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Last Updated : Dec 07, 2019 12:16 PM IST | Source:

Moneycontrol Pro Weekender: The curious incident of the MPC in the slowdown

The parallel between the little snippet from the Sherlock Holmes story and the Monetary Policy Committee doing nothing at its meeting last Thursday is rather neat

Moneycontrol Pro
Moneycontrol Pro

Dear Reader,

From Arthur Conan Doyle’s ‘The Adventure of Silver Blaze’:

Gregory (Scotland Yard detective): Is there any other point to which you would wish to draw my attention?
Holmes: To the curious incident of the dog in the night-time.
Gregory: The dog did nothing in the night-time.

Holmes: That was the curious incident.


The parallel between the little snippet from the Sherlock Holmes story and the Monetary Policy Committee (MPC) doing nothing at its December 5 meeting is rather neat.

Everybody, including yours truly, expected a rate cut, given the dismal GDP growth in the September quarter. We had argued a rate cut would not be of much use, but had little faith in the MPC’s intestinal fortitude for straying from the beaten track. Mea culpa.

Why did the RBI hold its fire? It was even more astonishing it did so in spite of slashing its GDP estimate for the current fiscal year to 5 percent, the lowest growth since the Lehman crisis.

We examined a host of reasons here, but our fond belief is the central bank has finally seen the light. After all, the definition of insanity is doing the same thing over and over again and expecting different results.

Predictably, bond yields spiked up and rate-sensitive stocks sold off. At the press conference, the RBI governor went to great lengths to give the impression that the decision not to cut is just a pause that refreshes.

But analysts fret that food inflation is unlikely to come down soon, global food prices are rising, while a fiscal stimulus in next year’s budget may lead to a prolonged hiatus by the MPC.

What people really want to know is: how near are we to the end of the rate cycle? Well, the RBI feels growth is going to bounce back to between 5.9 and 6.3 percent in the first half of FY2021. Why then the need for more rate cuts?

People are catching on that rate cuts may not work, which is why the clamour for a TARP (Troubled Asset Relief Programme) - taking stressed assets off NBFC books on the lines of what was done for banks in the US after the financial crisis, or some form of Quantitative Easing is growing.

We believe that instead of brushing bad loans under the carpet, the first step towards restoring trust in the financial system is for the RBI to publish the results of an asset quality review. Only then, after considering the magnitude of the problem, should we consider setting up a bad bank, at the same time making sure that delinquent promoters pay for their mistakes, in order to minimise moral hazard. That, of course, is easier said than done.

The markets show few signs that the Indian economy is anywhere near a Lehman moment. They continue to take setbacks in their stride and hover near their all-time highs, despite a bout of jitters on December 6.

Perhaps they are taking heart from the November Purchasing Managers Index that a bottom has been reached, although their faith in a quick recovery does call for a willing suspension of disbelief. Or they may be reading a Bloomberg report that says liquidity will remain strong next year, as the three largest central banks continue to expand their balance sheets.

Be that as it may, rallying markets have led to most initial public offerings (IPOs) this year doing fabulously. During the week, the CSB listing and the response to the Ujjivan IPO were mouth-watering, both stocks incidentally recommended by us.

Our team of independent analysts continue to find promising new themes, picking out microfinance stocks this week. And how do you approach a stock that has already gone up considerably after a stellar IPO? Read here to find out.

Next week will see the effect of the OPEC decision on oil prices. The Federal Open Market Committee will meet, but nobody expects any change in the Fed Funds rate. We will also see policy decisions from the European Central Bank and the UK elections. The industrial production numbers for October and the Consumer Price Inflation data for November are also on the cards. These additional facts will hopefully make for more informed investment decisions.

For, to return to Sherlock Holmes: ‘It is a capital mistake to theorise in advance of the facts. Insensibly one begins to twist facts to suit theories instead of theories to suit facts.’

Here’s hoping your theories on stocks and markets fit the facts in the week ahead.


Manas Chakravarty

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First Published on Dec 7, 2019 12:16 pm
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