Credit Policy Analysis

RBI announced its Credit Policy on Tuesday and the market reaction to it was in line with my expectations mentioned in the post titled "Credit Policy Eve".

Despite the fact that most of the key rates policy rates remained unchanged as expect, the benchmark indices corrected by around 2% with the banking and real estate sectors plummeting the most. This is mainly because of the fact that the policy sets a tone for the beginning of the reversal of Monetary Easing.

Please use the following link to download our group's report which would highlight some of the key aspects of the credit policy and why I believe that markets will correct further from here.

http://www.scribd.com/doc/21784924/KBSL-Credit-Policy-Analysis

Happy Investing

Credit Policy Eve

The Reserve Bank of India today released its review of the macroeconomic and monetary developments which serves as a background to the Second Quarter review of Monetary Policy 2009-10 being announced tomorrow, October 27^th, 2009.

Some of the Key Highlights of the documents which we believe will set the tone of the monetary policy are:

· Global economy has started exhibiting tentative signs of recovery, but the recovery is, however, widely perceived to remain slow and gradual, with receding but significant downside risks

· The first quarter GDP growth in 2009-10 still points to persistence of slowdown

· Information available on various lead indicators in the second quarter of 2009-10 suggests that because of deficient monsoon, kharif output may be adversely affected

· Deceleration in aggregate demand that was witnessed in the second half of 2008-09 continued during 2009-10. Growth in private consumption demand fell to as low as 1.6 per cent in the first quarter of 2009-10. Investment demand also decelerated further, and the high growth in government consumption demand that was witnessed in the last two quarters of 2008-09 moderated.

· Deficient monsoon and the associated drought like conditions in several parts of the country, and the more recent floods in some other parts, could also dampen rural demand

· External demand continues to be weak. Trade data show that during April-August 2009, merchandise exports and imports declined by 31.0 per cent and 33.4 per cent, respectively, over the corresponding period of the previous yea

· The liquidity conditions remained in surplus on a sustained basis, which was absorbed by the Reserve Bank through reverse repo operations under the Liquidity Adjustment Facility (LAF) and the over night rates hovered around LAF signaling ample liquidity into the system

· The changing inflation environment, however, is being driven by strong escalation in prices of food articles, which have increased by 14.4 per cent (year-on-year) so far. Excluding food items, the WPI inflation remains negative at (-) 3.4 per cent.

· From the stand point of monetary policy, anchoring inflation expectations in the face of sustained high inflation in essential commodities will be a key challenge

· The Reserve Bank’s professional forecasters survey points to downward revision to the growth outlook from 6.5 per cent to 6.0 per cent in 2009-10.

· Emerging inflationary pressures may also persist and escalate further on account of the fading away of the base effect, cost push pressures through wage-price revisions in the face of elevated CPI inflation, challenges in improving the supply situation of essential commodities in the short-run, gradual pressure on global commodity prices along with global recovery, and rising inflation expectations on account of elevated CPI inflation.

· The overall economic outlook is, therefore, a mixture of upside prospects of recovery and downside risks. Managing the trade-off between supporting growth and reining in inflation expectations poses a complex policy challenge.

Kredent Analysis:

The tradeoff will be costly since the capital markets are moving way beyond the real economy. However, we do not expect a rate hike in the second quarter monetary policy review due to a bleak growth outlook, however the tone in which inflation is presented in this press release by the RBI clearly sets a prelude for a rate hike in the third quarter policy review or even before that.

The way Nifty has behaved over the last 4 trading sessions clearly suggests that markets are factoring in a change in RBI’s stance. Thus we strongly believe that its time in the market to start booking profits and move away from the rate sensitive like banking, infrastructure and real estate and move towards defensives.

Sugar Stock Prices Could Correct...

Brazil this week imposed a 2 percent tax on foreigners’ purchases of stocks and stocks to curb the appreciation of its currency. This is because the Brazilian currency has appreciated by around 33% the dollar this year, the best performer among the 16 most-actively traded currencies tracked by Bloomberg.

This was in fact hurting the Brazilian economy, since a major portion of its income depends on export of Sugar and other related products. Thus in a move to protect its exporters the government took this decision. This also lead to a 3.4% fall in the Brazilian Bovespa Index tumbling by around 3%, the most since March.

I believe that this move could also lead to a correction in the Global sugar prices, because it will lead to a slowdown of fund flow in Brazil. Thus, at the current levels it makes sense to go short on the Indian Sugar stocks, which have already risen by a handsome amount (YTD), because if sugar prices will correct, its inevitable for the stocks to follow the same trend.

Moreover, most of the leading brokerage houses in India has come up with fresh buy calls on the Indian sugar stocks, despite their already escalated levels and which I believe could be the sugar sector entering into the distribution phase of this bubble.

Hence, one can go short on the sector with a trading view, but definitely with a stop loss.

Stronger Yuan... A Necessity

The basic idea I want to say through this post is that if China's economic growth has decoupled from that of America's, then it also need to decouple its monetary policy if it wants to stop the Chinese economy bursting like any previous economic bubble.

What has happened over the years that in order to support its exports the Chinese government has kept the yuan stable against the dollar or one could say that it has tied its monetary policy to US. So far it has mattered a little. But due to the current domestic deflation has lead to Chinese real interest rates to be among the highest of any big economy. But this monetary coupling will become increasingly dangerous.

America’s weak economy means its monetary conditions are likely to stay ultra-loose for far longer than it makes sense for China. Left in place too long, the currency alignment could swell an asset bubble.

Thus to re balance Yuan becomes a strong necessity if China wants to avert an asset bubble. This transition as Economist says "Will not be easy. The spectre of a stronger yuan will, temporarily at least, worsen China’s asset-price bubbliness, as foreign capital floods into the country in anticipation of a stronger currency" But still this calls for acting quickly and carefully rather than doing nothing.

The longer China continues to keep the Yuan at the current level, the bigger the distortions and the risks from any currency adjustment. Without an independent monetary policy China will eventually become a bubble economy. To avoid that fate, Beijing must let go of the yuan, so that it can raise interest rates to wipe out some of the access liquidity.

Happy Diwali...!!!

Branded Retail Sector

I often wonder why do people pay so much premium price to acquire Adidas or Nike shoes or an Apple iPod. Its just because the brand speaks for itself. People pay a premium to acquire that brand and the companies on the other hand make good money for themselves and their shareholders.

In our firms latest stock recommendations, we stand bullish on the Indian Branded retail Sector. We believe given the size of Indian consumption basket and ever growing middle class the sector offers immense potential for long term investments.

Also given the fact that in the last six-seven months the Nifty index has moved way beyond the real economic activities its time not to go for stocks which everyone is very bullish on cause their valuations are already at extreme levels.

In multi brand retail segment is plagued with problems like inventory management, high debt, and competition. However in the branded retail segment the companies like Provogue, Zodiac, Killer and Koutons have established a niche for themselves in terms of a brand value and is definitely poised to gain out of the changing preference of the Indian middle class.

Please use the link to download our latest report on the same.

http://www.scribd.com/doc/21038240

Happy Investing.