Where next for the economy of India?

A subject we returned to several times in 2019 was the economy of India. There were two main drivers here which were interrelated. One was the economic slow down and the second was the wave of interest-rate cuts we saw from the Reserve Bank of India. At the moment India is back in the news on two fronts. Firstly President Trump is in town although by his pronounciation of Sachin Tendulkar he had a lot to learn about the national sport. Second and much more sadly there are riots in Delhi continuing a recent theme of unrest in India. For our purposes though, we need to switch back to the economic situation and how India can deal as best as it can with the economic effects of the Corona Virus.

Where do we stand?

The latest minutes from the Reserve Bank of India tell us this.

Moving on to the domestic economy, the first advance estimates (FAE) released by the National Statistical Office (NSO) on January 7, 2020 placed India’s real gross domestic product (GDP) growth for 2019-20 at 5.0 per cent.

Whilst these would be considered fast numbers for elsewhere they are really rather underwhelming for India. Indeed numbers for the past are being revised down as well.

 In its January 31 release, the NSO revised real GDP growth for 2018-19 to 6.1 per cent from 6.8 per cent given in the provisional estimates of May 2019. On the supply side, growth of real gross value added (GVA) is estimated at 4.9 per cent in 2019-20 as compared with 6.0 per cent in 2018-19.

The RBI also gave us a reminder of how much has cut interest-rates in response to this.

As against the cumulative reduction in the policy repo rate by 135 bps since February 2019, transmission to various money and corporate debt market segments up to January 31, 2020 ranged from 146 bps (overnight call money market) to 190 bps (3-month CPs of non-banking finance companies).

It will be happy to see greater impacts than its move and India’s government will be grateful for this impact too.

Transmission through the longer end of government securities market was at 73 bps (5-year government securities) and 76 bps (10-year government securities).

Although caution is required here as bond markets have been rallying anyway so it is hard to determine the exact cause of any move. However amidst the cheerleading there is something we have seen elsewhere.

Transmission to the credit market is gradually improving. …….. The weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 69 bps and the WALR on outstanding rupee loans by 13 bps during February-December 2019.

This is a familiar feature of the credit crunch era where interest-rate cuts get lost in the banking system and do not reach the borrower be they individual or business.

Know Your Onions

These are a staple part of the Indian diet and back on December 2nd this was the state of play.

Households and restaurants in India are reeling under pressure as onion prices have surged exponentially  across the country. A kilo of onion is retailing at Rs 90-100 in most Indian states, peaking at Rs 120-130 per kilo in major cities like Kolkata, Chennai, Mumbai, Odisha, and Pune.

This hurt consumers and especially the poor adding to the economic difficulties faced by Indians. Well according to the Times of India things are now much better.

PANAJI: After burning a hole in the pockets of the common man for over three months, prices of onions have come down to  ..Rs 29 per kg at the outlets run by the Goa State  Horticulture Corporation Limited (GSHCL).

Whilst the onion crisis has faded from view the inflation situation has got worse with the annual rate rising to 7.59% in January. In spite of the fall in Onion prices it is being pulled higher by food (and drink) inflation which is 11.79% as the inflation shifts.

On the other hand, the recent pick-up in prices of non-vegetable food items, specifically in milk due to a rise in input costs, and in pulses due to a shortfall in kharif production, are all likely to sustain. ( RBI)

Looking back we see an index set at 100 in 2012 is now at 150.2 so India has seen more inflation than in many other places. I will let readers decide for themselves about housing inflation at 4.2% because in other countries we would consider that to be high but for India perhaps not.

Copying the Euro area

Firstly let us give the RBI some credit ( sorry) as we note that it got ahead of the US Federal Reserve which stumbled in this area last autumn.

Since June 2019, the Reserve Bank has ensured that comfortable liquidity is available in the system in order to facilitate the transmission of monetary policy actions and flow of credit to the economy.

Although that does rather beg a question of what it was doing in the years and decades before then! Also we seem to need more liquidity after all the monetary easing in India and elsewhere which is much more in line with my arguments that it is not working than the official claims of success.

The model was taken from the Euro area.

As announced in the Statement on Developmental and Regulatory Policies on February 06, 2020, it has been decided to conduct Long Term Repo Operations (LTROs) for one-year and three-year tenors for up to a total amount of ₹ 1,00,000 crores at the policy repo rate.

Yesterday’s one-year operation saw plenty of demand.

The total bids that were received amounted to `1,23,154 crore, implying a bid to cover ratio (i.e., the amount of bids received relative to the notified amount) of 4.9.

So the system is keen on what Stevie V called cold hard cash, dirty money and we see that there was even more demand for the longer version earlier this month.

The response to the LTRO has been highly encouraging. The total bids that were received amounted to ₹ 1,94,414 crore, implying a bid to cover ratio (i.e., the amount of bids received relative to the amount announced) of 7.8. The total amount of bids has, in fact, exceeded the aggregate amount of ₹ 1,00,000 crore proposed to be offered under the LTRO scheme.

We can add “highly encouraging” to my financial lexicon for these times. After all if LTROs are the triumph they are officially claimed to be the Euro area economy would not be where it is.

Comment

Today has been a journey through the problems faced by the economy of India. If we start with economic growth then it was weakening anyway and I have my doubts about the first bit from the RBI below.

the easing of global trade uncertainties should encourage exports and spur investment activity. The breakout of the corona virus may, however, impact tourist arrivals and global trade.

So far whilst the letter I has been over represented in the Corona Virus outbreak India has thankfully been quiet, but it cannot escape the wider economic effects.

Next comes the issue of inflation as India’s workers and consumers have been suffering from a burst of it just as its inflation targeting central bank has cut interest-rates substantially. So there will have been hardship which is fertile breeding ground for the unrest we are seeing.

Also there seems to be a thirst for liquidity in the financial sector in India. We have looked in the past at the problems of the banks there and it would seem that like in the Euro area they are in something of a drought for liquidity. The RBI deserves credit for so far avoiding the way the US central bank has ended up like a dog chasing its tail. But we return as so often to wondering why ever more liquidity is required? Which leads to whether it is merely masking underlying solvency issues.

Meanwhile The Donald is in full flow.

Trump in India: If I don’t win, you’ll see a crash like you’ve never seen before ( Maria Tadeo of Bloomberg)

The Investing Channel

 

The economic outlook for the Euro area looks even weaker

Today brings the economy of the Euro area into focus and to my mind yesterday brought us something to consider so let me hand you over to Statistics Netherlands.

In January 2019, prices of owner-occupied dwellings (excluding new constructions) were on average 8.7 percent higher than in the same month last year. The price increase was somewhat higher than in December 2018. This is evident from price monitoring of existing owner-occupied dwellings by Statistics Netherlands (CBS) and The Netherlands’ Cadastre, Land Registry and Mapping Agency.

This is a very familiar theme as we find that the era of low and in this instance negative interest-rates and QE bond purchases leads to higher house prices. We have looked at house prices in the Netherlands regularly over the credit crunch era so let us remind ourselves of the full scope and the emphasis is mine.

House prices reached a record high in August 2008 and subsequently started to decline, reaching a low in June 2013. The trend has been upward since then. In May 2018, the price index of owner-occupied dwellings exceeded the record level of August 2008 for the first time. In January 2019, house prices reached the highest level ever.

Compared to the low in June 2013, house prices were up by almost 36 percent on average in January 2019, and 6.5 percent higher on average relative to the previous peak in August 2008.

There are various issues to consider here of which the first is simply timing. Different central banks responded in different ways to the credit crunch but house prices turning in the summer of 2013 is a rather familiar message. Also we note that the turn in house prices was driven by credit easing policies at this point as large-scale QE had not yet begun. From December 2011.

To conduct two longer-term refinancing operations (LTROs) with a maturity of 36 months and the option of early repayment after one year.

They amounted to around one trillion Euros and slowly we see in this instance the Netherlands housing market began to sing along with George Benson.

Turn your love around
Don’t you turn me down
I can show you how
Turn your love around

Why do central bankers love this? A speech from Peter Praet of the ECB last week gave us the two main reasons and he opened with the wealth effects.

Residential real estate (RRE) is the main component of euro area household wealth. Housing accounts for around 50% of asset holdings[2] and is largely financed through borrowing, with mortgages making up 85% of household liabilities

Then the fact that it supports “the precious”.

The corollary is a tight linkage between RRE prices and the balance sheets of the euro area banking sector. Mortgage loans account for between 40% and 90% of total lending by euro area banks to households across EU countries.

One way of looking at the problems of the Italian is to note that the balance sheets of the banks have not been helped by higher house prices for their mortgage balance sheets and troublingly in fact it is getting worse.

According to preliminary estimates, in the third quarter of 2018 the House Price Index (see Italian IPAB) decreased by 0.8% compared with both the previous quarter and the same quarter of the previous year (on annual basis it was -0.4% in the second quarter).

The linkage to the real economy was also provided by Peter Praet and at the moment he will be thinking of the positives in spite of the fact he looked at it in reverse here.

Falls in prices therefore affect the euro area business cycle through two main channels. First, by reducing households’ net wealth, which has decelerator effects on consumption[3], and weakening banks’ balance sheets through the decline in collateral and property values (the asset valuation channel); and second, by increasing the riskiness of households and of construction firms, prompting banks to tighten their lending standards (the credit risk channel).

Overall I guess he will be happy with this.

House prices rose by 4.3% in both the euro area and the EU in the third quarter of 2018 compared with the same quarter of the previous year.

This compares to a current consumer inflation rate of the order of 2.1% back then which does not seem to include house prices, can anybody think why? Let me help out by suggesting in central banker terms at least the other around 2% is wealth effects.

Returning to the monetary analysis theme and looking at the path of narrow and broad money growth it looks as though house prices move with broad money growth which is logical with the role of mortgage lending in overall bank lending. House prices may even move first perhaps in anticipation of policy moves as we have seen with bond yields and exchange rates.

Money Supply Trends

We have got used to falling numbers and today was no exception.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 6.2% in January from 6.6% in December…….annual growth rate of broad monetary aggregate M3 decreased to 3.8% in January 2019 from 4.1% in December 2018.

If we look at this as a broad sweep then M1 growth has fallen substantially from the 11.7% per annum peak of the summer of 2015 and the bounce to 9.7% in late 2017. Much of this has been a deliberate policy with the monthly QE tap having been reduced and then finally closed at the end of 2018. This has had an impact on the broader measure as well which has also been weakened by this.

The annual growth rate of short-term deposits other than overnight deposits (M2-M1) stood at -0.8% in January, unchanged from the previous month. The annual growth rate of marketable instruments (M3-M2) decreased to 0.4% in January from 0.9% in December.

Putting it another way M3 would be growing at an annual rate of 4% if only M1 was a factor and the wider measures reduced the annual rate of growth by 0.2%.

Comment

The narrow money supply measure proved to be an accurate indicator for the Euro area economy in 2018 as the fall in its growth rate was followed by a fall in economic (GDP) growth. It gives us a guide to the next six months and the 0.4% fall in the annual rate of growth to 6.2% looks ominous. A little relief comes from the fact that inflation has fallen although that may change as we note the recent rises in the oil price. Thus it looks like more of the same weak trend in the early part of 2018.

The broad money measure has declined but in proportionate terms by much less or to put it another way this is mostly the result of the end of QE. This poses a problem as we are reminded of the words of Mario Draghi.

certainly especially in some parts of this period of time, QE has been the only driver of this recovery.

Now we see that as it has ended in terms of monthly flow economic growth in the Euro area has slowed to a crawl. Whether it will slow further I do not know but we seem set for more weak growth in the early part of this year.

Meanwhile some have claimed that bank lending growth is supporting things as opposed to my view that it is a lagging indicator and has been representing the better times seen in 2017. I guess they will be quieter today as even lagging indicators work over time.

Annual growth rate of adjusted loans to non-financial corporations decreased to 3.3% in January from 3.9% in December.

Returning to my opening theme unless there is a change the outlook for house prices in the Euro area looks set for a turn.