Indian Swansong

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Author: Nilotpal Addy

“Fragility is the quality of things that are vulnerable to volatility.” – Nassim Nicholas Taleb

Indian markets have been the king of swings in the past few weeks. Pick up any asset class that you may, and you will be enthralled at the volatility this market has provided to its investors. It was not long ago when the Bunds swung from 0.05% to 0.50%, which left many bond traders across the world gasping for breath. Wait till you look at the below data and determine where the Indian markets fared in this royal rumble:

India 10yr Benchmark (Old)old
Source: Bloomberg

India 10yr Benchmark (New)new
Source: Bloomberg

India 1yr OIS
Source: Bloomberg

India 5yr OIS
Source: Bloomberg

If you were wondering these were triggered by fears of Grexit and a possible surprise rate hike by the Fed in June, you would be caught on the wrong foot. If you notice the graphs carefully, it is evident that all of these market actions got triggered on 2nd June – the D-day when the Central Bank of India (RBI) under the helm of the able Dr. Raghuram Rajan announced the June Monetary Policy. The market was expecting a 25 bps rate cut on the back of easing inflation in the country. The fact that inflation was moving in line with the guidance set by the RBI under recommendation from the Urijit Patel Committee targeting 6% CPI inflation by January 2016 increased the market mojo. There were players who even expected a 50 bps rate cut with 25 bps being front loaded (just in case the RBI fell short in countering the Feds rate hike move later).

If you ask me, I believed that a rate cut was not in the offing. This was simply because Dr. Rajan has always been skeptic in his moves. More often than not he has disappointed the market punters by staying put (he put a rate cut on hold from September till December 2014 until he decided to give in with a surprise rate cut in January 2015, not so much of a surprise for a few considering he cut immediately after the CPI numbers continued to confirm a declining trend). If we were to look at the state of things when he was handed the mantle from Dr. Subbarao, you can’t really blame him for this approach. The Indian economy was in tatters, the world had started to give up on the Indian markets, and the currency was untamed (to name a few problems he had to deal with).

So much for all the expectations, Dr. Rajan delivered a 25 bps rate cut. But that is not what he just did. Being his usual self, he left the market with no clues for the next elusive rate cut. He had his doubts on the upcoming monsoon, and rightly so after predictions of another weak monsoon. He alarmingly left the market to fend for itself amidst multiple other geopolitical and economic concerns. Meanwhile at the other end of Asia, the Chinese equity markets had almost doubled since the start of the year. Foreign investors found the perfect excuse to take money out of the Indian markets. Rates traders started to shrivel, and the market started its swansong.  Bond/OIS started moving in a haywire fashion until inflation seemed to be taking a strong stand. CPI last month came in at 5.10% which was pretty much as per expectations. This was followed up by a decent trade deficit of $10.40 bn., which gave the markets a much needed booster to crawl up from the bottoms.

Last week Govt. of India along with the RBI decided to mark up the FII bond investment limit in India from USD to INR. The current bond investment cap is at $30 bn which has been set at somewhere around INR 50. Spot is currently trading at levels around 63.50 – 64.00. So this means a possible increased investment limit of $8-9 bn. This has provided a much needed fillip to the bond yields, which has now rallied from 7.88% to current levels of 7.70% – 7.75%. With Greece talks in its last leg and an expected Fed rate hike in September (25 bps hike expected), the upcoming weeks will determine the direction for the markets.

As I am writing this, there is some positive news trickling in for a renewed Greek settlement. I can already see some flutter happening in the markets. Bond and OIS markets have started to book some profits. Markets seem to be calming down now a bit as we brace for some movement in the commodities space. I am looking forward to the next set of data due early next month. Till then look out for this space, as I go fishing for some fresh cues in this appalling Mumbai rains!

© 2012-2015 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.


Switcheroo (Market Wrap- June 21st)

Coverage: Saudi Arabia, Turkey, UAE, Egypt, Nigeria and South Africa


Author: Kunal Damle

A mixed week comes to an end with most of the stock markets at multi-year highs but with mounting concerns coming in from multiple fronts, it doesn’t seem like it is going to get any easy.

With the FOMC out of the way, most emerging markets heaved a sigh of relief that the rate increase rhetoric is more subdued than one expected. We expect one rate rise before the end of this year, but more subdued increases going into 2016. With commodity prices having come off and inflation under control, the risk to USD will weigh on the Fed’s mind than anything else.

Most emerging markets (EM) saw the dovish stance of the Fed as a breather to rally on. Both the Nifty and Sensex in India rallied with even monsoon looking like being normal. In Turkey, as we postulated last week, we are bullish primarily because valuations are extremely attractive in our coverage universe; 12-month forward valuations show Price-to-Book at 1.33x and Price-to-Earnings at 10.59x. South Africa closed up 1.86% on the back of a strengthening Rand.


Source: Bloomberg

Closer to our region, last week marked the beginning of the Holy Month of Ramadan. Markets have historically tended to be very light on volumes and with Ramadan coming in during the summer months would put even more pressure on the markets. The Saudi Markets opened to foreign investment last week, which as we expected was a very tepid event. Look forward to Saudi markets seeing more profit taking with no triggers in place. We see markets being flat, low on volumes till mid – July.

The coming week look far murkier with Grexit now looking imminent. Emerging markets looking ripe for an downward correction while look to USD strength against most EM FX.

© 2012-2015 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.


EM Asia 2015: Winners and Losers


Author: Tanya Rawat

Published in Global Risk Insights

We are at cross roads of diverging monetary policies wherein the US gets ready to tighten policy rates whereas the Eurozone and Japan have adopted easing measures to invigorate economies at a risk of falling into a dis-inflationary cycle if not deflationary. Taking account of this paradigm shift, the lure of high carry which some of the high yielding Asian currencies offer shall no longer suffice, especially if US Treasury yields were to rise quickly as well. The differentiating factor then in choosing the right investment destination in EM Asia will be domestic stability, external fundamental factors viz. current account balances, FX reserves, percentage of short-term liabilities backed by these reserves, robustness of FX policy and the credibility of the Central banks.

The tables below show the 1-year (2013-14) performance of Asian EM currencies. Spot returns were trivial, while yield chasing was the norm given the rather benign carry environment. On such a playing field, the Indian Rupee was the prime victor (1M NDF Implied Yields).



Below I have complied some information (2014), which shall assist in the analysis.


With lower oil prices, Thailand, Indonesia, Taiwan and India standing to be relative gainers with Malaysia standing to lose as it is the only net exporter.


I also assess the sensitivity of headline CPI changes to changes in energy costs.


Even if the pass-through to consumer inflation is muted (as corporations will prefer to remain sluggish in lowering oil prices to maintain profitability), governments will eventually save on subsidies.


We use a rather simple scorecard methodology to choose probable winner and losers.

Korea is the only the country with a positive fiscal balance and as a function of it, the lowest gross public sector debt. Add to this the layer of currency sensitivity to rising US interest rates, in 2014, the Korean Won performed the best with high core balance (current account balance + net FDI, both as a % of GDP), low real interest rates, REER undervaluation when compared to historical levels, a low leverage economy, high fiscal balance (% GDP), low gross public sector debt (% GDP) i.e. less susceptible to inflation and lastly sufficient FX cover. However, it does remain receptive to competitiveness from a weaker Yen and China’s growth uncertainty (largest export partners; China and US).

Taiwan has the highest current account surplus, large FX Reserves and the highest import cover in the EM Asia universe. This makes it extremely robust to external shocks and there still remains room for inflation to catch up with the rest of the countries.

While Malaysia scores well, I remain skeptical of the story as external FX vulnerability (exposure to changes in US rates) remains its Achilles’ heel whilst concurrently being highly leveraged (household debt 86% of GDP). The Central bank has been sluggish in raising interest rates to curb this activity; the first hike of 25 bps since 2011 took place in the latter of 2014. Malaysia is a net oil exporter and thus remains to benefit the least from lower oil prices.

Indonesia with the lowest current account balances (% GDP), import cover and highest short-term external debt (% of FX reserves), also remains quite vulnerable to US rate hikes. Also, it is one of only two countries in the universe with twin deficits; the other being India. However, the fiscal balance looks set to improve as the government stands to save highly due to elimination of fuel subsidy supported by lower oil prices, which now renders the current price cheaper than the subsidized rates.

Though I remain neutral on India due to low core balance, low import cover and short-term external debt cover, I do remain positive as falling oil renders an improving current account balance, government savings on energy subsidies and ‘Modinomics’ that ensures momentum in economic reforms. Currently, all three rating agencies have India on a ‘Stable’ rating. Apart from offering the highest carry, inflation is trending lower as commodity prices continue to fall (CPI has a high sensitivity to energy prices) and monetary policy remains robust and supportive. Also, the Central bank is keen to shift to inflation targeting from 2016 onwards (4% with deviation +/-2%). Thus far it has been enhancing credibility, largely by following prudent FX policy – absorbing portfolio inflows when they are strong and selling dollars when sentiment weakens. Reforms in the food market, rising investment in agriculture and a boost to rural productivity are necessary steps in the flight against persistently high inflation in India.

Philippines and Thailand have one of the lowest FX reserves in the universe and food constitutes a high percentage of their CPI. Additionally, they don’t fare well compared to other regions due to rising leverage and/or fiscal deficit, high portfolio liabilities and weaker core balances.

Finally, while China offers the highest GDP growth (y-o-y) in the universe and has the largest FX reserves, it has one of the lowest current account balances (% GDP). While signs of a fundamental slowdown in the economy became evident last year, the market was one of the best performers in the world. This disconnect worries me as the rapid increase in momentum came close in the heels of the opening the Chinese market to international investors via Stock-Connect. Recently, stimulus ‘steps’ are a case in point that the government is aware of this slowdown and is taking appropriate steps to alleviate the same. I remain skeptical of the China story simply on the basis that this time the stock market is lagging the economic indicators, which maybe seen acting as a precedent to a deeper fundamental problem. Spending by the government may turn China into only the third region in the EM Asia universe with a twin deficit.

© 2012-2015 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.

© Buster Brown Photography.

An Indian Rhapsody

Europe is scrambling to keep the Euro together and the United States is readying itself for a tight electoral race, come November 6, 2012. Both continents have flushed their economies with cheap money to circumvent unemployment that remains stubbornly high and invigorate growth that remains minimal. The low yields offered by sovereign credit of the developed markets have urged investors to look to alternatives. Discounting for high-yield assets offered by a few European countries (with equally high default risks), the BRICs equation throws some interesting alternatives.

India recently had its sovereign credit outlook recently downgraded to negative from stable by Standard and Poor’s.  The reasons – an inhospitable investment environment made cumbersome by sketchy oscillating policy makers, gridlock in domestic politics, a burgeoning budget deficit, a weak Rupee and, incumbently entrenched corruption. Neither, highly publicized cases involving disgruntled foreign investors nor internal feuds in the ruling governance; the United Progressive Alliance has added positively to India’s investor haven image. It’s GDP, once galloping fervently, has weakened to a mere 5%.

Yet, the world’s largest democracy is still looking lucrative. Assuming Prime Minister Manmohan Singh’s recent blitzkrieg of reforms as outliers, let’s appraise India on its inherent indicators by assessing latest available statistics (courtesy: World Bank).

The primary school starting age in India is 6 years old in contrast to China’s 7 years old and the completion rate stands at 95% for both boys and girls. The secondary school starting age in India is 11 years old in comparison to China’s 12 years old. Public spending on education has historically been high at 3% of GDP in comparison to China’s 1.9% and 2% in Turkey. Despite its huge population, equity in distribution of income is a prominent theme in India with income held by the lowest 20% strata of the population at 8.64% in comparison to 5% in China, 2.85% in Brazil, 6.45% Russia and 5.7% in Turkey. With the largest contingent of a population residing outside their native country, Non-Resident Indians repatriate US$ 54 trillion i.e. 3% of GDP in stark contrast to non-residents of Brazil at US$ 3 trillion i.e. 0.18% of their GDP, Russia at US$ 5 trillion i.e. 0.35% of GDP, China at US $52 trillion i.e. 0.89% of GDP and Turkey at 0.11% of GDP. Thus, its historic lows of INR 56 per one US$ has in fact encouraged a sharp increase in the rate of repatriation, thereby unclogging any funding gaps faced by India in the form of lower Foreign Direct Investment (FDI). Indeed, a weaker Rupee exacerbates the current account deficit by effectively making imports expensive and thereby stoking inflation that currently is stubborn at a rate of 7.7%. However, India’s deficit isn’t as heavily dependent on foreign capital leaving less room for foreign exchange risk as seen during the South East Asian crisis of the 1990s where a flight of capital had dire repercussions with the manic widening of the current account trade gap.

However, a self-sufficient behemoth, India has one of the highest savings rate with gross savings at 33% of GDP in comparison to 17% of GDP in Brazil and 24% of GDP in Russia. The market capitalization of its listed companies comprise 54% of GDP in variance to 49% of GDP in Brazil, 46% in China, 42% of GDP in Russia, and a mere 26% of GDP in Turkey as traditionally, India has always been lead by Adam Smith’s Invisible Hand with ‘India Inc.’ always steering the juggernaut forth.

Friedrich Wilhelm Christian Karl Ferdinand Freiherr von Humboldt, a Prussian philosopher and founder of the University of Berlin said of the Bhagavad Gita “the most beautiful, perhaps the only true philosophical song existing in any known tongue”. In ‘The Argumentative Indian’ Amartya Sen succinctly highlights the message embedded in the sacred text, that of “faring well” and not just “forward”.

India is indeed embodying the message well.


Nair R., 2012. Moody’s says India sovereign ratings ‘stable’. Live mint & The Wall Street Journal, [online] 26 September. Available at: <> [Accessed 29 September 2012]

Jabri P., 2012. India government preparing new reforms. Business Recorder, [online] 27 September. Available at: <> [Accessed 1 October 2012]

Leaders, 2012. At Last. Economist, [online] 22 September. Available at: <>

© 2012 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.

© Christine Muraton Photography

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