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Moneycontrol Pro Weekender | The message from the RBI surveys

Economy is healing from the brutal second wave, but it’s a long way to go

August 07, 2021 / 10:00 AM IST

Dear Reader,

The Reserve Bank of India’s latest surveys, carried out in July, provide a snapshot of the economy and of consumer and business sentiment.

RBI’s survey of households’ inflation expectations show that median inflation expectations for the three months and one year ahead periods hardened by 50 basis points and 60 basis points, respectively, in the latest survey round. That did not deter the Monetary Policy Committee from continuing with its accommodative policy stance, albeit with one dissenting voice. It had little choice, given its assessment that “the nascent and hesitant recovery needs to be nurtured through fiscal, monetary and sectoral policy levers”. It did raise its forecast for inflation though and also tried to normalise liquidity by increasing the amount absorbed through the 14-day variable rate reverse repo (VRRR) auction. Its rationale for ignoring high inflation incidentally has impeccable credentials — It echoes the US Fed’s stance that inflation pressures are transitory.

The consumer confidence survey showed that consumer sentiment about the one year ahead scenario improved a bit, but it’s still very weak. Only 21.5 per cent of those surveyed said they would increase discretionary spending in the next one year; less than half believed their incomes would increase; and while 42 per cent said they expected their employment prospects to get better in one year, 41 per cent said it would get worse. Remember that these expectations are against extraordinarily low current assessments of the situation with respect to income and jobs, so a bounce in sentiment is entirely understandable.

The industrial outlook survey showed that business sentiments were very upbeat for the second quarter of FY22, although the assessment of Q1 was that it was a washout. Note, though, that in spite of improved sentiment, only a bit more than half of those surveyed said their capacity utilisation would increase in the second quarter.


The survey of bank lending indicated that most bankers were optimistic, with 64.3 per cent expecting a moderate increase in Q1 of 2021-22. Well, total non-food credit growth by scheduled commercial banks was 6.5 per cent year-on-year as of mid-July 2021, hardly a “moderate increase”, given that we were in the midst of a lockdown in the year ago period. And 71.4 per cent of bankers had earlier predicted moderate increase in bank lending in the January-March 2021 quarter, so take their opinion with spades of salt.

The RBI’s Services and Infrastructure surveys showed that services firms expect a gradual improvement, but they also said selling prices will remain elevated through the end of the fiscal year. It’s more or less the same for the infrastructure survey, although sentiments have been dented there from the second wave of the pandemic.

Our economic recovery tracker echoed the caution, as did the composite PMI for July, but there were also many signs of a return of buoyancy. The rains have revived and with them the hopes of a good kharif harvest. July auto sales show a strong rebound. There has been a decline in global food prices. Cement companies are seeing rising demand. The government’s focus on infrastructure, as well as several other positive factors, have sparked hopes of a long-awaited multi-year capex boom.

One obvious play on the recovery is SBI, whose first quarter results have been excellent. Among other recovery plays are Titan, Adani Ports, GAIL, Godrej Consumer Products, Emami and Aditya Birla Fashion and Retail. Escorts will ride the rural recovery. Sun Pharma’s story may get a boost not from India, but from the recovery in the US. And in these troubled times, a stock that provides consistency and predictability is NTPC.

Not everything depends on the macro environment —There are many other reasons that affect a stock. An impending merger, for example, is taking a toll on the Shriram Transport stock. Maruti’s retail market share has been shaky. An acquisition could be a trigger for PI Industries. Balaji Amines is an import substitution play. Airtel’s sum-of-the parts calculation signals upside potential. Aditya Puri’s induction as chairman adds heft to Solara Pharma. And Barbecue Nation’s valuations are at a steep discount to peers.

In the finance sector, uncertainties on its loan portfolio will weigh on the Bandhan Bank scrip. RBL Bank’s attempt to have a more secured book may take some time. HDFC and LIC Housing Finance tell two contrasting stories of the same sector. Low valuations could support the downside for Karur Vysya Bank.

Among FMCG companies, we looked at the prospects for Tata Consumer, Britannia and Marico this week, while we pondered the impact of inflation on the Indian arms of multinational FMCG companies. We smelled opportunity in the current weakness in Associated Alcohols.

But is the party in the market ignoring the risks? After all, these are extraordinary times. Our herd immunity tracker reminds us that unless the pace of vaccination increases, a third wave appears very likely in India. The Delta variant, after playing havoc here, has spread throughout the world and has led to an outbreak in China, the most serious one since Wuhan.

A series of extreme weather events across the globe raises the fear that climate change may already be upon us.

There are other warning signs. The IPO market is red-hot and our analyst Sachin Pal warned that it would “be prudent for potential investors to distance oneself from the herd mentality and take objective decisions to avoid capital losses in the ongoing market euphoria”. Not all the new age IPOs lined up have much of a moat, although Nykaa is an exception.

Asset inflation is seen not just in the capital markets, but also in the broadest global house price boom in two decades. The flood of money into private equity has led to new unicorns popping up every other day and we wondered when the bubble would burst. The onward march of technology is likely to see quants upending the private equity and corporate debt markets next.

And if that’s not enough, our Eastern Window adds geopolitical risk to the mix, with China flirting with the Taliban in Afghanistan.

The latest US jobs report is just out and it shows solid job and wage growth. In India, our government has done even better, by showing lower unemployment in the midst of a raging pandemic.


Manas Chakravarty

Manas Chakravarty

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