Money supply likely to be tighter in 2019

Investors drew comfort from the fall in crude prices. That in turn, led to a strengthening of the rupee.  Results across banking also indicate that there has been some headway in combating non-performing assets (NPAs). But the confrontation between the Reserve Bank of India (RBI) and the government continues, and there are new worries about global growth slowing down, and about the implications of possible changes in political equations both in the US, and in India.

The US mid-term elections have given the Democrats control of the House of Representatives (HoR, equivalent to the Lok Sabha). This means new dangers to the Trump government since an impeachment motion can be brought in the HoR. While the Republican-controlled Senate is unlikely to vote for the President’s ouster, he will be under more pressure and may react unpredictably.

As of now, the crude market has discounted the new Iran sanctions with India, one of eight nations that have conditional waivers to trade with the Islamic Republic. This has led to a 15 per cent fall in crude prices. There are even fears that oil could slide into a bear market if global growth tanks due to the Trump Trade War.

However, several key OPEC nations could go along with the Saudi stance of cutting crude production to ensure prices stay high. The US won’t mind high oil prices. It is the world’s largest oil producer but US oil extraction is also expensive.  

The US Federal Reserve held rates at its latest policy meeting but indicated it is braced to hike again in December. 

It will also continue with its Quantitative Tightening, cutting down the size of its balance sheet. This will mean tighter money supply. The European Central Bank is also likely to taper its ongoing quantitative easing programme in December-January.  Money supply is likely to be tighter through 2019 unless growth falls off a cliff and central banks change stances.

Meanwhile, the RBI and the government are still “discussing” their relationship. Forcing a confrontation by invoking Section 7 of the RBI Act to demand the central bank transfer a large chunk of its Reserves may also trigger a resignation from the Governor. The RBI Board meeting on November 19 could be crucial in resolving this situation. The demand for higher RBI dividends has also led to questions about a overshoot of the fiscal deficit, even though lower crude prices will reduce the current account deficit.

The “Twin balance sheet problem” of massive NPAs and corporate losses could be moderating, going by the Q2 results. Most banks reported a decline in bad loans to advances ratios in Q2, according to a new report by CARE Ratings. The rating agency says NPA to advances peaked in the fourth quarter of 2017-18 at 10.16 per cent. It moderated to 9.41 per cent in Q2 according to CARE’s estimates.

Provisions for bad loans had peaked in Q4, 2017-18 (Jan-Mar 2018) at Rs1.23 trillion for a sample of 30 banks. Provisions in Q1, (Apr-Jun 2018) reduced to Rs576 billion and in Q2 (Jul-Sep 2018), further reduced to Rs507 billion. Big players such as the State Bank of India (SBI), ICICI Bank and Axis Bank saw reductions in NPA ratios. This is heartening.

Incidentally SBI claimed a turnaround with a profit in Q2, (July-Sep 2018) after reporting losses in the three previous quarters. Net interest income (NII), (revenue minus

interest expenses), increased 12.5 per cent from Rs185.86 billion a year ago to Rs209.06 billion in Q2FY19. SBI also recorded exceptional gains of Rs15.6 billion from a stake sale in SBI General Life Insurance, and a 26 per cent stake sale in the Merchant Acquiring Business to a subsidiary. The real good news was that net NPAs declined to 4.84 per cent of advances from 5.29 per cent of advances as of Q1. Provisioning for bad loans dropped to Rs120.92 billion, down from Rs165.41 billion a year ago. 

Political equations are now starting to have an impact. Five state assembly elections in the next few weeks will indicate how much the mood has changed since 2014 and investors will be looking forward to gauge outcomes in the General Elections in April-May 2019. Every opinion poll and assembly result from here onwards, not to mention Rafale, CBI etc. could cause volatility and that will tend to dominate news cycles and perhaps, spook investors.

Technically speaking, it’s worth sounding a note of caution. The market indices are up over 5.5 per cent in the past fortnight. But this is on very low volumes. Foreign portfolio investors have been net positive but the contributions are tiny and Domestic Institutions have also made tiny net contributions. 

The market indices are below their respective 200 Day Moving Averages (the 200 DMA is about 10750 for the Nifty) and will face high resistance. In plain terms, there was a lot of buying at 10700-10800 Nifty. Short-term traders will cut their losses by selling if those levels are hit again. Fresh buying in high volumes will be required to absorb that selling.