In this briefing:
- The RBI Duly Caves in to Reality; Tame Inflation Implies a Further Rate Cut in Six Weeks
- Chalet Hotels Post-IPO – First-Day Traded Volume Pales in Comparison to past Indian IPOs
- 2019 Elections – Part 3. India: Modi’s Magic Touch Fades as Populism Re-Appears
1. The RBI Duly Caves in to Reality; Tame Inflation Implies a Further Rate Cut in Six Weeks
The RBI (Reserve Bank of India) cut its policy rate by 25bp, with the MPC (monetary policy committee) voting 4-2 in favour of the move. It also altered its monetary stance to “neutral” from “calibrated tightening”. We had said at the time of the RBI’s rate hike last June that it was making a major policy error ( RBI Raises Rates, but Will Likely Look Foolish when Inflation Moderates) because inflation was likely to completely bely the official forecast and move down rather than up. That has duly happened, with CPI inflation at 2.19% YoY in December 2018 (versus the RBI’s June 2018 forecast of “4.7% with risks tilted to the upside”). WPI inflation (not the RBI’s main target) has also eased to 3.8% YoY in December 2018.
India’s real repo rate of +4.3% was among the highest in the world before this rate cut — and the new +4% real repo rate still remains exceptionally high. Although food prices are likely to decline less rapidly in the current quarter, headline CPI inflation is likely to edge up only slightly to 2.5-3% YoY in January-March 2019. This will allow the RBI to cut the policy rate further to 6% at its next meeting — still leaving the real repo rate above +3%.
The rational decline in nominal policy rates should provide a significant medium-term fillip to growth, allowing real GDP to grow more than 8% YoY in FY2019/20 and more in subsequent years as further structural reforms occur under a rejuvenated Modi government in its second term. After its initial negative reaction, we expect the stock market to also welcome the easier monetary conditions. We recommend staying Overweight the India equity and bond markets, especially after recent sell-offs (i.e., Buy into this weakness).
2. Chalet Hotels Post-IPO – First-Day Traded Volume Pales in Comparison to past Indian IPOs
Chalet Hotels Limited (CHALET IN) raised US$239m at INR280 per share, the top-end of its IPO price range. We have previously covered the IPO in Chalet Hotels IPO Review – Backed up into a Corner.
In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.
3. 2019 Elections – Part 3. India: Modi’s Magic Touch Fades as Populism Re-Appears
The world’s largest democracy holds general elections over a six-week period in April-May. The ‘Modi magic’ of five years ago has long faded as growth failed to meet expectations. Poor results in recent state assembly elections signal something of a ‘Congress comeback’, which raises the risk of a hung parliament and a prolonged period of political uncertainty. The close race has spurred Modi’s BJP to backtrack on fiscal consolidation and instead pivot towards populist policies (like farm loan waivers) that may fan inflation, reignite ‘twin deficit’ concerns and reverse India’s ratings upgrades. Risk assets are likely to see more volatility, with risks tilted to the downside.
This insight is Part 3 of a six-part series on 2019 elections in which we evaluate key polls and their potential to re-shape the economic outlook and investment risk profiles. These six markets – Thailand, Indonesia, India, South Africa, Greece and Argentina – collectively represent one-quarter of the world’s population and more than $5 trillion in GDP. We review distinct domestic challenges as well as campaign pledges by incumbents (and their challengers) aimed at addressing them. We also humbly assign probabilities to baseline and alternative scenarios and their implications for macroeconomic outlook and investments.
Even amidst their diversity, these six jurisdictions display some remarkable similarities: subdued economic momentum, bouts of market volatility, signs of voter disquiet and/or disillusionment and an opposition looking to capitalize on all of these forces. In a bid to revive the ‘magic’ that had helped to install their administrations, many incumbent governments are now on the defence – either changing tack (and dialing back past policies) or attempting to convince voters to let their policies work their magic.
Summary – Election timeline, political risk classification and market implications:
Election date (2019) | Degree of uncertainty | Baseline scenario (%) | Market implications | Market view | |
Thailand | 24 March | Medium to High | Elections are held and pro-junta PP keeps control (65%) | Medium to Low | THB: Stable unless political uncertainty erodes confidence, tourism ThaiGB: Stable CDS: Gradually wider SET: Energy, materials and capital goods favoured. More upside in non-bank financials vs financials. |
Indonesia | 17 April | Low | Jokowi re-elected, PDIP coalition intact (75%) | Medium | IDR/IndoGB: Constructive INDON: Stable JCI: prefer energy, materials, services, capital goods, transportation,and telco.Cautious on main banks. |
India | April to May | High | BJP/NDA retain power, with smaller majority (60%) | High | INR/IGB: Steeper curve (bearish long-end) CDS: Wider on potential negative sovereign outlook Nifty: Cautious healthcare and banks. Overweight IT. |
South Africa | 7-31 May | Medium to High | ANC retains power (80%) | High | ZAR/SAGB: Constructive SOAF: Constructive JSE Top40: Constructive on Financials. Cautious on consumer. |
Greece | 20 October | Medium to High | ND returns to power (52%) | Medium to High | GGBs/CDS: Scope to tighten vs periphery peers AEX: Banks may revive though European credit markets need to be watched. Energy, Infra, and utilities offer opportunity. Gaming too. |
Argentina | 27 October | High | Cambiemos retains power (52%) | High | ARS/Argtes: Peso richly valued but slower inflation positive for Argtes ARGENT: Volatile Merval: Volatile. Optically cheap valuations signify risk and weak growth. Hydrocarbons could be a winner. Cautious on consumer. |
Historical 5yr CDS (Argentina and Greece = LHS, all others RHS):
Historical equity indices (rebased where 1 Jan-2018 = 100):
Please refer to other insights in this series:
- Elections 2019 – Part 1. Thailand: Magic Moment for Democracy’s Return?
- Elections 2019 – Part 2. Indonesia: Jokowi’s Policies – Magic Bullet or Bitter Pill?
- Elections 2019 – Part 3. India: Modi’s Magic Touch Fades as Populism Makes a Comeback
- Elections 2019 – Part 4. South Africa: Ramaphosa – ANC’s Magician?
- Elections 2019 – Part 5. Greece: New Democracy Promises Magic Makeover
- Elections 2019 – Part 6. Argentina: Macri Magic and the Peronist Spell
This series is co-authored by Paul Hollingworth at Creative Portfolios and Virgil Fernandez Esguerra.
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