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The markets seem to be waiting and watching before deciding on their next move. After last week’s speech by Fed chair Jay Powell, the market’s direction had turned positive, interpreting his comments to mean that a tapering of tightening was on its way. That got punctured a bit by an unusually strong US jobs market report that gave the hawks in the market some reason to preen. It’s that familiar feeling of uncertainty.
The Reserve Bank of India’s monetary policy committee will meet this week to take a call on interest rates. The MPC recently had to write a letter to the government explaining its failure to control inflation. Since inflation is high and expected to remain high, a rate hike has been priced in by markets. But the MPC is also seeing dissenting voices that could lead to a pause, if more join their camp. It’s not an easy decision. Here’s Aparna Iyer’s take on their choices and whether pausing too early could do more damage later on.
Strengthening the case for a rate hike is PMI data, which shows in the gloomy world of manufacturing, with November reporting a print of 55.7, nearly 7 points above the global average. Three-fourths of the 31 countries for which data was available reported a contraction. Worse, on three indicators of new orders, international trade and inventory build-up, the news is not good. India-watchers need not worry, however. The data, however, does signal that inflation remains a problem.
That manufacturing is regaining its appetite is also evident in bank credit data that shows offtake by big industry has begun gathering pace. Between August and October 2022, credit to large industry accounted for over a fifth of the increase in total outstanding non-food credit. Some of the sectors contributing were energy, chemicals, iron and steel and infrastructure. The government has played a crucial support in pushing for investments in energy and infrastructure while chemicals have benefited from higher demand due to the China plus One opportunity. Chemicals and steel have also benefited from higher commodity prices.
Even services are playing ball. The seasonally adjusted S&P Global India Services PMI Business Activity Index rose to 56.4 in November, from 55.1 in October. That points to a sharp increase in output that was the quickest in three months even amid higher operating expenses.
The big question is what about animal spirits. Looking at the manufacturing PMI data and even credit and the fact that business sentiment was at its highest in close to 8 years, it seems like it’s in ‘roaring’ territory. But the government and even bankers such as Uday Kotak are asking companies to be bolder when it comes to capital investments.
One is capital. Debt has turned more expensive than a few years ago and that means the returns’ bar to take up a project has gone higher. Startups finding it difficult to raise capital may seem like they are doing something wrong now. But it’s just that the moneybags are becoming more discerning. A global slowdown makes it even less appealing to invest. Read our FT selection on how global financial markets are facing a reckoning (free for Pro subscribers), which mentions: 'Soaring inflation is being met by rising interest rates, the slowing of central bank asset purchases and fiscal shocks, all of which are sucking liquidity, the ability to transact without dramatically moving prices, out of markets'.
Better to be stuck with a problem of full utilisation that can be solved by investing at that point, than to borrow and be stuck with low orders. And, when a large part of India’s population — in the middle and lower income of the pyramid — are tightening their belts, investing when consumption is anaemic does not make for good business sense. It requires some sort of a giant backstop to make companies invest. The sort that the US is doing with its Inflation Reduction Act, which saw the European Union crying foul as the act lends an unfair advantage to companies producing in the US. That’s the sort of thing India is attempting with its PLI scheme but that’s directed at chosen sectors. The uncertainties of the past few years have also made Indian industry wary. A bit of blame can be laid at the government’s doorstep, too. Policy certainty is imperative for entrepreneurs to make capital investments.
The squeeze that it applied on steel companies with its export duty will make them wary of going all in with investments. They will invest for sure, but it won’t be surprising if they stretch them out, to be sure they do not roll out goods in an oversupplied market. What is the precise moment when a business owner wakes up and decides to build is unclear but that time is not here, yet.
Investing insights from our research team
Karur Vysya Bank: Why there is upside despite the huge outperformance
Vijay Diagnostics: Stabilisation in pricing adds to constructive take
EID Parry: Why the prospects are sweet for this stock
What else are we reading?
Government and collegium face-off can worsen law’s delay
Import checks | Quality on lips, China on mind
The Eastern Window: China, Russia looking for fissures in US-EU unity
G20 Presidency | A big narrative articulating Global South’s priorities is crucial
Technical Picks: Hindalco Industries, Maruti, Silver mini, Zensar Technologies, USD-INR and Apollo Hospital (These are published every trading day before markets open and can be read on the app).
Ravi AnanthanarayananMoneycontrol Pro