The Indian Steel Industry

I dedicate this post to my father - Janmejay Pathak, who dedicated his entire professional life of 35 years to the steel industry and who was recognized in Essar Steel India Ltd. (where he served for 19 years before moving to Sohar Steel LLC, Oman) by many as Steel Man - I knew this because of my 2 month internship at Essar. Unfortunately, due to medical reasons, my father unexpectedly suffered a heart attack and left us a couple of months ago. 

This blog page was not updated since a long time. Realized this was the best way to rejuvenate! Happy reading!

Recent Trends seen in Indian Steel Makers

The steel industry around the globe has seen turbulent times in the years gone by – mainly because of the oversupply coming from Chinese steel manufacturers. Let us see have a look at the recent performance of the steel industry, particularly in India.

Stock price movements of the listed steel companies would be perfect to get the first idea on the performance of the companies as seen by the investors and their perception on the companies’ past and future performance. Let us see the stock price movements in the past 7 years.

Large Manufacturers

JSW Steel

Source: Moneycontrol.com

Source: Company Annual Reports

Note: The figures indicate Gross Operating Revenues

Medium & Small Manufacturers

 

Source: Moneycontrol.com

Sponge Iron

Source: Moneycontrol.com

Tubes & Pipes

Source: Moneycontrol.com

Steel Rolling

 Source: Moneycontrol.com; Finance Club

Most of the stocks in the steel industry have shown a good performance after July 2015. However, companies like SAIL have consistently eroded investors' wealth. Clearly, investors seem bullish on steel industry. Positive reports on complementary companies like Graphite India, HEG etc. by various broking institutions in India also reflect positive sentiment for the steel sector.

Current Scenario of the Indian Steel Industry

The past two years have proven good for the steel industry as far as the market performance is concerned. Also, sentiments and demand growth have hinted for a promising revival of the steel industry in India. 

Recently, the Indian government imposed an anti-dumping duty on imports of certain flat steel products from China and European Union for five years to guard the interest of domestic players from cheap in-bound shipments. The colour coated/pre-painted flat products of alloy or non-alloy steel have been exported to India from these regions at below the normal value from a few years. Such a move shall be able to protect the interests of domestic manufacturers. The duty will be the difference between the landed value of the steel products and $ 822 per tonne.

Robust policies in the infrastructure segment and major boost by making investments shall prove to be positive news for the steel sector. Also, as now more and more concrete roads are being constructed, it shall be a major boost to the steel industry. During FY17-18, Government of India allocated US$ 10.13 billion for development of national highways across the country. The Government of India plans to increase the length of National Highways from 103,933 kms to 200,000 kms. As of February 2017, national highways of 6604 kms in length were constructed, against a target of 15,000 kms, under various road transport and highway projects.

Source: IBEF report on Roads

As it can be seen from the figure, since the BJP-led NDA government has come in power, infrastructure project execution has taken a major boost, rising at a CAGR of 20% in the past 3 years and a CAGR of 13.6% in the past 10 years.

These figures indicate rise in sales of construction equipment, rise in the use of structural steel etc. All these factors, coupled with policies to support domestic steel makers, are indicative of good future for the steel industry in India. 

Indian Government’s Push for Electric Vehicles

As per a recent Bloomberg report, stainless steel makers around the globe are bullish on the push towards clean energy. One of the biggest gainers from this policy push, apart from the clean energy generators, will be the manufacturers of Electric Vehicles (EVs). A complementory winner will be the manufacturers of batteries. Stainless steel casings are needed to store the batteries in the EVs. While this is good news for nickel and chromium suppliers (as these metals are largely used to manufacture stainless steel), it gives the steel manufacturers a reason to cheer as this will add to the volumes of steel manufactured, and will result in their top line growth.

Bank of America Merrill Lynch (BoAML) has projected global electric vehicle sales of 13.6 million units in 2025. 

The Government and the Society of Indian Automobile Manufacturers developed the Automotive Mission Plan 2016-2026, a road map for the industry development in the following decade. This cooperation aims for the sector to reach $300 billions in revenues, to create 65 million further jobs and to generate 12% of India’s GDP by 2016. The achievement of this goal will require further investment of INR 4.5-5.5 trillion by companies and the continued institutional support to fiscal incentives on R&D expenditures and initiatives such as “Make in India” (launched in 2014 to encourage multinationals to move their production in India) and “Skill India” (launched in 2015 to train 400 million workers in different skills).

Consolidation in the Indian Steel Industry

With Essar Steel Ltd. (Rs. 45,000 crores debt) and Bhushan Steel Ltd. (Rs. 42,000 crores debt) coming under the government scanner and these companies being subject to the Insolvency and Bankruptcy Code because of highly stressed assets, global players such as ArcelorMittal and POSCO are actively considering investment in these companies to assume ownership of stressed assets. Also, domestic steelmakers like JSW Steel and TATA Steel are actively considering making investments.

POSCO, the company that had almost begun setting up its steel manufacturing plant in Odisha state of India, wrote to the government to take back the 2,700-odd acres of allocated land as the company withdrew its plans. Also, ArcelorMittal has been in active talks with Steel Authority India Limited (SAIL) for a joint venture since 2015. However, these talks have barely been moving ahead since 2 years. With Essar and Bhushan, these international companies have a chance to convert their ‘distant dream’.

In case JSW Steel and/or TATA Steel acquire the stressed assets, it shall prove to be a major capacity addition for either or both the companies, which shall translate to a substantial increase in the increase in market share in a highly price-competitive industry. This shall lead to a considerable consolidation in the Indian steel industry as well.

India Expected Steel Capacity Addition Problem

It was recently reported by Bloomberg in October 2017 that the Indian steel manufacturing capacity will double backed by the demand boom as companies will invest for expansion purposes.

Because of demand pick up and a positive outlook on the Indian steel industry, the stocks of major Indian steel makers i.e. TATA Steel and JSW Steel have beat the benchmark SENSEX in terms of performance since January 2017. India’s finished steel consumption rose 4.3 percent to 43 million tons in the six months to September, while output climbed 5 percent to 52 million tons, according to the steel ministry. In the financial year ended March 31, usage grew 3 percent to 84 million tons, the slowest pace in three years, even as production gained 11 percent to record 101 million tons.

However, doubling the capacity may only add problems to these companies. If they undertake a project of setting up a new plant, it will take not less than 3 years to the plants to get commissioned. The anti-dumping policies rolled out by several governments, including India, which are supporting domestic steel manufacturers against the ‘China steel’, may not be effective as market may reach a new normal. China has faced a huge steel production overcapacity since the country flooded the global markets with its cheap steel. India may face the same problem 3-4 years down the line if plans to double the steel output are materialized. 

World Steel Association Report

India is set to displace Japan as the world’s second-largest steel producer, and by 2022 will churn out 146 million tons compared with 118 million tons from Japan, according to an April report from Australia’s Department of Industry, Innovation and Science. Even a recent report by World Steel Association said the same.

Table 1: Demand Growth in the Top 10 Steel using countries

Source: World Steel Association Report; Finance Club, MISB Bocconi

Table 2: Top 10 country-wise crude steel production (in million tonnes) 

Source: World Steel Association Report; Finance Club, MISB Bocconi

From Table 1, it can be seen how the Indian steel industry has outperformed its global peers in terms of crude steel production. With this pace of growth, India is clearly set to overtake Japan for the crude steel production. Also, it can be observed from Table 2 that only India has an outstanding demand growth in the coming year. China, India and Russia are the BRICS countries that have made it to the above list. However, it is only India that has promising growth statistics.

Comments

While the demand growth is robust, it is the policy measures which can support the Indian steel industry, which has been the case for the good performance of the major steel producers – TATA Steel and JSW Steel on the stock markets. If the projections by World Steel Association are to be believed, Indian steel sector will outperform its global peers in the next financial year for the robust demand and robust production growth ahead.

Investors will reward for future outlook of an industry. With price support and technological advancement for which steel sector shall be one of the biggest contributor, the steel sector poses itself to be showing a good performance in the near future.

- Harsh Pathak

President - Finance Club, MISB Bocconi - Bocconi India

E-mail:harsh.pathak@misbbocconi.com; harsh.pathak0509@gmail.com

Contact: +91 9820976480, +39 3333291847

‘Pen’ is mightier than a sword – Not With love, from Paris

No, I am still that same enthusiastic Financial Markets guy. I haven’t changed my discipline. I haven’t lost hope and didn’t choose to get into philosophy after seeing back to back shockers in global politics and global financial markets. As an active participant in the financial markets, I choose to make my way through these events.

You can’t stop the world from functioning! You can’t stop evolution! Events happen. You need to make your way through it and emerge as a winner in financial markets

                                                  

                                                                                                                                                               -         Harsh Pathak

So….Still confused over that philosophical title on this post which is dedicated to finance?

Without creating much confusion, let me reveal…. This post is dedicated to Ms. Marine Le Pen – the pro-populist French Presidential election candidate who, on April 23, 2017, emerged as one of the finalists for the runoff on May 7, 2017. This post is about the bloodshed in the global financial markets that will result once she gets elected to power.

After long theories and interpretations that I read on Bloomberg and Financial Times on the most probable outcomes of the first round of the French Presidential elections that were held on April 23, 2017, yesterday’s results finally showed that Emmanuel Macron and Marine Le Pen advanced to a runoff which shall determine the next French President. The runoff is scheduled to happen on May 7, 2017.

It is the first time in the nearly 59-year history of France’s Fifth Republic that both of the final candidates are from outside the traditional left-right party structure. Mr. Macron, a former investment banker, abandoned traditional parties a year ago to form his own movement with an eclectic blend of left and right policies. He campaigned on a pro-European Union platform, coupled with calls to overhaul the rules governing the French economy. Ms. Le Pen’s success was a victory for people who oppose the European Union and for those who want to see more “France first” policies.

With this, it has broadly become a contest where French people shall choose between globalization and populism. As I read Bloomberg news and FT in detail on this, Macron’s victory on 7^th May shall indicate the future of European Union’s integrity to be in place, while his defeat and Ms. Le Pen’s victory seems to be, at the moment, a sure exit of France from the EU, which is fondly being referred to as Frexit by media and economists.

However, I am not a big think tank on politics. All I can contribute in political arena is read the news reports and get updates from market, analyse them, predict the scenarios and utilize them in combination with my other fundamental and technical analysis of financial markets to take positions on equities.

The future of global equity markets – in developed as well as emerging economies is, as per me, sitting on a big time bomb called the ‘Final Round of French Presidential Election’. The final outcome of the May 7 voting can either burst the bomb or diffuse it.

But why after all is it a bomb?  

A new paper from Sciences Po and Cepremap, shared with the Financial Times, shows a clear division between a “pessimist” France turned towards Ms Le Pen, and an “optimist” France put their confidence in Emmanuel Macron. According to the research, when asked about their expectations for the future, the individuals who were most pessimistic were those most likely to vote for Ms Le Pen. In contrast, those most satisfied with their life opted most often for Mr Macron. Cutting the long story short, statistical models are predicting win for Macron, but his defeat is also not ruled out completely.

Though there are statistical models predicting Macron’s win, I would rather choose not to completely believe them. This is because models are built on human interpretations and the use of analytics (system-based) and this year everything that can amuse and surprise anybody has happened in the 2017 French Presidential elections. From François Hollande’s decision not to run for a second term to former Prime Minister Manuel Valls getting defeated in the Socialist Party primary; from the rise of insider-outsider Emmanuel Macron to the standout debate performance by far-left candidate Philippe Poutou; from François Fillon’s rise, fall, and rise to Jean-Luc Mélenchon’s last-minute surge. All these events have increased the uncertainity of the outcome of the election.

So, the explosion is here – The case of Marine Le Pen winning the 2017 French Presidential Election

Name of the victim – the Euro and the European Union

After the results of the first round were out, the markets on Monday gathered optimism on the possibility of Macron winning the final round of elections on May 7. The win of Macron, who is a pro-Euro candidate, shall mean that the chances of EU collapse shall be mitigated (or rather eliminated tentatively) as the chances of Frexit get very weak because of his support for globalization.  

As per the data from Reuters, the Euro rose to day’s high of 1.0935 against the USD  after closing at 1.0723 on the previous trading day. It however slipped to 1.0863 against the USD at 16:15 hours IST. Reaching to that day’s high means an advancement of 2% in the currency’s value.

If Macron wins, market expectations for the EUR/USD in the range of 1.09-1.10 post the final round may hold and this shall result in stabilization of the U.S. Treasury market. Also, this win shall mean fading of credit risk in the Eurozone which means increased flow of funds in its cheaper equity markets which shall further support the EUR/USD.

They say, “When your expectations are not met, you feel that everything has fallen apart.” Stock market participants, according to me, face this situation in and out. The Euro, as seen, has rallied on expectations of a Macron win. However, if Le Pen turns out to be the winner and if market grapevine is to be believed, the euro can slide down to 1.00 against the USD as the fears of Frexit may take over (as was indicated by Le Pen in her campaigns).

It is they who make the rally and it is the same them who are responsible for the fall. Expect wisely!! Don’t torture yourself!!

-         

-                                                                     -            Harsh Pathak

One of the main reasons sighted is, if France, under the leadership of Le Pen, chooses to leave the EU and consequently drops euro as its currency, then introduction of a new devalued national currency, as indicated by Le Pen would give out a shocker to especially the bond markets. The French state is expected to pledge to limit its fluctuations against the EU currency basket to a maximum of 20 percent. The prospective devaluation may prove to an immediate inorganic boost to the French economy, but the foremost concern of investors in this case shall be the fear to switch to a completely new currency.

A devalued French currency shall mean increasing its competitiveness in the International financial markets and shall reduce France’s debt in Euro terms. As per a Bloomberg report, Le Pen’s adviser Bernard Monot said, “Government debt would be redenominated in the new French currency and the state would seek to buy back the debt from foreign lenders. France would meet all its obligations to secure the trust of lenders. The Bank of France’s quantitative-easing program would generate about 100 billion new francs a year for the government -- theoretically equivalent to 100 billion euros ($107 billion) -- which would use the revenue to cover welfare payments and to fund its industrial strategy. Between 30 percent and 40 percent of the revenue would be used to repay government debt. France’s borrowing costs will rise as result of this policy but not crazily”. He forecast that the yield on 10-year bonds would be between 2 percent and 3 percent.

However, 60% of the French bonds are held outside France. S&P has already warned that any move to repay debt in a new currency shall lend up France in a Default rating. On introduction of the new French currency devalued against the Euro and repaying the bonds in terms of that currency, French investors might not care as much, but investors whose base currency is dollars or sterling or any other currency per se would very much care as the base currency valuation of their holding could end up being significantly less.

Economically weaker Eurozone countries like Greece, Portugal and Italy may have a ripple effect on their financial markets as well as the credit risk in the union rises with Frexit.

Market expectations indicate that the chances of Le Pen winning the election are way too less. The only reason why I am not eliminating the possibilities of her win are that the significance of the models that are predicting Marcos’ win do not seem to be reliant as there is still a lot of confusion in what the French are thinking. The margins with which Macron won was also narrow though. Also, when I look to the past 2-month yield spread between the German and France on 10-year sovereign bonds, they indicate a completely different picture of market expectation.

As per the yield spread, investors seem to have dumped the French bonds and instead bought German bonds, which indicate that there is still an underlying room for Le Pen to win on May 7.

 Source: Bloomberg

US Stock Markets

On Monday, after the first round of French election results were out, the US stock markets also developed optimism, with the US stock futures opening sharply higher as Dow futures rallied by more than 200 points. Any disappointment on May 7 can severely affect the Euro currency and the US stock markets as a whole as a result of panic in the markets.

Talking about India

Le Pen’s win means introduction of new devalued (against the Euro) French currency and a major decline in the EUR/USD rate (remember my quote on expectations???). It also means further breaking up of the EU. Now, India’s debt exposure to Europe is 16.5% out of the total USD 485 Billion external debt (as per reports of the Reserve Bank of India as on March 31, 2016). We survived Brexit calmly – thanks to the RBI policies set by the former central bank governor – Dr. Raghuram Rajan in maintaining enough forex reserves and other measures as well.

India is one of the most open financial markets in the world and though it survived the effects of Brexit directly, it was indirectly affected by the spillover effect of the financial markets throughout the world – thanks to globalization. And this time the spillover effect could be huge, really huge. No…. Gigantic!!

Financial markets throughout the world are going to get a major shocker if Le Pen wins and would result in a global turmoil.

History has shown that once big negative news start coming in, market participant develop a pessimistic outlook on futures. I am still a new entrant in the financial markets, but to the extent that I have seen and heard in the markets and then reading the history of stock market events and outcomes, I have realized that market participants, on a large scale, take position on stocks on the prevailing events so much that they tend to become over-optimistic or over-pessimistic, depending on the type of news. I remember the May 2014 elections in India when there was euphoria and predictions of the Modi government to win with majority in the elections, big and well known brokerage houses became so over-optimistic that they went on to predict the benchmark index – SENSEX to touch the 35,000 mark by the end of that same calendar year. It didn’t even touch the 30,000 mark that year. It was in March 4, 2015 that SENSEX crossed the 30,000 mark, but didn’t even sustain it. It took 2 long years hence to again touch the 30,000 mark and is still not sustaining it and now many big brokerage houses predict the 40,000 levels! (You see! Expectations!!) But, however, we are humans and financial markets, to a considerable scale, show movement because of expectations of market participants.

This time also, it will be pessimistic expectations that will rule the financial markets in case Le Pen wins. The U.S. economy and the stock markets have a history of sending shocks to the global financial markets. This time also, it may be the case.

I am also expecting the Indian stock markets to see some heat way forward. As per the present scenario, not only India, but the world is very optimistic on the “India: A Growth Story” with its (India’s) strong macroeconomic numbers, stable government that is growth-oriented, robust monetary policies, robust stock markets, huge demographic dividend etc. The U.S., Australia, New Zealand etc. are adopting the “country first” approach which means that Indian youth may have to explore for domestic opportunities on a large scale. This means the government may need to create enough job opportunities at a good pace. This is, at present, not the case, which means that India’s demographic dividend may soon become its demographic liability.

Returning back to the threat that U.S. may pose to Indian financial market conditions, let us see the following graph,

Source: Bloomberg

This graph shows that the ratio of Market Capitalization of the S&P 500 Index to the U.S. GDP has been rising to levels that were existing during the dot-com bubble. The same levels are seen to be approaching at the moment since the Great Recession happened. This may be an indication of the U.S. stocks being overvalued at the moment.

Any shock from the final round of the French Presidential election (yes, the shock I am referring is the win of Le Pen) will trigger a global financial market turmoil and can send the U.S. stock markets back to the 2009 levels. We seem to be sitting on another possible recession, this time from the present EU. And, any shock in the U.S. means ripple effect in the rest of the world.

Le Pen has also indicated a 6-month EU exit timeline once she assumes power and then the introduction of the new devalued currency in the country, which shall be responsible for all of the above.

Let’s see if Le Pen can prove mightier and lead to a bloodshed in case she ‘writes’ France’s future. Or would Macron be able to diffuse the ‘bomb’.

- Harsh Pathak

President - Finance Club, MISB Bocconi - Bocconi India

About the author,

Harsh Pathak is a student at MISB Bocconi (Bocconi India) and the president of Finance Club of the institute. He has immense interest in financial markets and runs his own analysis on Indian stock markets on a daily basis. He can be reached at,

Phone: +919820976480

Email: harsh.pathak@misbbocconi.com

Facebook: https://www.facebook.com/harsh.pathak.1048

LinkedIn: https://www.linkedin.com/in/harsh-pathak-2a960559/

Demonetization - RBI - Government of India v/s Dalal Street

Novemeber 8, 2016 was the historic day when the Prime Minister of India – Mr. Narendra Modi announced a 50-day drive towards demonetization of the already printed old Rs. 500 and Rs. 1000 currency notes effective from midnight of that date. The demonetization drive was basically put in action to end the fake currency circulation of the high denomination notes in the Indian economy and as a strict measure against the parallel or black economy. Since the announcement of the demonetization, people holding a huge chunk of black money have been finding innovative ways to safeguard their wealth. Some seem to have found out ways to safeguard a substantial part, while others chose to declare their wealth and bear the fines.

On December 31, 2016, the Indian Prime Minister had addressed the nation as the 50-day Demonetization drive initiated by the government was completed. Mr. Modi laid out several major incentives mainly for the poor, the farmers, women, pensioners and small scale business people.

Soon after the PM announced bank related incentives for these segments, several banks had cut their Marginal Cost of Funds Lending Rate (MCLR) with SBI leading the pack by cutting MCLR by 0.9% Other PSUs like Punjab National bank and Union Bank of India have announced a cut in the lending rates. India's largest private bank ICICI too cut its lending rates by 70 bps or 0.7%

Narendra Modi had earlier indicated that the budget shall be presented 1 month in advance. On January 4, 2017, the government declared that the Union Budget 2017-18 will be presented on February 1, 2017.

So now the question troubling investors and traders is, with these developments in place, will the stock market see a huge bullish run before the budget is presented by the Finance Minister? Traders would be hungry for an opportunity to book quick profits, while investors may be seeking that golden moment to enter the market for long term.

Writer’s Analysis on this Scenario

Expectations in the Indian economy

• 1   More than 85% of the market participants including majority of the economists were expecting a cut in the repo rate of 25 bps. during the Reserve Bank of India’s bi monthly policy meet on December 7, 2016. About 23% of those participants showed over-optimism and even expected a cut of 50 bps. because the CPI numbers that were released few days before the policy meet were well within the central bank’s target. The main reason of the CPI figure remaining in limit was that food inflation was low and within the expected range as a result of a good normal monsoon. The OPEC members had still (i.e. before the December policy meet) not reached a consensus to put a cap on the oil output sighting uncertainty from Iran’s and Russia’s stance. This kept oil prices well below $50 per barrel, which was in turn good for Indian economy as low import prices mean lower import bill for the Indian government (oil prices make up about 80% of the government’s import bill). Thus, two main components – food and fuel, which have more than 50% weightage in the CPI basket of goods seemed well under control. Also in its policy meet in October 2016, RBI governor Dr. Urjit Patel had stated that the neutral real interest rate in India is now 1.5 – 2.0%. This may also have raised expectations of the market for a probable rate cut during the December policy meet. However, RBI did not cut the rates and that had probably led to a dissatisfaction amongst the market players.
• 
  
• 2    Soon as the demonetization drive was initiated by the government, the economy was seeing a tough situation with liquid cash getting dried up in the country as the currency notes of 500 and 1000 denominations, which made up 86% of the total cash notes circulated in the economy were no longer valid. The industries directly and indirectly related with the consumer markets – mainly the FMCG industry, were facing tough time as potential consumers queued up in front of ATMs and banks to either exchange or deposit their old notes. Consumer goods market saw a substantial hit because of the demonetization drive – So much that analysts and domestic as well as international investment firms now revised India’s expected FY 2017 GDP growth down to 7.0 – 7.2% from the previously expected 7.6%. This was the second reason for the market players to expect that RBI may go for a rate cut so as to stimulate the state of economy and to support growth at pre-determined levels.

What may have kept RBI from cutting the interest rates on December 7, 2016

Ø  There were mixed expectations of people from the Demonetization drive. Many saw it as a bold and a good decision by the Indian government against the parallel economy (black economy), while many claimed it to be a step only to get an advantage in the upcoming Uttar Pradesh state elections (Uttar Pradesh state elections are considered to be very important for the government in power at the center i.e. the BJP government, as a majority win in the same can get them a good number of seats in the Upper House of the Parliament, where currently they have very few seats as opposed to the Lower House of the Parliament where they have more than two-thirds of the majority). The government had however claimed it as a step towards eradicating the parallel economy. The results of the same could be analyzed only after the entire drive got completed and government could actually measure the success of their initiative only after that. The RBI had raised the CRR from 4% to 100% after the demonetization drive was initiated (This was   however rolled back during the December 7 policy meet).

Ø  As of December 7, 2016, it was only a month since Donald Trump was elected as the President of The United States of America and the world was still confused on how the global economy would move ahead with this development. This was because there was Hilary Clinton’s win was what majority of the global market players were expecting but it turned out to be the other way round. However, in spite of Trump’s win the US markets went on to post one of the best performances since the 2008 Global Financial Crisis. Thus, there was still confusion prevailing in the markets. Over and above that, world’s highest growing emerging economy – India, was facing a tough time because of a tentatively slowing growth as cash started getting dried up in the economy following the demonetization drive.

Ø  Russia, being one of the largest non-OPEC oil producer, had shown a positive indication to put a cap on oil output – much what the OPEC member countries were looking for to take a decision on controlling the oil output so as to support prices. This had given a positive indication for the upward movement in the oil prices, which had remained at sub $50 per barrel levels for quite a long time. This move, which was a cheer for oil producing countries, was seen as a potential point of worry for the oil importing countries like India. Movement of oil prices from those levels to about $55 a barrel (which the OPEC member countries were expecting) could add up substantially to India’s import bill, which would pass on and add up to the domestic oil prices, which would in turn start reflecting in the prices of goods produced in the country as they move up. This again would create a rebalance in the import-export scenario in Indian economy and would also lead to a potential inflation upwards.

Ø  The artificial disinflation (which was assumed to potentially occur because of the already evident low spending and low economic activity) in India following the demonetization drive would start recovering once the new currency notes would fully replace the old notes and as India would come out of the temporary liquidity crisis. Thus, once a sudden jump in inflation would raise questions and create panic in the fastest growing emerging economy in case RBI would cut the rates on December 7 policy meet. The U.S. Fed had not increased their interest rates as was being promised before the presidential elections happened.

With all these factors in place, it would be very hazy environment for the RBI to put one more rate cut in place. Also, now as the decisions for rate cut and other monetary policy forming decisions are jointly being taken by 3 members from the RBI team and 3 government appointed representatives after the formation of Monetary Policy Committee (MPC), the political and economic environments simultaneously brainstorm in the process. Thus, in such an environment, it was quite evident that RBI would not be cutting interest rates in the December 7 policy meet as such decisions should maintain as consistency in the performance of the economy. It was quite surprising that about 85% of the market players were expecting a rate cut during that meet.

Writer’s Comments

Taking into consideration all the factors, it seems that in this less-than-one-month period before the Budget, economic activity will start getting back to normal with the new currency notes accelerating back into the economy as they replace the old notes.

As per the recent developments, the U.S. shale production will be increasing in the coming months though the OPEC members have agreed to put a cap. This may pose a threat to the commitment of OPEC and there is a possibility that the leading oil producers like Saudi Arabia and Iran will refrain from limiting their oil output in order to retain their market share, which will lead to Russia becoming active in the oil market again to retain its own market share. This may drive the oil prices back to sub $50 a barrel levels which is a possible big cheer for an oil importing country like India.

On December 31, 2016 when Mr. Narendra Modi addressed the nation to thank the citizens of India, he specially thanked the bankers for taking due pain during that period and also announced several bank related incentives as stated earlier. With this, he gave several indications towards the possible incentives in the 2017-18 Union Budget that is scheduled to be presented on February 1, 2017.

The leading public and private banks in India had recently passed on the rate cuts to common people by slashing their MCLR substantially.

But in the next RBI policy meet scheduled on February 8, 2017, I expect the RBI shall maintain the policy rates at the current levels, reason being that RBI may monitor the activity in the economy after demonetization for quite some time and until the results of demonetization are measured, it would be difficult to take major decisions. Also, the recent benefits of rate cuts that have been passed by the banks shall be monitored for some time. In case RBI cuts rate in the February meet, there shall be an oversupply of stimulus in the economy because of back to back events happening, which can be a potential driver of inflation, which is again bad for the economy in a long run. We should never forget the case of the U.S. Housing Bubble that happened as the U.S. Fed provided an oversupply of monetary stimuli by aggressively reducing the rates following the Dot com bubble and the 2001 World Trade Centre attacks, which ultimately led to the 2008 Global Financial Crisis.

In this scenario, I expect the market to remain range-bound at the current levels with a few upward and downward fluctuations or move slightly upwards by about 2% from the current levels till February 1, 2017.         

The writer can be reached at pgpb05.34@misbbocconi.com

- Harsh Pathak

Student and Core-Committee Member of Finance Club, MISB Bocconi - Bocconi India