For too long now, every view on the stock market (including, we must confess, ours) has been peppered with that very intelligent-sounding phrase "global cues". Riding the increased appetite to absorb and take risks from large pools of short-term money, India - like many emerging markets - enjoyed the centre-stage of world attention. And with more attention came more flows and more flows resulted in higher stock prices which again led to more attention which again led to higher flow....the cycle gained momentum. But now, maybe global cues have lost ground to local cues.
The first evidence of this was on February 27. Global markets declined but India lost a little less as the market hung onto the expectations that the February 28 budget would give some good news (click here for our views on the budget). Well, it did not. For much of March the markets have been playing this tug-of-war between the impact of global news and local news. The RBI's weekend assault on inflation with another increase in interest rates has, as we see it, settled that fight. Like a mother-in-law controlling the kitchen the RBI has made it clear that it is the master of all that lies in Indian domain. The blonde, Bond-like women may come and do a few numbers on the Indian screen and sizzle and razzle with their global moves but, when push comes to shove, the script is written at home. The score says it all.
So far this year, global markets are up some +2% in USD terms, many emerging markets are up +7% (China is on its own trajectory and up +20% since January) and India is down -7% in USD terms (-10% in local Indian Rupees). So, is India now moving to its own beat? For a while, we would guess. And we would also guess that the next buzz word in the press will be "de-coupling" as in when a link has been broken. And this is a very subtle - and important - change.
The FIIs will still buy and sell Indian shares (click here to see the FII activity) but what they buy and sell - and how much - will be determined by what they perceive is happening within India. Or what they are told by their guides (the research analysts in the broking outfits) in India. So the quality of information fed to them will determine their actions. The audience (the FII) is sceptical and will need convincing. The momentum of returns since January is not in India's favour.
In the past, the FIIs told the research analysts who visited them that they were looking for India exposure so the broking analysts drummed up enough "buy" ideas and the shopping list was created. Here the audience (the FII) had already decided to spend money on the Indian stock exchanges, what to spend it on was the only problem. As the Indian stock markets notched up solid gains, the FII wanted more India in their portfolio. The momentum of India was drawing in more positive "global cues".
So while this sell-off in India continues, it will hit many great stocks too. When these global cues turn, they turn vicious - and indiscriminate. The hedge fund manager in Hong Kong, London, or USA has very little time to understand the nuances of the difference between an HDFC, HDFC Bank, and ICICI Bank (we do, click here to see our research reports) or between a Bajaj, Tata Motors, or Maruti. Now is the time to keep your balance for while local cues will now rule the day (and the Indices), local knowledge can outperform.
A few months ago the Finance Minister was telling the Chairman of PSU banks that they could not increase interest rates. Now, when Reserve Bank of India (RBI) increases the interest rates, the Finance Minister is supportive of the measure. Yes, dear folks, elections are around the corner. The perception is that an over-heated economy has led to high inflation and less votes. So the votes need to be won. Therefore, the thought process amongst the politicians is, bring inflation down and get more votes. So they welcome the higher interest rates.
Which suits the RBI fine. Like a good policeman the RBI has been warning banks to go slow on the way they give loans. And what did the banks do? Did they heed this "moral suasion"? No siree, they were too busy trying to impress the FII stock buyers with impressive growth numbers. So they hired or contracted a zillion call-centre folks to call us on our mobiles and give us loans to buy cars for which we have no roads to drive on, lend me money to buy my fourth house, and even take a vacation without paying for it. Risk assessment probably took a back-seat to those great credit-growth numbers that look great on power points.
So, after many failed efforts at "moral suasion" the RBI stepped in and like the mother-in-law reminded the wide-eyed honeymooners, that there is one boss, and only one. And to double the impact of its power, the RBI has struck on weekends. While the bank chiefs were totaling up their new loans and number of customers they have added in the past week, came the message: RBI raises rates. The rave-party celebrations are over. The moral forces have stepped in.
For now, the politicians and the RBI have the same objective: control demand and reign in prices. That is the lethal combination of the mother-in-law and the father-in-law controlling the new daughter-in-law. And, sadly, she cannot even move out to her own home - mortgage rates just got a lot more expensive.