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Markets will remain closed on 19th & 20th October 2017.
We wish all our readers a very Happy Diwali!

Sensex Trades Marginally Higher; Realty Stocks Witness Buying
Wed, 5 Apr 11:30 am

After opening the day on a flat note, share markets in India witnessed choppy trades and are presently trading marginally higher. Sectoral indices are trading on a positive note with stocks in the realty sector and consumer durables sector witnessing maximum buying interest. IT stocks are trading in the red.

The BSE Sensex is trading up 31 points (up 0.1%) and the NSE Nifty is trading up 15 points (up 0.2%). The BSE Mid Cap index is trading up by 0.4%, while the BSE Small Cap index is trading up by 1%. The rupee is trading at 65.03 to the US$.

Indian share markets are trading on a cautious note ahead of the Reserve Bank of India (RBI) monetary policy which is scheduled for tomorrow. The consensus among market participants is that the RBI will keep its interest rate unchanged.

As per the news, all 60 economists polled by Reuters expect the RBI's six-member monetary policy committee (MPC) to leave the repo rate unchanged at 6.25%.

The popular belief amongst market participants is that, there is an inverse relation between interest rates and market movements. The logic behind this belief is that as interest rates fall, investments and consumption gets a boost. Corporate profits increase which in turn drives the markets.

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While in theory, this sounds right, one look at the below graph shows, this isn't necessarily so. The global crisis in 2008 resulted in a stock market meltdown. During this entire period, the RBI began to cut rates from late 2008 through entire 2009 i.e. from 9.0% to 4.75%. The markets however continued to fall and were almost flat over the period.

Further, the rates since 2015 have been declining, while the markets have gone nowhere. Why so? While the rate cuts are beneficial for us on the whole, there can be situations where the market is anticipating a sluggish growth in the future due to which there are rate cuts. The markets thus anticipate a slowdown and falls.

Do Markets Rise When Rates Fall?

What one shall note is that there are many domestic as well as global factors that the RBI will consider to reach a decision. And it's hard to predict what the RBI will do and how the markets will react to the decision.

But as usual, we recommend that you, the intelligent investor, avert your eyes from this drama and keep them focused on the value and comfort of the safest stocks. Because, as you know, neither rate hikes, nor cuts, impact our long-term view on stocks.

After all, rate cut alone will not speed up the economic slowdown caused by notebandi-led cash shortage, and consumption reduction. To set the paralyzed demand into motion, way more action needs to be taken.

In other news update, the Yogi Adityanath-led BJP government in Uttar Pradesh yesterday announced writing off crop loans of up to Rs 1 lakh for about 21.5 million small and marginal farmers.

The total waiver on the back of this development stands at Rs 363 billion. This is one of the highest waiver promised by a state.

Of the above amount, Rs 56 billion represents non-performing assets of 7,00,000 farmers and will be waived off immediately.

The development will enable farmers to seek new loans from the bank. It will also clean up the account books of the banks involved for the above loans.

That said, the development will also mean loss of revenue for the banks. Banks will only be paid back the principal amount by the state, and thus will forego the interest income. Also, as the waiver will be returned to banks after a few months, the banks will sacrifice the interest revenue they would have earned during this period.

Apart from the monetary impact, there is also the question of moral hazard in loan waivers.

Our big picture expert Vivek Kaul explains it succinctly in his Diary:

  • The economist Alan Blinder in his book After the Music Stopped writes that the "central idea behind moral hazard is that people who are well insured against some risk are less likely to take pains (and incur costs) to avoid it."

    This basically means that once the farmer sees a loan being waived off today, he will wait for elections in the future for the newer loans he takes on to be waived off as well. Essentially, he will see little incentive in repaying loans that he takes on in the future.

In our view, India's agriculture sector needs the government's support but loan waivers cannot be the solution as they are only focused on the short-term. Moreover, expenditure on loan waivers will leave the government with less fiscal space for productive infrastructure spending.

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Oct 19, 2017 (Close)

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