[01 Oct 22] Newsletter: RBI hikes rates, Crisis in UK, 5 Good Reads & More

🔆 Quick glance

• RBI rate hike: Deepak Shenoy shares a quick summary
• Market Overview: Sensex 30 PE trend, Macro markers & Market Movers
• What we are reading: 5 good reads on markets & money
• What’s on YouTube: Falling Nifty, Increasing rates & UK monetary crisis!

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What are these rate hikes for? 📈

Deepak Shenoy is closely tracking the monetary policy developments in India and across the world. Here’s a quick summary from him on the recent Monetary Policy Committee (MPC) meeting which announced a 0.5% rate hike yesterday.

RBI has hiked rates by 0.5%, taking the repo rate, at which banks can borrow from the RBI to 5.9%. The SDF rate, the de-facto rate now at which banks can park their surplus money with RBI, is at 5.65%.

This is effectively the operating rate now since banks have surplus cash and are not borrowing from the RBI. This is the lower end of what you should be able to get in liquid funds, money market funds, etc. before adjusting for the expense ratios.

Growth is looking good within India. Rainfall has been better than the long-term average, and the Kharif sowing is a little bit above the typical level, so overall food production isn’t expected to create problems. On the demand side, credit growth is above 16%, and we’re seeing urban consumption ahead of the festival season doing well.

Capital expenditure has increased substantially. Steel and cement production has also increased significantly. So, investment within India is going up. Some parts of non-gold imports, as well as merchandise exports, have also been going up, with imports more than exports reflecting a growing internal economy.

On inflation, RBI is looking at possibly a moderation in a few months. Inflation projections seem to show at the top end of the cycle–the most likely path from here is to fall under 6% in two quarters, and close to 5% by April to June of next year.

To sum up what RBI has said: growth is relatively adequate, but inflation is still relatively high, thus the rate hike. RBI is quite honest about India doing better than the West. They don’t seem to be too worried–the growth direction going up, the inflation direction going down, it appears we may be closer to the end of rate hike continuity, if not at the end of it.

It appears that the situation in India is better than in the west, speaking from a macro perspective. If liquidity does not dry up, Indian stock and bond markets should do better – as they have in the last year. But if liquidity turns against us, all bets are off. This is a progressive and very optimistic policy for Indian markets.

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What’s happening in the market? 🎯

What goes up, must come down–that’s just how gravity works, but we also often find the reverse just as true in the markets.

Power Grid Corporation of India, which featured in our last week’s newsletter for closing in red for five consecutive days, actually just had a reverse run, with closing up for consecutive days and being the top gainer this week. Among other gainers, pharma players Cipla and Dr. Reddy’s Laboratories made it to the list, and so did Bharti Airtel, despite other telecom players closing in red for the week.

On the other side of the equation, Adani Ports and automobile giants Hero MotoCorp, Maruti Suzuki, and Bajaj Auto were the top losers from the index.

USDINR went up 0.7% this week, while crude climbed 290 basis points to $89. On a yearly basis, the Nifty is down 1.4%, while the shiny bullion is up 8.43%.

On the valuations front, Price-to-Earnings (PE) ratio for the Sensex was at 21.8, and there’s a graph below for historical comparison, but do listen in to this week’s Friday show linked at the end of this newsletter, in which Deepak talks about why the widening gap between earnings yield and the 10-year yield is deceptive.

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What we are reading? 📝

• Joachim cites a study that makes an unintuitive claim (unintuitive to present market conditions): an increase in inflation expectation has an asymmetric relationship with an increase in the share of household participation in stock markets. Read: The one good thing about high inflation 
• Michael Mauboussin had an excellent interview with Frederik Gieschen recently about holding Amazon for two decades, building a team of elite super forecasters, and more. If you prefer to read it, here’s the transcript
• Regions such as Bangladesh, and Egypt have seen little venture funding, for perhaps good reason with several execution challenges trumping lower competitive intensity, reasonable population size, and sizable digital opportunity.
  • The Generalist covers how Sturgeon Capital has generated 73.4% IRR over the past two years, investing in such markets. Read: Sturgeon Capital: Venture at the Frontier 
• Academic theories would like you to believe that financial systems function, among other reasons, to allocate capital to its most efficient and productive uses. With the era of SPACs, NFTs, and meme stocks, it’s hard to believe that has been true, but now may be a cue for a changeover. Read: Three steps for navigating the tougher road ahead
• A dearth of corrective feedback loops makes it incredibly difficult to become a good investor. How can we differentiate short-term noise from reality? Read: Learning to Be a Good Investor is Hard

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What’s on Youtube? 🎙

This week Deepak and Krishna talk about how to reconcile between long-term bond yields and earning yields, the crisis brewing in the UK with this week’s gilt meltdown, the pound taking a pounding (pun absolutely intended), and the 40-year UK bonds cut in half over the last year.

Krishna talks about the footwear company Liberty Shoes, and how it has doubled in the last couple of months. Listen In!

(If you have questions you would like to ask us, do join in live on Fridays at 4.)

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