiment?

Among other reasons, a moderation in the rate of inflation deserves the credit. You will recall how for a major part of the last year, our countrymen and policymakers endured a vain battle against inflation, which ran close to double-digits.

It was not until December 2011 that inflation showed some signs of moderation. In fact, in January 2012, food inflation even turned negative. What is more, the Reserve Bank of India (RBI) has not only halted its rate hike spree, but has also cut down banks' reserve requirements by 0.5% last month. Many investors and analysts are awaiting cuts in the key interest rates, which will probably mark the turn of the interest rate cycle. So the question which immediately comes to mind is this - Have we reigned over the monster of high inflation? Will we go back to the 'normal' inflation rate of 4-5%?

The answer, unfortunately, is not very encouraging. There are several reasons for this. It must be noted that the current inflation seems to have moderated since we are comparing it to last year's lofty numbers. In other words, it is the high base effect that makes current inflation look lower. Moreover, escalating food prices were among the main culprits for the high headline inflation that we witnessed last year. How can a meagre 4-5% growth in agriculture satisfy the hunger of a 1.2 bn population with real incomes rising by more than 5%? Indian agriculture continues to suffer the brunt of poor productivity, a highly inefficient supply chain, a skewed incentive structure, greater government focus on expenditure than investments. Even worse, whatever growth comes is highly dependent on the benevolence of the rain gods.

So though the recent moderation in inflation is welcome, it may not last long. The land of a billion opportunities remains the land of a billion vulnerabilities. We have to live with this reality, until of course the Indian government embarks on some tough yet much need reforms.

Do you think India's inflation problem has been solved? Share your views with us or you can also comment on our Facebook page / Google+ page.

01:20  Chart of the day
The recent ruling of the Supreme Court to cancel 2G licenses issued during Mr A Raja's time (of the infamous 2G scam) has been applauded by many. It has been seen as a victory of governance over greed. But it has also been criticised severely by another section of the society. This section states that the decision would hurt investor sentiment as there are a lot of foreign investors involved in this and the amounts invested by them are huge. Undoubtedly, the amount at stake was large as today's chart of the day shows. But the apex court's decision is not to try and hurt investors. It is to punish those who sought to obtain the licenses through any mean possible, even if it meant the wrong way. And it is not that every foreign company that holds a telecom license has been punished. After all, the judgement has not affected the likes of Vodafone and Aircel (both companies have foreign party interests). The judgment is against those who did not even qualify for these licenses but went out of their way to make sure that they got a pie of the hitherto lucrative telecom sector.

Data source: Mint
*Includes the amount for Spice

Have you noticed what happens when an economic good is artificially controlled by the Government? Well, a black market for the same emerges. Thus, don't be surprised if you go to Chinese dominated regions and find a thriving black market in the form of people desperate to stock dollars and give away the Chinese Yuan. Needless to say you may receive slightly less than the official exchange rate. Well, this is so normal that even Government does not bother to do anything to check this. But alarm bells should start ringing loudly if this trickle starts turning into a flood. Is China facing any such flood right now? It certainly does if the Financial Times is to be believed.

The paper has reported how capital flight out of China has become even more intense in recent times. Part of the reason could be the political transition the dragon nation would witness in 2012. The consequences of such a transition have always been difficult to predict. Thus, the wealthy and well connected in China do not want to take a chance and hence, are moving their money out of China. There is another reason such flows are getting more attention than they deserve. You see, with the developed world facing a slowdown, China's trade surplus with them is on a decline and this is thus making the capital flight look more egregious than before. Does this indicate all is not well with China and its problems run deeper than imagined? Well, we've been a supporter of this theory for quite some time and have now found one more reason not to change it.

Recently, National Highways Authority of India (NHAI) came out with its Rs 100 bn bond issue. With the listing date just around the corner, there is a considerable euphoria surrounding it. So much so that the grey market premium for these bonds has increased from Rs 5 to Rs 22 in just a month and quite understandably so. Being a tax free instrument, 8% coupon offered is effectively translating into a yield of 11-12% for investors in the highest tax bracket. As a result, High Net-worth Individuals (HNI) and institutional investors are actively trying to lay their hands on this issue through off-market deals.

Further, there are strong indications that the interest rate cycle has peaked out. This has further increased the attractiveness of these bonds (interest rates and bond prices tend to move in opposite direction). Sovereignty of the bonds (eliminates credit risk) is an additional feature. Thus, it appears that the NHAI bonds too are on a way for a bumper listing like the State Bank of India (SBI) bonds. In fact, the current economic scenario (flight to safety) has meant that listing gains are not just a feature of equity markets.

For the cash rich PSUs and even the ones hoping for some dole outs from the government, here are some interesting takeaways from India's largest public sector undertaking. We are referring to Indian Railways. The government may want PSU entities to spend more in order to accelerate economic growth. Many unlisted PSUs are using this situation to their advantage. However, the Railways has a budget of its own. Hence, the entity is bound to be more accountable for its finances than its unlisted peers. This explains why it has actually cut its expenditure in FY12 by around Rs 90 bn. But all of it is not to the Railways' credit. Some of the expenditure did not materialise due to project failures and below par revenues. However, reducing wasteful expenditure in itself is appreciable when the government budget is tight.

India is a poor country with a large agri-dependent population. In order to improve their lot, the country's central bank has put across a mandate that banks need to maintain lending a 40% share to the 'priority sector'. This includes lending to agriculture, small scale industries etc. But now the RBI is considering that banks should trim their exposure to the same. Banks themselves are also unsure of meeting these targets this fiscal. Credit growth is hard to come by in light of the current economic environment. Rising risks of bad loans are also deterring banks away from lending to these areas. Under the new RBI guidelines there will be renewed focus on defining what exactly constitutes 'priority sector'. This will ensure that credit actually goes to deserving parties rather than just for meeting targets. Lending to important sectors like infrastructure and housing finance to weaker sections may also be considered.

In the meanwhile, the Indian stock markets were trading in the green after opening trade on a flat note. At the time of writing, BSE Sensex was up by 114 points (0.7%). Barring metals, all sectoral indices traded in the green. Asian stock markets traded mixed. While China led the pack of gainers, Indonesia, Japan and South Korea witnessed selling pressure.

04:50  Today's Investing Mantra
"If you took our top fifteen decisions out, we'd have a pretty average record. It wasn't hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor." - Charlie Munger
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.

Equitymaster requests your view! Post a comment on "Has India reined over the monster of inflation?". Click here!

4 Responses to "Has India reined over the monster of inflation?"

Shashikant Nishant Sharma

Feb 4, 2012

Inflation in India seem to be under control but in real sense of term I don't think so. The recent news that food inflation is negative is illusory as the base year or month taken is not a real representative of the situation is recent years. The RBI has trying its various measures like Cash Reserve Ratio(CRR) and cuts in interest rate and increasing lending rate to reign in the Monster of Inflation in India and repeatedly it remained unsuccessful. The negative balance of India's foreign trade and commerce will pauper the country in coming years. Instead of developing indigenous capability of Light Combat Aircraft government is making $10.4 billion deal with France. How can we expect that the government is trying to reign in inflation.

Shashikant Nishant Sharma

Like (1)


Feb 3, 2012

!) Widening fiscal deficit,
2)No change in any financial improvement so far,
3)Remaining deficit in supply chain procedure,
4)Decrease in GDP,
5)Increasing imports & Rupee value depreciation,
6)Big business Firms purchasing back of their shares,(Negative
political atmosphere to initiate a new business),
7) Continuing SCAMS & SCANDALS,
8)Lack of proper infrastructure,
9)Ever increasing Subsidies on all the front,
10)Enormous spending on governance.These Are the few to mention
that we are far away from expecting our inflation would soon
soften.Probably Governing people might be interested in
maintaining high inflation & make money out of it for their
pocket, & let their favorites to scrape the national wealth &
accumulate it in another country.Until at least we realize that
our selfish nature is the reason for all the ill effects of our
growth, no big change will come from the void.

Like (1)

Sarika Shah

Feb 3, 2012

India has not at all reined over the monster or demon called INFLATION.We are way off I feel.The price of essentials is still so high.The rates have almost doubled whether commodities,food items etc.The aam admi is finding great difficulty in making his living.Prices of property,gold,silver are touching the sky and also becoming scarce.In this run between indusrialisation and so called GROWTH,the demon inflation will always win.Growth has to be in some balance with inflation.Soon land will not be available for agriculture.We are turning into a concrete jungle where inflation like monster is happiest.India is an agricultural country and should retain its nature for inflation to cme down.

Like (1)

anupam garg

Feb 3, 2012

Real incomes rising by more than 5%...u sure??

Like (1)
Equitymaster requests your view! Post a comment on "Has India reined over the monster of inflation?". Click here!


Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407