Sudip Bandyopadhyay’s Blog

Wen Jiabao the Chinese premier announced last week that  “we will spend our way out of the crisis and the country  must not loosen its grip on exports even though trade protectionism was rising and the global financial crisis was yet to hit the bottom”.   In his address to the National People’s Congress, he outlined seven ways to strengthen exports, pillar of the chinese economy.  They included increasing the foreign trade development fund to help small and medium-sized businesses export, boosting export credits and expanding services outsourcing.  Wen Jiabao, also said that Beijing will run up a record deficit and predicted this year would be “the most difficult of  this century”.  It is clear that China will use whatever money is necessary to avert a sharp slowdown. Since Barrack Obama was elected US president in November, stocks have witnessed a triumph for the audacity of hope.  But hope won in China, not the US.  Since November 4, China’s Shanghai Composite Index has out performed the US S&P 500 by a cool 75 per cent.  November’s announcement of an economic stimulus package helped start the rally.  In recent days, data showing revived economic activity, and official hints of another stimulus, have buoyed it further.  Meanwhile, Mr. Obama has had the most negative welcome from the stock market of any president since 1900.  Plainly the market is not happy with the new team so far. It is hard to attribute this to objections to the huge Obama stimulus package, as China has revived confidence with exactly the same policy; or to complaints about Mr. Obama’s alleged socialism, as China is run by avowed communists.  Instead, markets may be disliking the American-style democracy.  China’s autocrats can announce a stimulus and get on with it – in the US, it must be refracted through Congress.  Ideally, economic policy should not be written by committee:  and there is plain dissatisfaction that the Obama team left the detail of its stimulus to Congress.  Second, there are the banks.  China’s are in good health, with both loans and deposits rising American counterparts are not.  Finally, there is confidence in officialdom.  Since Tim Geithner, the US Treasury secretary, made his terribly received speech on plans for the bank sector, the S&P has dropped 20 per cent.  Market may not have expected a “silver bullet”, but did expect the new administration to have a clearly stated “plan A”.  The realisation that it did not was a severe blow to confidence.  Meanwhile, hope – maybe too much of it – is pinned on the audacity of Chinese officialdom and its ability somehow to keep their economy on course.

In the week gone by,  Indian capital markets continued to display extreme volatility and sentiments were spooked with both Indices Sensex  and the Nifty touching three year lows. It was relentless selling from FIIs in the cash segment coupled with continued negative news flows from the global markets which, shook the sentiments of the markets.  Global Markets also  saw a big meltdown during the week  and the Dow Jones plunged below 6600 mark. The sharp fall in U.S. markets was triggered by rising recession concerns.   RBI announced rate cuts of 50 bps in both Repo  and Reverse Repo. A slowing economy and falling inflation gave RBI enough room and reason to reduce rates and although this was not one of the ‘big bang’ rate cuts, it was a welcome move.  With this move, the RBI has cumulatively cut the repo rate by 400bps (from 9% to 5%) and the reverse repo rate by 250bps (from 6% to 3.5%) since September 2008.  However these rate cuts failed to boost the market sentiments as these measures were already discounted and probably viewed as only incremental steps in a situation where drastic action was required.Monetary policy must reach out and influence asset prices all across the economy, through a well functioning monetary policy transmission.  In India due to absence of Bond-Currency-Derivatives nexus and multiple regulations the impact of monetary policy changes takers ages to percolate down to the economy.  In some cases like equity market, the transmission is very weak as bank lending to equities is walled off.  Also words no longer move markets.Action backed by details and some cold hard cash, however can have an effect.

Current week, a short one with just three trading sessions will continue to remain choppy. FIIs pulled out about Rs 2000 crs from markets in just last one week pushing rupee to a new low of Rs 52.18. This has resulted in indices cracking significant levels and closing nervously.  With Election programme now being announced, uncertainty in the markets is likely to stay with absence of any other positive triggers.  Inflation remained the only silver lining for the economy moderating to 3.03%. This is one of  the lowest in last one year. The fiscal measures taken by the government during the last three months have slowly started to show some results on ground.  To a great extent, the fate of our economy during  the next few months would depend on the appropriate and timely implementation of these fiscal and monetary measures including making adequate credit available to the industry. On the whole markets could remain edgy with global news flows driving the sentiments.

( ** this is the transcript of the weekly column I write for Economic Times )