GROWTH MAY BE AROUND THE CORNER

What makes the governor’s case more compelling is that despite front-loading a cut of 50 bps in interest rates during the first quarter of CY2015 and several banks reducing their deposit rates, customers could not derive any benefit out of this policy action. The intention of the central bank behind cutting the policy rates by 50 bps was to spur growth of the entire economy and not only banks who were the prime beneficiaries of the reduced repo rates. Although the bankers earlier resisted any cut in lending rates under the pretext of higher non-performing assets and cost of funds not coming down after these rate cuts, they have had to blink after the governor literally forced them to do so. I believe that though the higher NPA is partially due to slowdown in economy, bankers cannot escape from their imprudent lending practice that has resulted in such higher NPAs.

Moreover, one of the reasons why the RBI governor maintained status quo in his latest monetary meeting was because of no transmission of earlier rate cuts and the fact that he wanted to see some action on this front before deciding on future rate cuts. We need to understand that the economy is coming out of its slow growth phase of two years and banks play an important role in reviving growth through lower lending rates. The lowering of lending rates may impact their margins in the immediate future but in the longer run it will benefit them by reviving credit growth, which is barely in double digits for now.

This gains more importance at the current juncture with the prime minister actively promoting India as manufacturing hub worldwide through the ‘Make in India’ campaign. In his visit to Germany, while addressing NRIs, he said, “There is a big demand of time that India become a manufacturing hub. If we lose this opportunity, we will regret it later.” He wooed German investors and promised to make ‘corrections wherever required’ and said that development is “not a mere political agenda” but an “article of faith” and sought international support to achieve the objectives crucial for growth.

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Even while he was in France, before visiting Germany, Prime Minister Narendra Modi sought to address problems in areas where global investors found it cumbersome to do business in India because of unnecessary rules and complicated procedures. With ‘Make in India’ being the prominent theme, the two sides signed about 20 pactcs, covering areas like civil nuclear energy, urban development, railways, and space. The much-criticized decision to buy 36 Rafale fighter aircrafts in flyway condition ‘as quickly as possible’ should be looked at from the right perspective as this will enhance our defense capability.

All these steps will start reflecting in the economy of the country soon and will lead to higher economic growth. The capital market will follow suit and we will see the long-term rally of the stock market remaining intact. Nonetheless, for the next few weeks the movement will largely be driven by the quarterly results. Since we are not expecting superb performance from India Inc. in the fourth quarter of FY15, I believe we have made a near-term high of 9000 in Nifty, which will act as a strong resistance for the market and remain cautious of the market as of now. This is further supported by the fact that the mid-cap and small-cap indices have moved up by 5 per cent and 11 per cent respectively in the last 15 trading sessions compared to 2.15 per cent by frontline indices. Such large outperformance by small-cap and mid-cap indices normally acts as the last leg of a rally.

Regardless of the movement in the broader market, there are always opportunities in individual stock and theme. In our cover story this time on ‘turnaround candidates’ we have tried to exploit one such opportunity. In another special report, our research team has tried to demystify the latest foreign trade policy and how is it going to impact the various sectors. Please do send us your feedback at comment@dsij.in.