My chance meeting with Raghuram Rajan!
(Feb 3, 2015)
|A A A
In this issue:
» No repo rate cut by the RBI
» India to run a current-account deficit for the foreseeable future
» Is the auto sector set for a revival?
» ....and more!
Readers of The 5 Minute WrapUp will be aware that we strongly believe in the independence of India's central bank. We have praised the Reserve Bank of India (RBI) on many occasions for taking a view different from the central government. In fact, it often seems that the RBI governors have chosen to value their independence over everything else. Dr Rajan's independent thinking was evident whenever he refised to oblige with political corporate demands for rate cuts. While he may have left the benchmark Repo rate unchanged today; he did surprise everyone with a rate cut a couple of weeks ago.
On a Saturday evening last month, I got a chance to ask him about this very issue. Lady luck was kind enough to grant me an opportunity of a lifetime. A couple of weeks ago, I was at Phoenix, in Lower Parel Mumbai to watch the movie 'The Imitation Game'. While the movie was good, I will remember that evening for a different reason.
I was waiting outside the movie hall before the start of the show. There weren't too many people around. That's when I saw a woman approach a tall man standing a few feet to my right. I noticed that she had spoken to him only for a few seconds. To me it felt as if she had just approached a celebrity. I realised then that I'd heard her say the name 'Rajan'. I turned to face the tall man and sure enough, there he was, the Governor of the Reserve Bank of India. In a bit of a daze, I approached him.*
Sarit: Err... Hello! I don't mean to disturb you but are you Dr Raghuram Rajan?
Raghuram Rajan (RR): Yes (nodding)
Sarit: (smiling) I just want to say that it's an honour to meet you.
RR: Thank You
Sarit: My name's Sarit. I have read your books. It's wonderful to actually meet you in person.
RR: Thank You. What is it that you do?
Sarit: I work for Equitymaster as an equity research analyst.
RR: Oh... everyone over here seems to be into equity research!
Sarit: If you don't mind Sir, may I ask you a question?
RR: Sure (nodding)
Sarit: Do you really believe in taking actions that surprise the markets?
RR: (Shaking his head) No no... It's not like that.
Sarit: It's just that in your books, you have criticized Alan Greenspan (former Fed Chairman) for leading the markets. So I was wondering if you believed that central bankers should not try to lead the markets but instead act in a way as to surprise the markets. That monetary policy might be more effective that way.
RR: No it's not like that. Anyone who has read my books will know that I did not mean to say it that way. I have spoken about my views before.
Sarit: Yes Sir. Your words and actions are very much in sync. What I meant was, do you as governor, believe that surprising the markets is the best way to go?
RR: No I don't believe that.
Our short conversation had to end at that point. As Dr. Rajan and his wife had come to watch the movie, I did not want to pester him with more questions. Our interaction might have been just about a minute long but I don't regret that. I got a chance to talk to someone who I admire enormously and the opportunity itself was more than enough for me.
I did understand what he meant though. He was trying to say that just because something is wrong does not mean that the opposite is necessarily right. My main take away from the interaction was that he was doing his best to maintain objectivity in conducting monetary policy. He did not want to be influenced by anyone. This reinforces the view that we at Equitymaster have about Dr. Rajan. He has always been a voice of reason highlighting risks that corporate India would like to ignore. We at Equitymaster admire him for it. Do you?
* Conversation not verbatim
Do you think that Governor Rajan has been objective in conducting India's monetary policy? Let us know your comments or share your views in the Equitymaster Club.
--- Advertisement ---
Small Caps for Big Returns...
There are many investors who avoid investing in small cap stocks altogether.
The simple reason being they consider small caps to be too risky.
However, after researching for over 6 years we've defined a way of identifying high potential small caps that are already delivering strong returns...
Returns like 250% in 2 years and 1 month, 217% in 3 years and 11 months, 175% in 4 years and 5 months... amongst many more.
Now we are sure you're interested to know more about such companies and how we're picking them out!
So click here for full details...
Today's monetary policy certainly reinforces our view further about Dr. Rajan. While every so called 'expert' was clamouring for a rate cut, he has not obliged them. Yet again the RBI governor has stated that his job is not to boost stock prices. By keeping the benchmark rates unchanged, he has stated that rate action will depend on inflation remaining in check. While maintaining the Jan 2016 inflation target of 6%, he has once again highlighted the risks faced by the economy. The governor also stressed the need to bullet proof India's balance sheet before the US Fed starts to hike rates. This is a big risk as it could result in an outflow of money from India. So while corporate India might complain as usual, we are satisfied that the RBI is firmly focused on the long term health of the economy.
Central bankers the world over may have lost the plot trying to revive their economies through pointless money policies, but the RBI is a different central bank altogether. Indeed, as we have pointed earlier, one of the reasons why India's banking system has been resilient to global shocks is because of prudent policies followed by India's central bank. In fact, at a time when growth was slowing down, the RBI refused to cut rates when inflation was still high. Clearly it had its priorities right.
Indeed, the governor Dr Raghuram Rajan is of the view that for India to succeed, it will have to deepen domestic demand, strengthen its financial institutions, considerably ramp up infrastructure and improve in human capital through investments in healthcare and education. Dr Rajan also opines that India will run a current-account deficit for the foreseeable future. Thus, the funding for this will have to be through foreign direct investment (FDI), which is longer term in nature. But for this, policies will have to be transparent and not mired in red tape.
And the governor has also stressed on how important it is for the RBI to pursue prudent monetary policies. He states in an article in Project Syndicate, "It will be important to remember that the central bank's role is not to boost stock prices, but to ensure that the economy's underlying fundamentals and its financial system enable sustainable growth."
Thus, in the RBI, India clearly has a central bank that can be relied upon to remain independent and focus on maintaining stability. Now it is up to the Modi government to do its bit as well.
The auto sector is a likely beneficiary of interest rate cuts. After a couple of bleak years, the auto volume numbers for the first nine months of FY15 appear to be much better. In other words, better growth in volumes probably points to recovery in the sector albeit gradual. The segment to give evidence of this is commercial vehicles (CVs). Indeed, in the CV industry and in that the medium and heavy CV (MHCV) space, the last couple of years saw volumes plunge by as much as 50% combined. Although volumes have been down in 9mFY15, the pace of fall is much lower and is largely due to the 13% YoY drop in volumes of light commercial vehicles (LCVs). MHCV volumes grew by 10% YoY during the period and are an encouraging sign since the growth in this segment is closely linked to that of the economy. Exports have done the best and most of these have largely been to the markets of Asia, Latin America and Africa.
A revival in auto industry seems underway
*Passenger vehicles, **Commercial vehicles
In the meanwhile, led by heavy selling activity, the Indian markets were trading weak with the BSE-Sensex trading lower by about 210 points or 0.7% at the time of writing. Realty and banking spaces leading the losers; while FMCG stocks were trading firm. As for markets in Asia, most ended the day on a strong note; while European indices were also trading strong at the time of writing.
"Be fearful when others are greedy, and be greedy when others are fearful." - Warren Buffett
|| Today's investing mantra
Today's Premium Edition|
What history tells us about investing at current valuations
A look at the kind of stock market returns that have been earned in the past by investing at valuations similar to that of today.
| Get Access
|This edition of The 5 Minute WrapUp is authored by Radhika Pandit.
|DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group.
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.
There are no outstanding litigations against the Company, it subsidiaries and its Directors.
GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.
DETAILS OF ASSOCIATES:
DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
- Quantum Information Services Private Limited (QIS) having its registered office at 103, Regent Chambers, Nariman Point, Mumbai 400021 is registered under SEBI (Investment Advisers) Regulations, 2013 vide Registration No. INA000000680. QIS provides information on mutual funds and personal financial planning, financial markets in general, and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services through its website www.personalfn.com
- Agora Holdings (Cyprus) Limited having its registered office at Akropolis, 59-61, 3rd Floor, Office 301 Strovolos 2012 Nicosia Cyprus belongs to Agro group (Agora) which owns www.agora-inc.com and is one of the largest and most successful consumer newsletter publishers in the world.
- Common Sense Living Private Limited (CSL) owns www.commonsenseliving.co.in and is an initiative that provides straightforward lifestyle and wealth-building ideas from wealth coach Mark Ford. CSL is 100% subsidiary Company of Equitymaster.
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
- Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
Definitions of Terms Used:
- The Research Analyst has not served as an officer, director or employee of the subject company.
- Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
- Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
- Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
- Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
- Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.
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 infringementDisclosure & 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: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407