With gold at its highest level since 2013 and oil prices rising, and threatening more, are we on the brink of a structural shift in the easy risk mood that has been driving global markets? Significantly, the volume of global government bonds that are “earning” negative yields has been falling over the past couple of months—from an incomprehensible $17 trillion to under $11 trillion now. While that is still a mind-boggling number, it is beginning to appear that there is a shift in sentiment, with even central banks recognising that things can’t go on like this.
The Swedish central bank, which was the first to issue bonds at negative yields, has abruptly brought their new issue yields up to zero. Since, this is neither in response to a potential inflation fear nor are there any signs of a significant change in growth, it would appear that they have come to recognise that negative interest rates are, on balance, negative for the economy. Savers are suffering, and investors are not anywhere near charged up enough to utilise these mouthwatering borrowing rates.
Could global bond markets have reached a saturation point?
Closer to home, all of this is beginning to impact the rupee. While equity inflows have been robust (if tapering a bit in December), debt inflows have been negative for the past two months, indicating that investors are getting a little more risk conscious about India. Perhaps, as a result of the more or less continuous demonstrations against the government’s policies.
The rupee has fallen sharply and is, once again, threatening Rs 72 to the dollar. There is just one more support (at Rs 73), which, if taken out, could open up another all-time low.
While on the one hand this would benefit exporters, it would certainly not be a positive for the economy, particularly considering the huge ECBs that have been raised so far this year—more than $30 billion between April and November, a jump of over 40% as compared to the same period in the previous year. Obviously, difficult domestic liquidity conditions multiplied by ultra-low global rates have driven more and more companies to take on more risk.
If, indeed, the rupee does tank, this would weaken the balance sheets of many companies and push more and more of them to get even more risk-averse, and the long dreamed of investment cycle will be further delayed.
Of course, if truth be told, expecting any kind of significant private investment in India today is a hemp-filled pipe dream. Irrespective of the financial environment (which is, in any case, somewhat dire), the primary criterion for any investment, whether greenfield or brownfield, is a belief in sound management of the business environment.
And, whatever his other attributes, nobody could credit Modi with having either an economic plan or a credible team with one. His entire approach to the economy, as to everything else, appears to be—I know what to do, so just suck it up.
Well, as he is finding out with the nation-wide protests, people are sick and tired of following his backward-looking path. While there have been a few (both anti and pro) politically driven rallies, the bulk of the protests have been spontaneous. My son, who till now has never shown any political inclinations, has (so far) been to two of them.
To profile him, he was born half Sindhi and half Punjabi; he celebrates Diwali with great joy, as also Holi and Christmas; he loves Ganpathi (even though he finds it difficult to be vegetarian for two days) and he celebrates Ramzan Eid in his own way. With great discipline (more than mine), he doesn’t drink alcohol during the holy month—quite a performance for a party boy. I guess the best way to describe him is that he is a modern Indian.
He told me that the protestors he met were both lower middle class—many of them conservative Muslims—and upper middle class Indians (like him) of various religious persuasions, all of whom are affronted by the threat to their belief of India. And all of them are looking to a modern future, which is certainly not what Modi-Shah are selling.
As a young cab driver from Uttar Pradesh told me the other day, “Yeh kya Adityanath ko CM banaye hain. Mujhe uske jaise thodi hona hain? Mujhe Hrithik Roshan jaisa banna hain”.
This is the real India.
While corporate leaders (other than Rahul Bajaj) remain, perhaps understandably, unwilling to say anything, the havaa in the economy remains foul, and if we have to contend with a suddenly sharply lower rupee, things could get even worse. Perhaps, in a stroke of tragic poetry, Modi will end up presiding over India’s return to a neo-Hindu rate of growth (of 3-3.5%).
More and more, I am beginning to believe that growth will remain handicapped till Modi leaves office.
The Author is CEO, Mecklai Financial
Views are personal