Will Sensex soar if Dr Subbarao changes his mind? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will Sensex soar if Dr Subbarao changes his mind? 

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In this issue:
» Should we worry about stable growth in Asian economies?
» Buffett still optimistic about the US' fiscal cliff
» The biggest concern on Jeremy Grantham's mind
» Yet another stock investing related scam!
» ...and more!

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Not lack of reforms. Not corruption. Neither fiscal profligacy nor blatant misallocation of scarce natural resources. None of these are to blame for Indian economy being on the edge of a drastic slowdown. Instead, the entire blame for all of India's problems apparently lie on the shoulders of a gentleman who calls himself Dr Duvvuri Subbarao! The Reserve Bank of India (RBI) governor is not a favourite amongst most of India's corporate and political heads. The Finance Minister in particular does not see eye to eye with him. But that has been the case with Dr Subbarao's predecessors as well. However to hold him squarely responsible for every economic problem that India is confronting is stretching things too far we believe!

We were not just surprised but rather amused to read the interview of Mr Shankar Sharma of First Global published by Economic Times. According to Mr Sharma, Dr Subbarao is the 'real problem' for India. According to him the baby steps taken by the government on opening up FDI (Foreign Direct Investment) in some sectors are encouraging. The feel good sentiment alone can pump prime Indian stock markets he believes. Moreover he believes that schemes like UID will solve a lot of problem on the subsidy and fiscal deficit front. All in all, if not for Subbarao's cautious stance on interest rates, the Sensex would soar in the short term.

Needless to say, Mr Sharma's opinion is based on the fact that an interest rate cut would give markets a reason to cheer, albeit temporary. Whether lower interest rates would facilitate investments is anybody's guess. Particularly, if the reforms remain on the backburner. Plus lower interest rates are unlikely to solve any of India's fiscal and budgetary problems. On the contrary it might stoke inflation. But those looking to speculate in the markets on the back of short term cheer see the RBI governor as the main culprit.

We for one have always been in support of the RBI's conservative monetary policies. For they are not myopic. More importantly, instead of focusing on the Sensex, these policies have ensured Indian economy's stability during global upheaval. And last but not the least, the Sensex' long term fortunes are tied little to feel good sentiments. A steady economy and sustainable corporate earnings growth will ensure long term wealth creation in Indian stock markets. As long as the RBI ensures this, we give kudos to Dr Subbarao!

Do you think Dr Subbarao should change his monetary policy stance for Indian stock markets to react positively? Let us know your comments or post them on our Facebook page / Google+ page

01:15  Chart of the day
India and China together contributed 24% of global output in 2011. As per OECD's projections, by 2060 the two Asian giants will have a 46% share of world GDP. In fact as per data published by Economist, GDP per person in China will be 59% of that in America by 2060. As compared to that, India's GDP per person (on purchasing power parity basis) will be only 27% of that in the US. However, as seen in the chart, India's GDP per person will multiply nearly 5 times in the next five decades. This will arguably make it one of the fastest growers on this economic parameter. But one should also take cognizance of the fact that India's public debt per person is growing at an equally rapid pace.

Data source: Economist, OECD

Developing Asian economies are known to be one of the fastest growing in today's times. But that's not all. An article in the Economist magazine points they seem to be also the most stable in the world over the last decade. What exactly does that mean? It means that the growth has been steady, without very wide fluctuations. The list includes countries like Indonesia, Laos, Bangladesh, among others. Moreover, it is said that the growth has been more stable in the decade spanning 2002 to 2011 than any other since 1988.

Intuitively, steady growth is taken as a positive indicator. But wait, the article has something very interesting to point out. Before the financial crisis of 2007-08 hit the global economy, there was a period of economic stability that prevailed in the US and in other developed economies. The name given to this era is the "Great Moderation". Many economists believed that wise monetary policy and sophistication in the financial system were among the major reasons for this extended period of stability. The financial crisis has laid bare all these assumptions. In fact, it now appears that the seeming stability was indeed responsible for the eventual storm.

That leads to us this question- should we worry about stable growth in developing Asian economies? Incidentally, the trends appear to be similar to the West. Credit in these economies has been rising sharply. An argument goes that when the economic growth is stable, borrowings tend to rise. If this rise in credit continues unchecked, it could eventually destabilise the economy.

Is it pure optimism or the great investor is able to see something that we ordinary mortals are not? We are referring to Warren Buffett's recent comments about the state of the US economy. The Oracle of Omaha sees improvement ahead for the economy and labour market. 'We will gain a lot of jobs in the next four years", he is believed to have said. We have our doubts. The US economy as we see it is going through a deleveraging phase right now. In this phase, people reduce consumption and repay past debts. Since the US economy is close to 70% consumption, job growth is bound to get affected owing to this deleveraging. Thus, for Buffett to say that US economy will add jobs over the medium term is a little hard for us to believe.

Then there is the issue of the man being a strong supporter of tax increase on the wealthy. This is also something that is hard for us to digest. We don't believe that Government is the most efficient user of capital. Thus, to give more money in its hands by way of tax increase is not the best use of capital we think. This will only lead to a drag on economic growth. But Buffett seems to be going in just the opposite direction. One of those rare occasions where we are not in agreement with the legendary investor perhaps.

A famous professor, Philip Lubin had once said 'Every generation thinks it has the answers and every generation is humbled by nature'. This seems to be apt given the changes in climate that we are witnessing worldwide. No one can predict what will happen next. No one can predict how bad it will get. And there are implications of these changes in everything we do and have. Including our investments. For legendary investor Jeremy Grantham, climate change is the biggest concern on his mind. In his opinion these changes affect commodity prices and food supplies. The two things combined determine other key global trends including economic growth and asset prices. He further states that changes in the climate have led to a shrinking supply of fertilizer in the world. Therefore countries including the Soviet States, Canada and Morocco have a quasi monopoly. Why? Because they together control 70% of the global potash production. If anything happens to the supply of potash, then the supply of fertilizers would be hit drastically. This in turn would hurt the production of nearly every food grain and agriculture produce. And this would hurt commodity prices. Unless fertilizer use is reduced, the world food grain supply would be drastically hit in 20 to 40 years given the shortage forming in potash supply.

The last few years has seen scams and scandals on the rise both in the corporate and political world. What is more, scams have been prevalent in the Indian stock markets as well. The Harshad Mehta scandal for instance is a painful reminder of this fact. The latest to do the rounds is the Stockguru Scam. As per reports, a couple has been arrested for allegedly duping around 200,000 investors from seven states of nearly Rs 5 bn by promising them high returns on their investment through their firm dealing in the stock market. The lure here was obviously 'quick returns'. Investors need to be very very careful while investing in such firms. Especially those that promise quick returns in the markets.

Indeed, we believe that stock investing is an exercise that requires tremendous discipline. It requires researching companies and investing in those that have strong business models, sound management and available at reasonable valuations. This means that investing has to be from a long term horizon. Only then can the results be meaningful. Lure of quick returns more often than not can only burn your fingers.

Amidst looming economic uncertainty, the benchmark indices in Indian equity markets moved deeper into the negative territory since the start of today's session. The BSE Sensex was trading lower by around 151 points at the time of writing. Other major Asian markets closed lower today while Europe also opened on a negative note.

04:50  Today's Investing Mantra
"The individual investor should act consistently as an investor and not as a speculator. This means that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase" - Benjamin Graham
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15 Responses to "Will Sensex soar if Dr Subbarao changes his mind?"


Jan 22, 2013

No not at all.


Sreenivasa Rao NG

Nov 26, 2012

During 50s/60s either it be North Block or RBI ,used to be with a majority of Down South personnel, in particular from Tamil Nad(followers of Sri Ramanuja). Over a decade and half, it looks like Andhras . Well then. One thing is certain: Of late it looks like the Elected Ministers whether at Centre or in States by and large, want the Administration to toe their line, irrespective of the results. Persons like Mr.Seshan, Dr.Reddy, Subba rao, and the like may not toe their line because.........



Nov 18, 2012

I agree with your view as well as the majority of the comments received posted above. Dr. Subba Rao (RBI)is right and our primary duty is to reduce the fiscal deficit and control the inflation rather than the short term gains(which are also unsure) and improving the 'sensex' to play to the gallery and filling up the pockets of punnters (which seems the only aim of our FM).



Nov 16, 2012

i think the operators in the stock markets have highly fragmented knowledge of the real economy which prominently is rural based and have all together different needs and aspirations and to sustain the health of the real economy if the governor is offsetting the echoes of the Mumbai economy than be it.

Like (1)

k gopalan

Nov 16, 2012

The immediate impact of interest rate drop will be to reduce the income of pensioners for whom interest from bank deposits is the primary source of income. The only beneficiary will be GoI which is the biggest borrower from the system. Spectrum auction has been a damp squib and PSU divestment is a non starter. So GoI is not going to be able to deliver on its promise to control deficit.Also given the overall scenario, even if RBI is forced to cut rates, will "animal spirits" be up? I doubt it.

Like (1)


Nov 15, 2012

My opinion is business sentiment is more of a factor of the general economy whether locally or globally. So if the economy is great, would an interest rate differential of 3% - 4% really matter? A business person would go and borrow if he/she can make more than his/her costs of funds. Similarly if the economy is weak, would a business person be enticed enough to go and borrow even if his/her borrowing costs are lower by 3% - 4%? If that is the case why is Japan's economy going nowhere with its lower interest rate environment? Unless the business expectations over the economy improve, tinkering of interest rates would not be much of a help, in my opinion.

Like (1)


Nov 15, 2012

Sensex may soar as it is not based on fundamentals but then the economy may suffer in the long run as pointed out by you.Control of inflation is of prime importance than resorting to populist policies.RBI's stance is in the interest of the country. KUDOs to Dr.Subbarao. His place is already coined in the history of RBI as the Governor, who did not sacrifice the interest of his motherland over reelection for second term

Like (1)

Prof. N K Jain

Nov 15, 2012

I was also amused by Mr. Shankar Sharma's comments about Dr. Subbarao. Interest rate is a matter to be determined by the central bank of a country and it can not be guided by the desire of sock market players. No doubt reduction in interest rate is going to boost stock market in short run but the market follows the fundamentals of the economy in the long run.
In fact some of these guests on the market channels behave larger than life and most of them sing the same tune. I have seen when most of them are pessimists markets runs north and vice verse.

Like (1)

Prakash D. Basrur

Nov 15, 2012

SENSEX ("SENSELESS" for a common man !) is for punters on the Dalal Street to become billionaires from Millionaires by indulging in "Speculative" trading under the control of a few Czars on the "market" ! On the other hand RBI ( and SEBI if you may !) are national agencies "by the people , of the people , for the people ! They are the watchdogs of our so called "aam admi" economy and have been doing a marvellous job since inception ! Just like a medical man would take the side of Pharma industry ( for obvious reasons !), a stock broker will always want the "SENSELESS" to be like Captian Marvel , i.e. up-up-and-away ! These so called "professionals" have selfish motives which are not congenial to the safety of national economy ! By the way why is our SENSEX ( or NIFTY) not displayed on CNN and BBC ? Are theose insignificant internationally !

Like (1)

Gopal Kalpathi

Nov 15, 2012

Only if people like Mr. Sharma had ever thought of those teaming billions of India who are struggling to meet the basic needs of life. Then again it is a fool's wish to hope our politicians and the rich think beyond making a fast buck. Kudos to Dr. Subbarao, the inflation (especially, the food inflation) which affects the poor most, is at least not on a northward flight due to the policy rates. My take is we can afford to wait for another quarter before any rate revision is brought in. As it is we have seen all these growth of 8-9% in the past has not helped much the poorest of poor. The income disparity is widening, which is also a fact. So we must not listen to such Fm or Mr. Sharma.

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