MPC Meet: October 2018

Friday, October 5th, 2018

A few notes from the MPC statement and press conference today.


But first, a quick recap of the previous August policy and guidance:

In the August meeting, the MPC was of the view that domestic growth momentum was strong and that the output gap was closing. However rising trade protectionism, geo-political tensions and elevated oil prices posed risks to near term and long-term global growth prospects. Additionally, the MPC was of the view that uncertainty around inflation needed to be monitored even after accounting for MSP hikes and elevated crude prices. Keeping these factors in mind, the MPC increased the repo rate by 25 basis points to 6.5 per cent and kept their stance as neutral.


What has happened since the last policy decision:

The last inflation print came in at 3.69 per cent which is below the target inflation of 4 per cent and lower than the MPC’s own target of 4.8 per cent. However between the policies, oil has moved from roughly 70 dollars per barrel to over 85 dollars a barrel. The rupee has also depreciated substantially to over 73 rupees to the dollar. both of these factors could create substantial upside risks to the inflation outlook going forward. In addition, bond yields have moved up sharply and liquidity in the credit markets have tightened with issuances drying up.



Notes from the latest policy statement and press conference:

The policy statement kept the repo rate unchanged but changed its stance to one of calibrated tightening. The RBI governor mentioned that the outlook was overcast with downside risks to global growth and trade. This is due to various factors including country specific emerging market events that have a spill over effect on portfolio flows, global tapering of quantitative easing as well as a normalisation of the monetary policy stance and continuing tariff wars affecting global trade.

Domestically, there is a sequential acceleration of GDP growth, with manufacturing and agriculture in particular doing well. However, the services sector performance has been mixed. Consequently, the GDP print of Q1:2018-19 was significantly higher than that projected in the August resolution.

Inflation outcomes were actually below projections. This was driven by expectations that food inflation would to remain benign. The crude oil rally however would pose upside risks.

In terms of fund flows, FPIs have been net sellers in both equity and debt, whilst net FDI has been positive. Additionally, Rupee depreciation has been moderate compared to its emerging market peers. The RBI governor mentioned that real effective returns on currency has been about 5 per cent.

The MPC noted that global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and tightening of global financial conditions posed substantial risks to the growth and inflation outlook. It is therefore imperative to further strengthen domestic macroeconomic fundamentals.

Urjit Patel mentioned that this could be done in the following way:

  1. maintaining inflation credibility via the monetary policy framework
  2. sticking to fiscal deficit targets at general government level
  3. allowing flexible exchange rate adjustment without undue volatility
  4. retaining adequate liquidity and capital buffers to maintain financial stability particularly in light of the fact that retail credit growth is growing faster than nominal GDP growth
  5. undertaking further structural reforms, and
  6. liberalising capital flows, including FDI

The RBI also had a short note on the current crisis in NBFCs. They mentioned that the RBI, SEBI and the government were monitoring the situation closely. They mentioned that the Asset liability mismatch from NBFC’s due to over-reliance on CP for lower marginal cost of funds. And that a better model would be to rely on equity funding to better match liabilities.

Finally, Urjit Patel mentioned that assumptions on exchange rate and slippage in fiscal deficit were already baked into inflation projections. The MPC has already raised rates twice this year and a change in stance means that rate cut is off the table. Now the two options would be either rate hike or neutral.

Jeff Bezos Interview

Thursday, October 4th, 2018

Interview of Jeff Bezos at the Economic Club of Washington



Some of my key takeaways:

  • Obsessive compulsive focus on the customer vs focus on competitors
  • Using heart, intuition and guts to making decisions. Analytics and data are useful as well, but the most important decisions will be made with the former
  • He commented on his acquisition of the Washington Post that the internet destroys most things for newspapers, but gives one gift: free global distribution. This enables a shift in the revenue model. They can now charge a little bit from a lot of customers globally.
  • There are many different types of smart. Its not just about academics
  • At the peak of the dot com boom, Amazon share price was $113 which swiftly went to $6. Jeff Bezos talks about how the stock is not the company and the company is not the stock. Even though the price collapsed, all the business metrics were going in the right direction.
  • On Amazon Prime: They were looking for a loyalty program. The financials looks terrible because shipping is incredibly expensive. Here is where heart and intuition took a role.
  • If a quarter is good, it is baked in three years ago. Today he is focused on success 3 years from today
  • Physical stores: No point offering a me-too product. Amazon Go and Amazon Books are a very differentiated offering
  • There are two types of founders: Missionaries and Mercenaries. Mercenaries are trying to flip their company while missionaries are more passionate about serving their customers better
  • Whole foods: They are a missionary company and Amazon can augment their mission and add value in different ways
  • In AWS, they got extremely lucky in that they had no competition for seven years. You are lucky in most businesses when you get a two year head start
  • On regulation: It is natural for big institutions to be cross examined. Bezos is of the view that no matter the regulation, customers are still going to want low prices, fast delivery times and big selection and Amazon will continue to deliver that.

Monthly Market Summary: September 2018

Wednesday, October 3rd, 2018

We look at returns of various asset classes such as equity, debt, gold, crude oil and the Indian rupee in our latest monthly market summary.


We use data for these charts from


Global Equities

Monthly Market Summary

October was a brutal month for Indian equities. As can be seen from the chart above, the Sensex on a broader level fell over six per cent in the month. The correction in mid and small caps was even larger. However, on a longer term basis, the returns are still in double digits. In fact our recent post on the long term returns on Indian equities corroborates this view. Most other indices had a rather uneventful month, with returns being roughly flat across the board. The US markets continue to deliver the strongest returns over both a medium and a long term basis. The broader emerging market indices have given poor returns over the last one year. This is partly due to escalating trade tensions and a strong depreciation against the dollar.


Fixed Income

Indian bond yields spiked sharply in September, going from 7.95 to 8.20 before closing at just under 8 per cent. The concerns over defaults on the systemically important IL&FS created an overhang on the market. This was amplified by concerns over oil prices spiking, the FED raising interest rates, the currency depreciating sharply and a liquidity deficit at the end of the month due to tax outflows etc.. The market is likely to be driven over the next few weeks by decisions and guidance given at the next Monetary Policy Committee meeting.



Gold moved down in the month and closed below the 1200 dollars per ounce. If the commodity stays below this level or moves strongly away from the 1200-1400 range, it would give a better indication of the long term trend.



Oil continued its rally in September. From a value of 71 in the beginning of August to just over 83 dollars per barrel at the end of September. Because of our large dependance on oil imports, it is important to keep an eye on this figure as it can have a destabilising effect on our macros.


Indian Rupee

The Rupee continued its sharp depreciation against most major currencies in September. In fact, even thought the currency was one of the worst performers globally against the dollar in the month, the rupee depreciated most sharply against the pound, with the GBPINR rate crossing 95 in the month from 91 in August.



Linkfest – 93

Monday, October 1st, 2018

Interesting commentary from across the web in the last few weeks:


RBI policy is less relevant now, guidance is key – Tamal Bandyopadhyay

CP issuances slide amidst liquidity crunch – Bloomberg Quint

India’s health-insurance scheme – The Economist

Summary of the Aadhaar verdict – Bloomberg Quint

Lessons from the 12 IBC cases – Bloomberg Quint

The FED is taking off the training wheels – Bloomberg Quint

A tapering of the boom in US share buybacks? – FT Alphaville

The rise of Silicon Seed investing – Medium

Amazon may not be that unique in retail history – Learning By Shipping

Why do debt crisis come in cycles – Ray Dalio

Quantifying Advisor’s Alpha – The Big Picture

China’s Economic Power – Knowledge@Wharton



Debt Refinance: Differential impact on NBFC’s – YouTube

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What is ESG investing?

Friday, September 28th, 2018

The last few years has seen a global shift toward sustainable investing. It started with investors avoiding putting money toward companies that harm the environment, but over time this has evolved into investments that take into account climate change, social issues and responsible corporate citizenship. Environmental, Social and Governance (ESG) investing is thus a new way of approaching investments that takes into account not just financial parameters, but also social ones.

According to a 2016 report by the Global Sustainability Alliance, over 22 Trillion dollars, or 26 per cent of all assets managed in the world now capture an ESG strategy. The report actually even standardises the definition of ESG investing into different categories. From the report, the categories are as follows:

  1. Negative/exclusionary screening: the exclusion from a fund or portfolio of certain sectors, companies or practices based on specific ESG criteria;
  2. Positive/best-in-class screening: investment in sectors, companies or projects selected for positive ESG performance relative to industry peers;
  3. Norms-based screening: screening of investments against minimum standards of business practice based on international norms;
  4. ESG integration: the systematic and explicit inclusion by investment managers of environmental, social and governance factors into financial analysis;
  5. Sustainability themed investing: investment in themes or assets specifically related to sustainability (for example clean energy, green technology or sustainable agriculture);
  6. Impact/community investing: targeted investments, typically made in private markets, aimed at solving social or environmental problems, and including community investing, where capital is specifically directed to traditionally underserved individuals or communities, as well as financing that is provided to businesses with a clear social or environmental purpose; and
  7. Corporate engagement and shareholder action: the use of shareholder power to influence corporate behaviour, including through direct corporate engagement (i.e., communicating with senior management and/or boards of companies), filing or co-filing shareholder proposals, and proxy voting that is guided by comprehensive ESG guidelines.

HSBC has done a global study with East and Parnters that analyses the state of sustainable financing and ESG Investing and they found that three of the seven above mentioned styles are used by investors globally; ESG Integration, negative screening and sustainably themed investing.

In fact, the HSBC report had a key insight that ESG decisions are increasingly financially driven, proving that the market is sustainable. Investors cite financial returns as being one of the key factors in their decisions about ESG as shown in the chart below:


There is a view in the minds of investors that choosing to invest in an ESG involves a trade-off in returns. The evidence points to the contrary, and returns from ESG investing are just as good as regular investing. Jeremy Grantham of GMO, captures this in his latest report:

So if you can invest in a way that makes you a more responsible corporate citizen, without any trade off in returns, why wouldn’t you?

The recent correction put in perspective

Thursday, September 27th, 2018

The last few weeks have seen a sharp correction in the equity market. Overall valuations are still high, primarily led by the overexposure of indices to financials. We will update our quarterly valuations charts next month, but for this post, we would like to focus on the momentum in the current equity bull market.

Looking at the longer term charts of the Nifty, puts the recent correction in perspective from a technical point of view.



If we look at the one year chart, we will see that the Nifty is actually up about 12 per cent. In fact, the recent correction has only just now brought us below the highs reached in January of this year. RSI levels that indicate the market is oversold and there seems to be strong support around 11,000. The long term upward trend also appears to be intact.



If we look at the 3 year chart, the recent correction looks like a normal occurrence in an otherwise strongly upward moving market.



The same is true with the five year chart.



When we look at the 10 year returns, the correction barely registers, which speaks to the long term compounding power of equities and the strong structural bull market we are currently in.

This final chart is a bit misleading though because it starts near the low point of the 2008 correction and so point to point returns look extremely good. However it is useful to demonstrate the scale of the recent correction compared with long term returns.

RBI Annual Report 2017-2018

Tuesday, September 25th, 2018

The RBI Annual Report generally has a lot of interesting charts and data that give good insights into the state of the economy. In this first of a series of posts, we cover five charts that we found quite informative from the latest report.


1. Stalled Projects coming down

RBI Annual Report

The number and value of stalled projects, especially from the government side, has been coming down. Though new investments have not yet picked up meaningfully, we could start to see a return of pricing power for manufacturers and a revival of the capex cycle.


2. e-NAM accelerating

The e-NAM trading platform has grown exponentially since its launch in 2016. From the report:

The scheme has immense potential to transform the agricultural marketing structure through smoother inter-state movements, more efficient price discovery and removal of intermediaries. The adoption process, however, has been slow and gradual with a majority of traders/farmers still continuing with the manual auction method for selling their products. 


3. Food Inflation down structurally

From the report:

For 2017-18 as a whole, food and beverages (weight: 45.9 per cent in CPI) inflation moderated sharply, with its contribution to overall inflation dropping to 29 per cent from 46 per cent a year ago amidst significant intra- year variability. The softening in food prices, which began as early as in the second half of 2016-17 under the weight of a bumper crop and distress sales post-demonetisation, spilled into the first quarter of 2017-18, diving into deflation during May-June 2017 (Chart II.2.3). Two factors stand out in this plunge in food inflation: first, the unusually muted and delayed seasonal uptick in prices of vegetables ahead of the monsoon; second, a deepening of the deflation in prices of pulses since March 2017.

The last few years have seen good monsoons, low global food prices and excess supply which have led to a deflation in food prices.


4. Domestic vs. International Oil prices

Diesel deregulation coincided with the global fall in oil prices. The government smartly increased taxes to shore up public finances. This is seen very clearly in the expansion of the spread between the international crude basket and prices at the pump. With oil increasing sharply in the last few months, it will be interesting to see if the government will maintain the current tax rates or if the spread will normalise.


5. Private vs. Public Bank Credit growth

Private sector Banks are clearly dominating their public sector peers in incremental business. From the report:

Credit growth was largely driven by private sector banks, which were resilient in the face of these tectonic shifts, with their credit portfolio growing at 18.7 per cent during the year as compared to 5.3 per cent by public sector banks (PSBs) and 3.8 per cent by foreign banks. Among PSBs, those under prompt corrective action (PCA) turned out to be laggards, though signs of revival were evident in this category as well during 2018-19 so far (Chart II.3.8). During Q1:2018-19, non-food credit has maintained its momentum, with credit accelerating to 12.9 per cent as on June 22, 2018 as compared to a meagre 6.3 per cent a year ago.

Linkfest – 92

Monday, September 24th, 2018

Interesting commentary from across the web in the last few weeks:


The new breed of FMCG startups – Bloomberg Quint

The misleading narratives of our time – Urbanomics

Death of passive management? – Institutional Investor

Spot electricity spikes turning structural? – Livemint

A fix to the commission problem – ValueResearch

The US Tax reform gave a massive boost to US financial assets – Macro Tourist

The world is full of surprises – Morgan Housel

Asia is not immune to EM woes – The Economist

Analyst Buy/Sell Ratings are the worst – Innovate Wealth

Amazon’s Anti-trust paradox – Yale Law Journal

The recent correction put in perspective – The Calm Investor

The rise of private labels has transformed CPG companies – CBInsights


Adrian Mowat: Free trade increasing across the globe – YouTube

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Can NRI deposits be the saviour of the currency?

Thursday, September 20th, 2018

Interesting and pertinent observation by Jehangir Aziz of JP Morgan in an interview with Bloomberg Quint



Currently the narrative around the rupee is that if things “get really bad” then the RBI can step in, issue NRI bonds and that would keep the currency in check. Jehangir Aziz observes that if you look at what actually happened in 2013-2014, things were actually a lot more challenging.

To paraphrase: It started with a 300 bps rate hike, followed by a large fiscal tightening in a pre-election year and only then did the government go for the NRI deposits. And they did not come cheap; a massive subsidy was provided to Indian commercial banks to ensure it was lucrative enough to get the deposits.

If we were to try NRI deposits again this time around, things may be more costly and difficult than market participants believe.

Lower Mutual Fund costs

Wednesday, September 19th, 2018

In its board meeting on Monday cleared a number of proposals with regards to mutual funds that bode well for the long term health of the sector.

Firstly, SEBI has created new caps on the total expense ratio (TER) for most funds. However, it allowed an extra 30 basis points for selling in B-30 (beyond top 30) cities. The revised structure is as follows:

According to CLSA, the lowering of TER could lead to a 15-25 basis point reduction in fees. This will level the playing field between AMC’s and force the benefits of economies of scale to accrue to investors. Earlier we had a very odd situation where the largest AMC’s had the highest expense ratios, which is the reverse of what you would expect!

Secondly, Sebi said all mutual fund commissions and expenses must be paid from the scheme itself. This will go a long way to curb “”Marketing expenses” that fund-houses use to incentivise distributors. We could see a lot less “international distributor meets” arranged by asset management companies.

Finally, the regulator has said that the industry must adopt a full trail model of commission in all schemes without paying any upfront commission. This will reduce churn for investors and also result in the exit of distributors who churn portfolio constantly to earn their fees. The trail model aligns incentives correctly and would be very healthy for long term returns.

What are the possible negative impacts of this? AMC’s have already talked about how the cut in expense ratios would be majorly passed on to distributors. This would particularly hurt the smaller IFAs and could lead to some exiting the business. With the advent of an all-trail model, we may see banks and other intermediaries push more costly products such as AIF’s, PMS and ULIPs instead of mutual funds. Such products are far less transparent, command higher fees and have a mixed track record on returns. Unfortunately, this would not stop a lot of distributors, who would be motivated by the commission they would earn. Similarly, for an all-trail model, investments for smaller investors get less lucrative from the distributor point of view and therefore we can see less interest in mutual fund penetration at smaller ticket sizes.

Overall though, lower charges will boost returns for the end investor and the switch to all trail model will ensure that distributors’ incentives are more in line with the clients’ long term wealth creation.