Moneycontrol Pro Weekender | RBI shows how to be accommodative with focus on not being so

The RBI’s Consumer Confidence Survey for March 2022, however, shows its Current Situations index was the highest since March 2020, or when the pandemic had just started. The Future Expectations Index, which measures one-year-ahead expectations, was the highest since January 2021. For the first time since January 2021, more than half those surveyed said they expect their incomes and job prospects to improve in the next one year. One caveat is in order, though -- the survey was done between March 2 and March 11, before the fuel price hikes took place. And it’s worth noting that although consumer confidence has improved, it’s still well below what it was for most of 2019.

While consumer confidence has increased, so have inflationary expectations. The RBI’s Household Inflation Expectations Survey “for both three months and one year ahead rose by 10 basis points each to 10.7 per cent and 10.8 per cent, respectively, as compared to January 2022 round”. Inflation expectations were still below their November 2021 levels, but this survey too was carried out between March 2 and March 11, and they are likely to rise now that fuel prices have gone up so much. We had pointed out that managing inflation expectations is likely to be a headache for the central bank.

That the current macro uncertainties have had an impact on consumer sentiment is seen from Titan’s quarterly results and from FMCG companies such as Godrej Consumer Products and Marico. Parts of the auto industry are seeing early signs of a pick-up in demand, although we were sceptical about UVs retaining their market share gains. Tyre makers such as CEAT are seeing strong demand. Hope springs eternal on rural demand, with firm crop prices benefiting agri-input providers. And with commodity bulls charging and gas prices rising sharply, this could be the time to pick up some gas stocks. Higher metals prices could whet investor appetite for companies such as Hindalco and Jindal Steel & Power. Indeed, power tariffs in the spot exchanges reached such stratospheric levels that the authorities were forced to cap them.

The talk of the week was about the HDFC Led-HDFC Bank mega merger, which we parsed, sliced, diced, analysed and wrote about its impact on markets, on the financial ecosystem and in the larger context of M&As.

One of the consequences of the “tectonic shifts” in the global economy that RBI Governor Shaktikanta Das mentioned is the weaponisation of finance and a possible backlash against the US dollar. The war in Ukraine will extract its toll on the Indian economy and the current account deficit is likely to widen considerably. A rise in defence spending is also on the cards. How could investors benefit from these trends? The push towards defence indigenisation should be good for stocks such as BEL and HAL.

We also discussed the stampede to launch brands in the metaverse, the lessons for India from the economic mess in Sri Lanka, what the Bandhan Bank-IDFC mutual fund deal means for the asset management sector, how the benefits of the India-Australia trade deal go beyond commerce, the impact of the CCI probe into food delivery companies and the nightmarish scenario that will unfold after the proposed GST rejig, if the pernicious anti-profiteering provision is retained.

This week, the stocks covered included KIMS, Dr Reddy’s, Mphasis, AU Small Finance Bank, Aavas Financiers and a mid-tier IT company that has shown resilience as our tactical pick.

The Eastern Window saw Pakistan as the latest theatre of the tussle between the US and China. Start-up Street featured the wasted opportunities in healthcare. Crypto Conversations asked whether SocialFi is the Next Big Thing; Decoding PLI assessed medical devices and their prospects; both GuruSpeak and Algo Rhythm were about algo trading strategies; and in our Personal Finance section, we explained Loans Against Securities (LAS).

In view of all these uncertainties, what should investors’ strategy be? We pointed out that physical assets such as gold and silver have historically outperformed equities during periods of uncertainty and elevated inflation. We underlined why investors need to be cautious. And this story by Mohamed El-Erian says there is a considerable mix of hope and faith in the resilience of the stock markets to the huge uncertainties. El-Erian says, “Highly exposed investors (and there are many according to the latest asset allocation numbers) would be wise to make the most of the strength of equities and take some chips off the table.” For a contrary opinion in the Indian markets, see here.

As for monetary policy, let’s leave the final word to Agustin Carstens, general manager of the Bank for International Settlements, aka the bankers’ bank. In a recent speech titled ‘The Return of Inflation’, he said, “The key to higher sustainable growth cannot be expansionary monetary or fiscal policy. We must strengthen the productive capacity of the economy. Indeed, this is well overdue… Central banks have done more than their part over the past decade. Now is the time for other policies to take the baton.”
Cheers,
Manas Chakravarty