No more band-aid; Need bold fixes

Just got back after a vacation to Mussoorie hills for over a week. Had a great time driving around the hills and eating choicest Punjabi, Tibetan, Chinese and South Indian food. It had been more of a `getaway’ - unless someone truly wanted to witness the market mayhem.

Now back to work. The first thing that strikes me in the morning is the now almost daily paean from Mint Street. They have done it several times in the recent past. Tell me – does it really matter?

If RBI is serious about liquidity reinfusion, it should by now have realized that the cuts of 50 basis points or 100 bps are loose change in these times of massive financial drought. Cash flows of businesses are fast drying up; the ones that have cash to spend are fearful of counter party risk. No one is trusting the other. There is no real economic exchange.

So I have a one line agenda for this crucial Monday meet, if it is meant to be that – facilitate Economic Exchange. Let's call it EE.

If the meet were ever to yield a positive outcome, it has to be by way of drastic measures. I for one think post cut repo rate at 7.5% is still a bomb. It has to be around 5% levels so that banks that borrow can make some meaningful credit forward. Why do I say this? I am glad my bank deposits earn me 11% if I park it in my mother’s (a senior citizen) name, but I am equally wary that the bank has fewer avenues to deploy that high cost money. How many takers will lift credit at rates higher than 14% (assuming that bank will have an administrative cost of 2% leaving it a margin of just 1%)? If ever they do, what business will earn still higher return so that they are able to pay it back to the bank? So I worry about the sustainability of that higher return that I get before moving on to worry about the probability of retrieving my capital.

So this is what I suggest to D.Subbarao, RBI guv. He shouldn’t just stop at cutting rates, he should inspire the banks to lower their lending rates and deliver EE. Money flow has to resume. Liquidity is the current that can drive the economy forward. We’ve all experienced it during the bull years April 2003 – Sept 2007 and we know the difference now. I would even go FM and SEBI should be infected by RBI’s bold moves. It should leave the doors open for every serious investor to walk in with his money and do business on our markets. That's EE for you. Short term measures and band-aid type fits and starts don’t mean much in these hellish times.

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How about tax exemptions for equity investments for the next two years? Cut Dividend distribution tax? Lower income tax rates leaving more money in the hands of the investors? Think on these lines and surprise us on Tuesday morning bozzos... and see the markets giving a thumps up to that ;-)

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Doc says "Drug all analysts for a while"

What do many financial analysts and business media have in common? A drive to talk our economy – into a depression.

To begin with, they over-research the financial services sector (FSS) and extrapolate it into their broadbased prophecies. Go tell them FSS is not the whole economy. FSS (at Rs.1.65 trillion) account for just under 14% per cent of India’s GDP (Rs.12 trillion). Ranting against RBI for its three rate hikes in two months betrays poor understanding on their part.

I ask them to set their clock back by about 5 years and take a peek. Back in 2002-03, we had rate drops in quick succession that drove up bond prices, when banks and bond funds declared phenomenal returns. Now it's just the reverse of that and such shifts in dynamics only confirm the prevalence of a cycle and hence room for hope that they will go back to where they came from. What matters at a world level and for countries is that total nominal demand should be rising fast enough to support a sustainable rate of real growth but not so fast as to generate runaway inflation. That’s exactly what Guv. Y.V.Reddy sought to rein in by hinking repo and CRR earlier this week. In spite of India’s exceptional experience in this “nice” (non-inflationary, constantly expansionary) decade, this demand expansion is rarely going to take place along a simple straight line, but it makes sense as an average over a period.

The world economy as a whole has clearly hit the buffers. Demand growth has been too high for world supply potential. This is the common factor behind the rise in oil, food and commodity prices, which has struck the OECD countries as a rise in imported inflation. At present, commodity overheating in some of the BRIC (Brazil, Russia, India, China) countries coincides with economic slack in Europe and North America. This is no more paradoxical than the situation that confronts central banks when some regions are depressed and others over-buoyant.

No one really knows what the permanent element is in the rise in oil, food or commodity prices. [Is it surging demand, squeezed down supplies or flip side of derivative positions in oil futures market?] Even if there is a long-term upward trend in these primary prices, there is likely to be a temporary fallback. Meanwhile, shall we ask the analysts to just shut up, stop staring at the screens and prognosticate?

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