Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
US Presidential Election Forecast Matrix, Stock Market Uncertainty - 29th Oct 20
Stock Market Turning? Look For These Support Levels - 29th Oct 20
Silver: A Conceivable Dead-Cat-Bounce on the Cards - 29th Oct 20
Stocks are Strong but be Aware of this Continuing Pattern - 29th Oct 20
The Most Profitable Way To Play The Gold Boom - 29th Oct 20
Why You Should Hire An Accountant To Complete Your Tax Return - 29th Oct 20
Global Banking: Some Sectors Look as "Precarious as Ever" - 28th Oct 20
Silver Price Minor Dip Possible Before 2nd Major Upleg Starts - 28th Oct 20
�� How to Carve a Simple and Scary Pumpkin Face for Covid Halloween 2020 �� - 28th Oct 20
Gold Price One Last Dip Likely Then Major Upleg to New Highs - 28th Oct 20
Smart Money Is Going All-In On This New Gold Frontier - 28th Oct 20
Gold Stocks Still Correcting - 27th Oct 20
Gold and Crypto: Is This How Charts Look Before A Monetary Collapse? - 27th Oct 20
Silver's Coming Double Trigger Shotgun Price Explosion - 27th Oct 20
The $126 Billion Gold Opportunity in Australia - 27th Oct 20
Tips to Breeze through Your Spanish Classes Online - 27th Oct 20
Try The “Compounding Capital Gains” Strategy Today - 26th Oct 20
UK Coronavirus Broken Test and Trace System, 5 Days for Covid-19 Results! - 26th Oct 20
How the Coronavirus is Exacerbating Global Inequality, Hunger - 26th Oct 20
The Top Gold Stock for 2021 - 26th Oct 20
Corporate Earnings Season: Here's What Stock Investors Need to Know - 25th Oct 20
�� Halloween 2020 TESCO Supermarkes Shoppers Covid Panic Buying! �� - 25th Oct 20
Three Unstoppable Forces Set to Drive Silver Prices - 25th Oct 20
Car Insurance And Insurance Claims and Options - 25th Oct 20
Best Pressure Washer Review - Karcher K7 Full Control Unboxing - 25th Oct 20
Further Gold Price Pressure as the USDX Is About to Rally - 23rd Oct 20
Nasdaq Retests 11,735 Support - 23rd Oct 20
America’s Political and Financial Institutions Are Broken - 23rd Oct 20
Sayonara U.S.A. - 23rd Oct 20
Economic Contractions Overshadow ASEAN-6 Recovery - 23rd Oct 20
Doji Clusters Show Clear Support Ranges for Stock Market S&P500 Index - 23rd Oct 20
Silver Market - 22nd Oct 20
Goldman Sachs Likes Silver; Trump Wants Even More Stimulus - 22nd Oct 20
Hacking Wall Street to Close the Wealth Gap - 22nd Oct 20
Natural Gas/UNG Stepping GAP Patterns Suggest Pending Upside Breakout - 22nd Oct 20 -
NVIDIA CANCELS RTX 3070 16b RTX 3080 20gb GPU's Due to GDDR6X Memory Supply Issues - 22nd Oct 20
Zafira B Leaking Water Under Car - 22nd Oct 20
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

India Interest Rates Scenario Part1

Interest-Rates / India May 17, 2010 - 06:24 AM GMT

By: Dhaval_Shah

Interest-Rates

Best Financial Markets Analysis ArticleIf you are thinking Interest Rates(IR) would not go up? Think twice.

All major inflationary forces acting like windstorm swiping the world and pouring debt(currency printing ) across the world first to bail out corporate than to taxpayers and now to nations and in last stage probably to entire world seems like windstorm & rainstorm are converging to category 5 Hurricane Katrina.


India Interest Rate Scenario

Why do I believe IR would go up?

1. Massive inflation across the sectors and categories in India. High prices of Oil.

2. Massive Govt. Spending

3. Gargantuan liabilities of Govt, which requires Govt to borrow 30% of GDP every year thus pumping enormous money supply in the economy, which coupled with Fractional Reserve Banking multiplies and floods the economy with cheap currency.

This ends in currency loosing purchasing power and inflation swiping the nation.

4. Monsoon effect. We had worst monsoon post 1972 in 2009. Met dept forecasts normal monsoon in 2010. But, it still remains worry.

Inflation

Look closely at above chart. In year 2000 interest rates had reached to as high as 15.5% in India. Yes, not corporate or multinational, this was the rate of borrowing for Banks from RBI.

On 10th July, 2000, Interest rate was mere 7% and on 9th Aug 2000, in less than a month, it climbed full 8.5%…..yes whopping 8.5% in less than a month to 15.5%.

We will examine causes later. But, keep in mind that when things get worse, central bank has to resort to use this last and final tool of jacking up rates as fast as possible to rein in the situation.

Chart also demonstrates very clearly that interest rates have completely bottomed out now and ready to march upwards.

Question is not only, how high rates would go? But how hasty would it go up?

Inflation

To answer both of these questions, let us review RBI’s annual policy statement for 2010-11 published on 19th April.

RBI governor looked much concerned about Inflation and got reflected at every other line of policy statement.

Here are some excerpts

“ Though inflation has started rising in several EMEs, India is a significant outlier with inflation rates much higher than in other EMEs.

Going forward, three major uncertainties cloud the outlook for inflation. First, the prospects of the monsoon in 2010-11 are not yet clear. Second, crude prices continue to be volatile. Third, there is evidence of demand side pressures building up. ”

Here, In very soft and polite language Governor Dr. D. Subbarao expressed his concerns.

Govt Borrowing

These concerns have erupted from below chart!!!!!

Look, How hastily Inflation has gone up? It has doubled in less than a year.

Here, Mr. Subbarao explained causes of concerning inflation…

“Clearly, WPI inflation is no longer driven by supply side factors alone. The contribution of non-food items to overall WPI inflation, which was negative at (-) 0.4 per cent in November 2009 rose sharply to 53.3 per cent by March 2010. Consumer price index (CPI) based measures of inflation were in the range of 14.9-16.9 per cent in January/February 2010. Thus, inflationary pressures have accentuated since the Third Quarter Review in January 2010. What was initially a process driven by food prices has now become more generalised. ”

But, think twice, Is inflation only worry? Heck no.

Govt Borrowing

The biggest worry is Govt. Borrowing program. RBI Governor has not shied away to express his resentment on massive govt borrowing program.

Finance Ministry is to borrow 36% more this year form market compared to last year. If I put it into figure, Govt is set to borrow Rs. 3,89,300 crore and add borrowing by state govts…..

Put together, RBI has to facilitate borrowing of close to Rs. 5,97,414 crore without affecting interest rates in year 2010!!!!?????11.gif11.gif11.gif

In current Fiscal, combined expenditure of the centre and states pegged at Rs. 18,92,880 crore.

Govt is set to borrow Rs. 5,97,414 crore from markets and would spend Rs. 3,30,389 crore, from expected fiscal revenue, towards paying interest on earlier borrowings. Remeber, only interest not principal.

Put together, Rs. 9,27,803 crore will be spent in the economy, which is either borrowed money or goes towards repaying interest .

It is colossal 50% of budgeted expenditure, funds which Govt does not own and has to repay with Interests.

This insane spending places India in very high Budget Deficit category of nations with Gross Budget Deficit at close to 11.5%

Data is taken from RBI. Click to view in detail.

http://investmentacademy.files.wordpress.com/2010/05/current-statistics.pdf

Those, who want to know our Govt’s Fiscal situation, refer to my Fiscal Disaster article. Link: http://investmentacademy.wordpress.com/2010/01/28/fiscal-disaster/

Meanwhile, Total Liabilities of the Centre and States [ includes internal and external debt, small savings schemes and provident fund liabilities] has reached to close to Rs. 50,00,000 crore. Yes, you read it right, FIFTY LACS CRORE. Close to 90% of GDP.

And, this does not include off balance sheet liabilities.

RBI Statement on Govt Borrowing program

“ Historically, fiscal deficits have been financed by a combination of market borrowings and other sources. However, in 2009-10 and 2010-11, reliance on market borrowings for financing the fiscal deficit increased in relative terms. The large market borrowing in 2009-10 was facilitated by

the unwinding of MSS securities and OMO purchases, as a result of which fresh issuance of securities constituted 63.0 per cent of the total budgeted market borrowings.

However in 2010-11, almost the entire budgeted borrowings will be funded by fresh issuance of securities. Therefore, notwithstanding the lower budgeted net borrowings, fresh issuance of securities in 2010-11 will be Rs.3,42,300 crore, higher than the corresponding figure of Rs.2,51,000 crore last year. The large government borrowing in 2009-10 was also facilitated by sluggish private credit demand and comfortable liquidity conditions. However, going forward, private credit demand is expected to pick up further.

Meanwhile, inflationary pressures have also made it imperative for the Reserve Bank to absorb surplus liquidity from the system. Thus, managing the borrowings of the Government during 2010-11 will be a bigger challenge than it was last year.”

Have these concerns started reflecting in Bond Market?

Yes, look at the below chart.

Dotcom bubble crisis in year 2000 swung the rates high close to 12% and later in year 2001, after 9/11, central banks of the world slashed the rates to jump start the economy.

Similar instance was seen in year 2008, first rates went up sharply and later dived to halt the economic decline.

Wouldn’t this time situation be similar and rates would remain at bottom for longer period?

NO, because never ever in History, Debts and Liabilities of the nations have reached to patently unpayable level.

Instance: US has accumulated Public Debt to the tune of $ 127.8 tn. Yes, you read it right. It is 10 times of GDP. Situaltion is either simiar and in some cases even worst than US in Europe.

What is different this time, that is driving interest rates high??

1. Accumulation of gargantuan debt and liabilities by Govts, which is becoming patently unpayable even 10 yrs down the line

2. Massive borrowing by central Govts across the world

3. Massive money printing by central banks across the world.

Instance:

For US central bank, It took 100 years to expand the monetary base to $850bn and in last short 18 months, it climbed to $2.1 trn. i.e Fed created new money worth $1.25 trn out of thin air, more than 250% new money to what it was 18 months before

That’s an irresponsible, irrational and insane increase of 2.5 times in just 18 months — and you must not underestimate its sweeping historical significance.

There is no historical precedence to compare such a massive printing.

Same and probably worse is the situation across the Europe.

Last year, Budget deficits of European nations zoomed past 10%, which is considered as red mark.

Debt to GDP

Of late, you have been frequently listening about debt to GDP ratio.

What money managers and creditors closely look at is Debt to GDP ratio of nation to decide the risk of lending.

Ratio includes 2 factors. Debt and GDP.

In 2008, GDP did not fall much as effects were yet to be felt in real economy. But, to stem the fall, Govt spent heck lot of money in 2008, mostly assuming that if GDP remains stable, this debt is payable.

But, in 2009, real economies dived miserably. US decline -2.4% to Russia as high as -7.90%.

Country Real GDP % est 2009
US -2.4
Euro Zone -4.0
Germany -5.0
France -2.1
England -4.3
Russia -7.90
Japan -5.70
India +6.50
China +8.70
World - 1.0

When GDP fell, Debt to GDP ratio got ugly.

Example: say country’s Debt was Rs. 70 and GDP was Rs. 100. Hence, Debt to GDP ratio comes at 70%, fine.

Now, GDP falls by 5%, so 95 and Debt remains at same level that will drive Debt to GDP ratio higher at 74%.

And, what if next year again GDP falls by 5%, and debt increases by 5%, that drives ratio to 81%.

10% increase in Debt to GDP ratio in 2 years and do not forget, Govt has to keep paying interest on debt which it has been piling up since decades to gather.

This is what precisely happening with Greece, Portugal, Ireland, Italy and Spain.

These nations GDP has been falling since last 2 years, official unemployment rate has reached as high 20% to 25%, banks are in huge losses due to their sub prime exposure and participation in interest rate derivatives.

Put all these factors combined with inflation, creditors are scared to lend money to these nations because their repaying capacity is becoming dismal.

I have also presented table for you of G-20’s Debt to GDP ratio.

Look at G-20 situation

Above data is upto April 2009. Govts have piled up huge debts after that. That means, ratios are more uglier than it looks into table.

Some Market Reactions:

Warning from Finance Secretary

Bond yields near 18-month high on inflation concern

4 May 2010, 0201 hrs IST,ET Bureau

The benchmark 10-year bonds declined, pushing yields to near an 18-month peak, after finance secretary Ashok Chawla said inflation at current levels is high.

The yield rose as in vestors also speculated there will be fewer trades in the existing note after the central bank on April 30 sold a new 10-year bond, according to Devendra Das, a debt trader at Development Credit Bank. Chawla said inflation, which at current levels is not “socially, economically or politically acceptable,” may cool by the end of 2010

Corporates are busy raising money before rate hikes

Corporates hit Bond Street ahead of rate hikes

3 May 2010, 0447 hrs IST,ET Bureau

MUMBAI: A host of state-owned and private corporates are expected to raise funds through fresh debt offerings in the coming days as they try to make

the best of the recent fall in bond yields, ahead of a possible interest rate hike. Dealers say IDFC, HDFC, Exim Bank, Power Finance Corporation, RIL and IRFC are some of the companies that may hit the bond street as early as next week. For close to a month before the April monetary policy review, there were hardly any large issuances.

This flurry of issuances comes in the backdrop of events in Europe hurting appetite for debt of emerging market economies like India. Companies have so far countered this by selling their bonds in the local market. For instance, HDFC, Reliance Power and Utilities, L&T Infra, Nabard, Shriram City Union Finance, SAIL, BPCL and IFCI are some of the companies that have raised around Rs 6,000 crore in the past ten days. This trend could gain steam in May, dealers said.

Hence, It does not leave any doubt that Interest Rates across the world are set to go up.

Global Perspective

You may think why rates would go up in India? Broadly, it looks developed nations problem. We are still growing at healthy 7-8%. Growth in GDP nos must help us to contain the contagion.

Answer is Why Indian market tumbled in 2008? Housing crisis had not originated in India neither our banks were exposed to sub prime or derivatives.

We tumbled along with world markets because we are part of Globalised world. Decoupling is a mere assumption far from reality.

Our markets fell more than rest of the world in 2008, RBI also joined race to reduce benchmark banking rates with central banks of the world , our markets recovered in 2009 along with world markets.

None of the last 2 years events exhibits that we can sing a solo economic tune.

And, do not forget out own garguntunan liabilities, that has reached 90% of GDP.

For world, borrowing is getting costlier and same will reflect in our bond prices, too, soon.

Hence, be prepared.

Regards

Dhaval Shah

Blog: Http://investmentacademy.wordpress.com

© 2010 Copyright Dhaval Shah - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules