Thinkpad: Growth, Inflation And Tantrums

Happy Sunday!

This week really packed a punch. To avoid wasting word limits, we’ll get straight to it.

The inevitable happened this week — someone played party pooper to the equity markets. Not surprisingly, that someone was the bond market. These fixed-income fellas!

U.S. bond yields which have been inching higher, moved past 1.6% on the 10-year treasuries this week, as large additional stimulus continues to be discussed in the United States. Fear took hold. Fear that the fear of inflation will prompt central bankers to tighten quicker. No central banker has so much as even hinted at it yet so this isn’t a taper tantrum redux, it’s the pre-pre-cursor.

As global markets sold-off, local markets followed. The rupee did too — partly because of the equity market tumble and also because of a completely different regulatory change on the large exposure framework relevant to foreign banks in India, which brought down forward premia as a by-product and took the wind out of the carry trade story.

After this week’s episode, everyone will be watching U.S. bond markets with a hawk eye. We’ll just repeat a comment from Mahesh Nandurkar of Jefferies made earlier in the year. “Over the last decade, there have been three episodes of sharp rises in U.S. 10-year yields (~100 basis point increase in less than 12 months). These were in 2013 (taper), 2017 (Trump election), and 2018 (Fed tightening). Indian markets saw sharp corrections during the same period.” Buckle up.

Alongside, we got third-quarter GDP data for India. We did return to small growth of 0.4% but the numbers were mildly puzzling. First, some had expected a stronger growth number backed by growth in government spending. Second, there was a gap in GDP and GVA, which grew at a faster clip of 1%. Also, the revised estimates put full-year GDP contraction at 8%, implying that the economy will contract in Q4 again. That doesn’t sit right with other high-frequency indicators.

Pranjul Bhandari of HSBC explained it well so we’ll just rely on her view.

“We know that GDP = GVA + indirect taxes – subsidies. We also know that indirect taxes grew sharply in the December quarter (GST grew +8% y-o-y; central government indirect taxes grew 33% y-o-y). So for GDP to grow at a much slower pace than GVA, subsidies would have had to grow rather strongly. But why would that be? Because the budget on 1st February made it all too clear that over two years, the government intends to pay off past accumulated dues to intermediaries for food and fertilizer subsidies. Repayment of some of these bloated up subsidy growth, thereby depressing the December quarter GDP growth, in our view.”

On to local inflation. Told you it was a heavy week!

The RBI published its formal review of the inflation-targeting framework. It backed not just continuing with flexible inflation targeting but also the 4 (+/-2)% numerical target. Their rationale is summarised here, as are the suggested changes. This includes a change in the definition of failure to meet monetary policy objectives, which, the RBI suggests, should be judged over four quarters and not three as presently done. This is reasonable given the lags with which monetary policy works. A second change suggested is to publish longer-term interest rate forecasts. An Indian dot-plot coming soon?

We now await a final word from the government on the inflation targeting review. Hoping it doesn’t create unnecessary controversy at this time.

We’re exhausting you on a Sunday, so we’ll quickly flag-off two other things.

This week, the government released new rules for social media, digital news, and OTT platforms. The knives are officially out in the battle between big tech and government. You can read the details here and watch this conversation to bring yourself up to speed on a debate that will dominate for some time to come.

Finally. Finally! On Wednesday, the country’s largest exchange went down for effectively an entire trading day. Serious issue, we know. But it spawned an industry of memes and gave us a light moment in an otherwise heavy week. Scroll through #NSEIndia. You’ll thank us later.

Thinkpad’s own favourite is this one posted on the day of the shutdown — a spin-off from the viral chatwalla fight. And if you haven’t caught that yet, you’re working too hard.

Take a break. Till next week.