RM talking points

Why should there be an Indian GDP growth revival in the second half of the year?
1. Rate cuts
2. Market sentiment on credit improving
3. Liquidity taps NHB 10,000 Cr liquidity window for HFCs to lend to individual borrowers
a. Overall liquidity - Cash in the system has come back after the election, RBI is
purchasing USD to ensure the Rupee does not appreciate thereby adding to
liquidity. Rate transmission, while rates are being cut system rates are not going
down. 75 bps cut transmission is 40 bps. SBI reduced MCLRs, as RBI pushes
through transmission measures.
4. Government spending has gone to a freeze, this will come back now that the GOI is in
place, and projects where sanctions and approvals were in place and funding was
awaited will start in the coming quarters.
5. Line of sight seen in headline cases, DHFL, Essel for example, will bring down the credit
spreads AAA 112 – 125 Bps over G Sec
6. RBI policy statements on NBFCs in policy meetings.
7. Positive turn in Monsoon data is supportive with the gap coming down to 7%.

Global markets: Current indicators do not provide too much joy both globally and locally.
Polarized global environment where US is doing well whereas The Eurozone (led by the
largest economy there Germany), Japan and China there are going through a slowdown.
German bonds as an example along with most parts of the developed world are in a negative
bond yield scenario with some negative beyond 30 years.

This puts pressure on the USD leading to USD strength. US follow an export led growth
policy and prefer a weaker dollar. A stronger dollar is bad for their economic growth.
Therefore with an objective to cut to weaken the USD the Fed may be compelled to cut
rates. This means a competitive devaluation or Central Banks consciously weakening their
currencies for export competitiveness. Today China has opened the currency flank, pushing
the Yuan lower than 7 Yuan to the USD mark, an effect of the trade war. 7 is the
psychological and watershed mark.

In 2018 INR moved from 73.48 to 68 led by huge flows into domestic Fixed Income markets
because of positive real rates.

Explanation: Inflation at 3.18% and 10 year benchmark yields at 5.75(Real Interest rate 5.75
minus 3.18 = 2.57%) in a world where real rates are below zero. So the dollar came in and
demand pushed up the Rupee. REER overvalued by 24%. This round of currency movements
offers us a change to gain export competitiveness.

Why do we believe the second half will be better from a GDP growth perspective?
1. GDP formula = (Consumption (which is down) + Investments (which is down) +GOI Spend)+
(X-M which is net exports).

The net exports (X-M) part provides some hope or opportunity trigger for Rupee to auto
correct. The same was seen in 2013 when CAD went to 4.8% of GDP the INR went from 54 to
69. This triggered growth. We have to see beyond the currency war and trade war gloom.
India has to balance the situation as Indian Debt Markets have seen high inflows where
equity has seen outflows.

2. Growth environment – Data Indicators are not positive but when the movement is so sharp,
the Jul-Sep’19 quarter could be the “trough out”. This is based on past times when we have
troughed out and matches with RBI view that second half we should see a recovery. Years
target is 6-6.5 to 7%. FY19 Q4 number was 5.8%, similar expectation for Q1FY20, Q2FY20 will
be poor.

In the second half why are we confident of a growth revival, RBI will lead the way as 75 bps
of benchmark rates have been cut on Aug 7 another cut is likely. It will be backed by one
more cut as we are in a globally softening rate environment and positive real interest rates
offer room. So after two cuts rates should be at 5-5.25% from the current 5.5-5.75%.
Liquidity in the system is surplus by 1L-1.5L Cr from a similar negative number in Feb-
May’19.
a. Because cash in the system has come back after the election
b. RBI is purchasing USD to ensure the Rupee does not appreciate thereby adding to
liquidity
c. Rate transmission, while rates are being cut system rates are not going down. 75 bps
cut transmission is 40 bps. SBI reduced MCLRs, as RBI pushes through transmission
measures.
d. Market sentiment on credit is slowly improving, two ILFS entities green NCLT close
reclusion by 360 days, tangible resolution.
e. Liquidity taps NHB 10,000 Cr liquidity window for HFCs to lend to individual
borrowers
f. Government spending has gone to a freeze, this will come back now that the GOI is
in place, and projects where sanctions and approvals were in place and funding was
awaited will start in the coming quarters.
g. Line of sight seen in headline cases, DHFL, Essel for example, will bring down the
credit spreads AAA 112 – 125 Bps over G Sec
h. RBI policy statements on NBFCs in policy meetings.
i. Positive turn in Monsoon data is supportive with the gap coming down to 7%.

3. Valuations, Liquidity, Sentiment – these two will never come together in this environment.
In this case, Sentiment and Valuations will go by looking in the rear view mirror rather than
what is ahead.
4. Earnings growth numbers are not as bad as they were expected to be.
5. Nifty FY19 EPS 490 FY20 still at 620 discounting a 23% growth. Downwards earnings
momentum is still in play. 60% will come from corporate banks and related.
 6. Sentiment – FPI sentiment dampener could be looked at in form of a carve out – wait and
watch for this.

In an environment like this, the indicators coming in now look bad but therefore the market will be
in a rear view mirror mode, but we should watch for what lies ahead. We are not saying a 8% plus
growth or bumper number on economic growth, incremental data from here on will look far better.
Understandably markets have gone through a sharp cut back, whenever such sharp retrenchments
happen, the up move which follows will seem very unconvincing when data starts looking better.
We have taken a lot of pain, but investor liquidity remains strong, people are in cash. Either you take
a call to exit based on the premise that for the next 3-4 years India wont perform. Hence other asset
classes remain are where they are and global markets are going through their own concerns.