Free Reports

Inflation Coming Back to Haunt Government, Rajan and You

May 20, 2016

In this issue:
» Biggest loss-making PSU banks in 2015-16
» Different view on Gold
» Market update
» ...and more!
0:00
Tanushree Banerjee, Co-Head of Research

We have read more reports from gold bulls in the past month than we have in several years. Many of the world's most intelligent and successful investors have recommended owning gold. The list includes David Einhorn, Seth Klarman, George Soros, and Stanley Druckenmiller.

The central banks of China and Russia have been in gold buying frenzy. In fact, China is set to buy a US$90 billion gold vault in London.

World over, there is a rush to buy gold. Everyone wants to protect their purchasing power and prepare for negative interest rates and hyperinflation.

But for Indians, inflation is 17-month old news. Right after the new government was elected, the problem of wholesale price inflation vanished from our newspaper headlines. Cheap oil and the commodity crash ensured that inflation was among the least of the government's worries. On the contrary, falling prices would even put pressure on the RBI to cut rates.

So, though not to its credit, the Modi government enjoyed low inflation and lower interest rates for most of its post-win period.

At the RBI, Dr Rajan was never convinced that inflation and economic headwinds were behind us. He even explained his position with an old expression: 'In the land of the blind, the one-eyed man is king.' But he eventually had to accommodate the government's rate cut demands.

The occasional spurts in food prices over the past 17 months were camouflaged by the sharp dip in oil and non-food commodities. But oil prices have started rising again. And higher vegetable prices have started stoking the benchmark inflation index (WPI).

A recent economic update by SBI called 'Potaflation' (potato inflation) a key worry.

Vegetable prices paving the way for higher WPI
Vegetable Month Inflation Persist for
Potato Apr-16 35.40% ?
Onion Aug-15 74.40% 3 months
Tomato Nov-15 137.60% 7 months
Brinjal Feb-12 49.70% 6 months
Potato Apr-12 59.30% 12 months
Cabbage Jul-13 21.30% 8 months
Potato Apr-09 39.70% 12 months

Source: SBI Ecowrapup

It is difficult to speculate on when inflation will make the headlines again. And we are terrible at such things anyway.

But I can tell you that the problem of inflation cannot be forgotten so soon. That's because the causes of inflation haven't been resolved. We have been plain lucky to enjoy lower prices over the past few months. And so have companies reporting higher earnings on the back of lower input costs.

Inflation will haunt the government again. And Governor's Rajan fears will come true. If cutting interest rates by 1% was difficult last time, it will be nearly impossible on 7 June.

For you and me, the inflation problem in India does not necessarily mean going back to gold. We will continue to weigh the potential returns from the Sensex versus the yellow metal. But nothing stops us from allocating a small proportion of our portfolio to gold.

Do you think Indians should be as bullish on gold as many investors world over are? Let us know your comments or share your opinions in the Equitymaster Club.


--- Advertisement ---
Profit From Junior Blue Chips...

We have released our latest Special Report on the best of the best small caps - Junior Blue Chips!

Yes, we believe Junior Blue Chips possess the high growth potential of small caps along with the stability of blue chips.

That is an amazing combination every investor would want in his portfolio.

And the best part is you can get this report for FREE!

Just click here to know how...
------------------------------

2.30 Chart of the day

Following RBI's asset quality review (AQR) exercise that pushed banks to make proactive provisions of stressed loans, Indian PSU banks have been reporting heavy losses.

The Indian banking system reported the worst NPA levels among Asian economies in 2015. Vivek Kaul has written extensively about the mess in public sector banks in his Diaries.

While most corporates blame the economic slowdown for the poor asset quality of banks, Vivek offers an alternative perspective. As per him, the real story behind the bad loans of Indian banks is about diversion of funds and willful defaults...

  • As on December 31, 2014, the top 30 defaulters accounted for nearly one third of the bad loans of close to $47.3 billion, which is clearly worrying. Also, many high value loans have gone bad. And they keep piling up. In fact, in a survey carried out by the EY Fraud Investigation & Dispute Services found that 87% of the respondents that included bankers stated that diversion of funds to unrelated business through fraudulent means is one of the root causes for the NPA crisis.

The March quarter and full year results of Indian companies have been pouring in. And yet again, Indian PSU banks are in the limelight. The chart of the day shows PSU banks that have reported the biggest losses in the financial year 2015-16.

Is the Worst Over for Indian PSU Banks?

Is the Worst Over for Indian PSU Banks?


Is the worst over for Indian PSU banks? Here is what Madhu, our public sector banks analyst says:

  • Betting on profits of PSU banks over the next two to three years is as good as throwing darts. The RBI's mandate has definitely front loaded most of the provision pain for these banks. But that is not to assume that the banks have seen the end of it. Provisions will continue to hurt profits...and in some cases even the networth of the banks. Hence, if at all, investors should bet on which of these banks will be around even 5 to 10 years down the line. And value them conservatively. That's what we have been doing...
3.50

A couple of days back, our colleague Apurva at Daily Profit Hunter, gave us the chartist's view on Sensex versus Gold. Yet again, another colleague at Daily Profit Hunter, Asad Dossani, has made a very different prediction on gold. Given Asad's experience in trading in commodities like gold, his views on the yellow metal cannot be missed.

4.15

After trading in the positive territory during most part of the trading session, the Indians stock market dipped below the dotted line in the afternoon session. The BSE Sensex was trading lower by 74 points (0.29%) at the time of writing. Most sectoral indices were trading in the red with healthcare and realty sector stocks leading the pack of losers. Mid cap and small cap indices were also trading in negative territory, each lower by 0.31% and 0.65% respectively.

4:40 Today's investing Mantra

"Financial companies are more difficult to analyze than other companies. They can report whatever earnings they want - it's an easy game to play. For banks, earnings depend on loans and the reserves set aside. It's easy to change and manipulate the reserves." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Ankit Shah (Research Analyst).

Today's Premium Edition.

Will Balkrishna Industries' North American Ride Be Smooth?

Especially considering that one of its key competitor is losing direction...
Read On...Get Access

Recent Articles

This Rs 71 Trillion Business Could Make or Break (Your) Wealth in the Next Decade October 17, 2017
How to profit from behavioral biases afflicting the industry.
Sometimes the Market Makes Me A Crazy Person October 14, 2017
It's necessary to guard yourself when euphoria surrounds the market.
A Grave Mistake Both Companies and Investors Make October 12, 2017
When a company is making acquisitions or an investor is buying shares, this one important factor cannot be ignored.
Timeless Stocks on the Electric Car Assembly Line October 10, 2017
Are they on their way to create Coca Cola-like wealth?

Equitymaster requests your view! Post a comment on "Inflation Coming Back to Haunt Government, Rajan and You". Click here!

1 Responses to "Inflation Coming Back to Haunt Government, Rajan and You"

Krishna Murthy

May 20, 2016

I always invest on gold in small quantity to beat by urgent needs.

Like (1)
  
Equitymaster requests your view! Post a comment on "Inflation Coming Back to Haunt Government, Rajan and You". Click here!
DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
INTRODUCTION:
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. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

DISCIPLINARY HISTORY:
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:
Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
  2. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
  3. 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.
  4. 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.
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. 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.
  4. 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.
  5. 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.
GENERAL DISCLOSURES:
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. 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.
  2. 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.
  3. 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.
  4. 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.
Feedback:
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.