The cash reserve ratio (CRR) cut releases an estimated Rs 32,000 crore into the system. The impact will be negligible. The Reserve Bank of India’s open market operations remove twice that quantum on a regular basis. The last few government treasury bill auctions have mopped close to Rs 1.5 lakh crore each, indicating that government deficits continue to crowd out corporate borrowers.
The impact of the CRR cut on GoI yields is likely negligible as well. As of now, the yield curve at the short-end is inverted. The differential between short-term and long-term yields is minuscule. The 91-Day Treasury Bill (DTB) last traded at a yield till maturity (YTM) of 8.73 per cent, while the 180-DTB was at YTM of 8.55 per cent and the 364-DTB was at 8.47 per cent. The 2021 GoI security was at 8.79 per cent.
The apparent absurdity of short-term yields being higher than long-term yields occurs when further rises in interest rates are expected. Since those in the GoI security market are all major institutional players, it can be argued that they know more about likely trends than equity traders.
So far, what we’ve seen of Q3 results indicates that interest costs continue to rise and the cut won’t interrupt this trend. In combination with higher raw material inputs, this has a toxic effect on bottom lines. A sample of 400-odd non-financial companies have seen consolidated net margin shrink to around 9.5 per cent from around 12 per cent a year ago. The impact on OPMs (operating profit margins) has also been severe with Q3, 2011-12 OPM dropping below 16 per cent from above 19 per cent a year ago.
Earnings growth has been negative or anaemic for this sample. It’s possible that companies that have not yet declared Q3 results will reverse the trend. But that’s unlikely because the ‘early birds’ consist of bigger, more profitable concerns. Is it worth running businesses at a net margin of 9.5 per cent, if you receive 8.7 per cent for three-month AAA debt? Is it worth buying into a market trading at a current PE of 20-plus when EPS growth is single digit at best? If the answers to the above questions are ‘no’, one shouldn’t be buying into the Indian stock market right now.
However, the Nifty has gone up by over 10 per cent in 2012. My instinct is that this is a dead-cat bounce. Going by technical and historical indicators it’s likely to persist if pre-Budget rumours are positive. If you enter the rally at these levels, be prepared to reverse and go “double-minus” on B-day and after.
The author is a technical and equity analyst
