Why the stock market is being myopic in celebrating Urjit Patel's resignation

There is no free lunch. The market is forgetting there will be a price to pay for loosening the government’s and RBI’s purse strings.

If the outcome of the state election and sudden resignation of RBI governor Urjit Patel was a stunner, what was even more surprising was the market’s reaction to the unfolding events.

Impending rate cut?

The irrational exuberance got a boost from the recently released retail inflation number that showed CPI inflation easing to 2.33 percent in November. While the base effect was favourable for a lower print, a sharp contraction of 2.6 percent in food inflation triggered the decline.

To be sure, RBI should have reverted to a neutral stance in the December policy itself and will likely turn more dovish going forward, thereby opening the gate for future rate cuts. However, having acknowledged the soft inflation outlook, RBI has been hamstrung by the deteriorating fiscal picture, which will likely worsen post the recent state election outcome.

A pliant RBI?

The euphoria doesn’t stop with rates and cyclical stocks. Market reaction seems to suggest that we are quite okay having a pliant regulator. Only time will tell how the new regime at RBI would turn out to be. For now, markets are celebrating the probability of relaxation of PCA (prompt and corrective action norms) norms, without paying much heed to the inadequate capital position of these PSU banks that should have been addressed first.

The possibility of relaxed NPA (non-performing assets) recognition norms is also taken positively, with little worry about the impending risk building up in the system that has already paid a heavy price in the last few years as large part of corporate credit turned toxic.

The assumption that seems to have also comforted the traders is a dilution in governance standards of RBI that will result in relaxing standards over bad loans and governance lapses at a private bank, relax the promoter holding criteria of a few other private banks and grant exemption to small finance banks from listing within a stipulated period. While individual stocks might gain on company-specific relaxation, a dilution in governance standards from RBI should be a cause for worry and not celebration.

The IL&FS crisis led liquidity tightness has eased quite a bit with RBI injecting liquidity through its open market operation. For credit-worthy borrowers, there is no dearth of funds as the issue was more of risk aversion than liquidity. Opening a special tap for NBFCs indiscriminately will only benefit the not so credit worthy and might increase credit to the subprime – again not something to rejoice about.

Can markets run on the oxygen of populism?

The credit party which the market seems to be looking forward to seem to dovetail well with the political strategy post the state election verdict – that of boosting consumption to mask agrarian distress and urban joblessness.

Time and again such short-term doles do little to boost agricultural income as poor crop realisation and too many people trying to make a living from farming lies at the heart of the problem. Unless alternative employment generation is facilitated through massive job creation in industries, the problem is likely to persist.

Moreover, there is a fiscal cost of freebies, so a short-term spurt in consumption always evens out in due course. The usual fad about chasing consumption companies pre-election therefore has its limitations.

As discussed earlier,  the fiscal situation is grave and can get worrisome with populist spending and loan waivers. The quick fix solution of bridging the fiscal gap with RBI’s capital will leave us with a weaker central bank to face a volatile global landscape.

The lack of checks and balances with the government fully controlling the central bank, the probability of a fractured mandate in the upcoming general election and the negative implications on the fiscal front from heightened populism seem to have been completely ignored.

While a pro-growth agenda is always welcome, incremental returns with much higher risk certainly warrant caution. Amidst the hype and whoop-la in the markets, long-term investors need to keep that in mind.

Source: https://www .moneycontrol.com/news/business/markets/why-the-stock-market-is-being-myopic-in-celebrating-urjit-patels-resignation-3286891.html

If you want more information regarding the Market News & many other tips like Intraday Tips, MCX Normal Calls, Bullion Market Tips, Share Market Services, NSE & BSE Market Tips, Free MCX Market Tips, MCX Premium Tips, Bullion Energy Tips, commodity market tips.

Visit: Trade India Research

Whatsapp User Join Our Group: 9300421111