RJ, a maverick who set his own rules: Business Line August 24 2022

 

Though Rakesh Jhunjhunwala’s success in the market has been celebrated, replicating his style won’t be easy

Rakesh Jhunjhunwala, who was popularly known by his initials RJ, has quite appropriately been associated with operating successfully in probably the most enigmatic market. This is the stock market which is free from market intervention by the regulator, unlike bonds and currency where the RBI can play a guiding role.

Given the very idiosyncratic behaviour of stock prices, dealers are always trying to conjecture the future (with the past providing some clues), which need not always play out.

Also, there is the question of how short or long is the future. Often one says that equities give returns of 12-15 per cent in the long run and that one needs to be patient. But how long is the long-run — five years, 10 years or 20 years? Besides, there is also the case of timing the sale. Anyone wanting to cash-in on stock holdings when the pandemic started could have made minimal gains even if the portfolio was held for 10 years. These are questions which have no easy answers.

Rakesh Jhunjhunwala’s feats have now been narrated across a number of forums. RJ, known also as the Indian Warren Buffet, started with an investment of ₹5,000 in 1985; his portfolio is now valued at over ₹30,000 crore. Getting to this stage involves continuous and judicious investing in specific stocks with sharp exits when required. The micro strategy will never be known, but his significant holdings in specific stocks is common knowledge, thanks to the disclosures that companies have to make.

Therefore, there are names like Crisil or Star Health Insurance in this basket which may not be everyone’s pick as other popular names tend to dominate the investment landscape. Quite clearly, the manner of choosing stocks can be subjective if the investor is an individual or a broking firm. This is in contrast to, say, a mutual fund where the investment portfolio is revealed as per regulations.

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Culture of equity

RJ’s inherent belief in the India growth story is a point highlighted by most experts. This as a macro view cannot be discounted because the Sensex, for example, when juxtaposed with the GDP growth over a period of 30 years, shows a good fit. Therefore, for an economy like India a potential average growth of 8 per cent per annum on a sustained basis is a fair assumption to make.

This is because of the opportunities that arise out of the lacunae in the system. There is high unemployment (which we like to call demographic dividend) and low levels of infrastructure (which opens the door for investment). Given the size of the population there will always be demand which will be increasing at a steady pace as jobs are created and incomes increase.

On the positive side India has a strong financial system that helps in flow of funds and some excellent regulation from RBI and SEBI which has stood the test of time. Therefore, the faith in Big India is well founded.

The acumen of RJ is probably what is hard to replicate. As has been revealed of late, some of the investments made have been in companies which would not be a part of the basket of investments of most fund managers. These calculated moves by RJ should hence be interpreted carefully by investors new to the market; as with Warren Buffet, his methods were unique.

So have people like Rakesh Jhunjhunwala spearheaded the equity culture in India? This is an interesting question because while his success story is worthy of any business case study, there have been several big investors who have not been able to replicate his success. Several individual investors have lost money.

Culture of equity

The creation of the equity culture has been a product of several developments. The opening of the capital markets post-1991 was the first step followed by the creation of SEBI which has worked tirelessly over 30 years to bring the market to this position. There have been learnings along the way; while regulation can enforce the rules, drafting them is hard because new regulations are evolved only in the face of deviations as the gaps are filled.

The growth story has played out well with the business cycles displaying various lengths of amplitudes. This has also been associated with progressive performance of companies, which again has not been even at all times; this is why the BSE 30 or NSE 50 which has now expanded to 100 have been the preferred picks.

The problem of going with the herd is that the marginal gains tend to be limited. Being a contrarian, which was also a characteristic of RJ, has worked. But choosing stocks is still a hallmark of a good investor. Similarly building a portfolio of the size which he has done requires a cogent strategy of holding periods because one has to wear the hats of both an investor and a trader.

That the capital market has lost a brilliant investor cannot be contested. His investment achievements have been closely followed by some investors. The market is big and there is evidently room for all kinds of players. At the same time the investment path can be complex as seen by the rather poor performance of several start-up companies, which have made promoters rich but not investors.

The answers to successful investing are still unknown and while there are other brilliant investors like Saurabh Mukherjea, who argue on the merits of investing in solid and staid companies like HDFC group or Asian Paints which get tagged to the India growth story.

Picking other stocks like how RJ had done is not easy for most investors.

Opinion: Whose freebie is it, anyway? Free Press Journal 20th August 2022

 

The Finance Commission should ideally state in detail what is a freebie, and then ensure that only a certain amount of money can be spent on these outlays. Camouflage terms like ‘empowerment schemes’ should be covered here.

The recent debate on freebies being given by various governments raises the broader issue of how governments should be spending money. Given the federal structure of the country there are central, state, municipal and panchayat levels of government involved, with the maximum power being given to the centre in terms of levying of taxes. The interesting thing is that the physical support to enterprise or farmers is provided by the lower levels of government which in turn are dependent on the centre for funding. It is in this context that the Finance Commission had been constituted which lays down rules of devolution of funds.

When the 14th Finance Commission decided that the centre devolve 42% of the shareable resources to the states from 32% the logic was that the latter would get more funds to use the way they wanted. Hence the centrally sponsored schemes would be reduced.

The issue of freebies has surfaced today as in the last two decades or so there has been a tendency for all parties to mention in their manifestos that if voted to power there would be several payments made to different sections of society. There are other schemes announced separately by governments like say the NREGA, which is a dole scheme as there is no productive work done but money is paid. All this comes under social welfare which is the job of the government. Hence free meals, education, health, employment guarantee, payments for girls, women, special sections of society etc. are considered to be economically expedient though there are always political undertones.

Of later there has been a lot of umbrage taken by everyone as every party has gotten into a competitive mode and is offering electricity, water, plain cash and so on without any restraint. What are the options for getting states or even the centre, for that matter, to be more judicious in spending?

The first option is for the Finance Commission to officially state that only a certain portion of the budgetary revenue can be spent on so called freebies. This will be a rule-driven policy with the CAG monitoring the progress.

The alternative is to have some kind of voting of the public on where the government should be spending. In a democracy, unfortunately the 1300 million are represented by around 542 representatives of which the majority are in the government in power. The decisions taken are top down. Suppose it has to be bottoms- up. There can be several interesting conjectures here. The majority would not vote for highways and bullet trains and would have humble requests for pucca, well-maintained, motorable roads connecting villages. The majority will favour subsidies, employment doles, cash transfers and so on. Hence the present controversy of disdain for freebies will be seen as an elitist view to exacerbate inequality, as any withdrawal means hardships for the poor.

A third alternative is to put all governments under check through the funding route. While pegging fiscal deficit at 3% or 3.5% for states is a rule that worked well, a similar cap should be on the centre. This way the possibility of deviation can be curbed. Further, to correct anomalies which come in the way of the power sector, for example, government guarantees should be banned and entities must be made to borrow from the market if not being financed directly from the Budget. This will address the issue of free power.

Suppose banks and financial institutions refuse to lend money which would be the case for private enterprises with similar balance sheets, then the governments would have to perforce pay the DISCOMs from the budget or desist from giving free power. Banning contingent liabilities is an effective way of controlling expenditures.

A fourth option would be to separate freebies into those that distort the market like free power — which no one, including the government, pays for — and plain cash transfers, which come through the Budget. The PM Kisan scheme is a pure cash transfer, paid for by the Budget, and does not distort the system. The same holds for cash payments for marriages of girls or special category of society. But subsidies in the form of MSP is the tough one. Ideally MSPs should be replaced by a cash transfer, because the MSP is a doctored price which distorts markets as it raises benchmark prices in mandis.

A combination of the suggestions made could be the way out. The FC should ideally state in detail what is a freebie, and then ensure that only a certain amount of money can be spent on these outlays. Camouflage terms like ‘empowerment schemes’ should be covered here. Second, any scheme which distorts markets should be withdrawn or replaced by transfers. Third, anything outside the budget should be banned and every PSU would have to fend for and fund itself. Last the private sector should cease to look for props from the government and have to use all the tax benefits to run their business. Looking for incentives from the government can be in say EXIM policy but not for cash returns through say the PLI or any other such scheme. The private sector cannot have it on both sides all the time.

How will credit behave now? Financial express 19th August 2022

 With the repo rate going up by 50 bps, there is speculation on what the terminal repo rate will be by March. The corollary: How will other interest rates play out for depositers, borrowers and markets? The repo hike to 5.40% takes it to just above the pre-Covid level of 5.15%. After being very accommodative, the regime has reverted to normal.

It is hard to guess how other interest rates will behave during the year. But there have been some signals from the movement in rates since RBI increased the repo rate from 4% to 4.4%, and later to 4.90%. This increase of 90 bps can be linked with the movement in other rates.

The base rate for banks rose from an average of 8.02% to 8.275%, around 25 bps. The overnight MCLR was up from 6.75% to 7.10% (35 bps). The basic lending benchmarks of banks increased by just 25-35 bps in response to the 90-bps repo hike. One of the key components of these benchmarks is the cost of deposits. The 1-year deposit rate of leading banks averaged 5.3% when the repo rate was 4% and went up to 5.52%, an increase of 22 bps. This has hence aligned the lending benchmarks by a similar increase.

The market rates at the shorter end have been driven more by liquidity considerations, which is interesting. RBI has spoken of withdrawal of liquidity. From around Rs 6-7 lakh crore a day, it is down to ~Rs 3 lakh crore. Therefore market rates have been very responsive, though the cause is liquidity, not the repo hike. Call rates moved in consonance with the repo rate because the latter serves as a cap. But the 91-days T-Bill moved from 3.98% to 5.04%, while the 182-days T-Bill was up by ~160 bps and the 364-days T-Bill by 152 bps (4.81% to 6.33%).

The story however takes a twist when it comes to the longer end of the maturity spectrum. The 10-year bond yield was up from 7.15% to 7.32%. Such variation is more due to the linkage with other nations’ bond yields that had also come down in this period. Besides, notwithstanding the inflation spectre and a large borrowing programme, the economy’s buoyancy assures us of no additional fund raising by the government. Global inflation has eased, and this should also reflect domestically in the next few months. Hence, the 10-year yield has come down, after crossing 7.6% post the June policy.

In this situation, another relevant question is how will credit behave? Will higher interest rates militate against borrowing? One can look at how lending has behaved in both the historical and current context. Historically, when the economy is doing well and investment is increasing, there is higher borrowing even though interest rates are high. This is led by manufacturing, within which the large companies drive credit. In 2009-14, when the weighted average lending rate was in double-digits, credit grew by 14% per annum. From 2015 to 2020, growth slowed down to 9% even as the WALR slid from 10.72% to 9.28% (7.86% in FY22).

The share of large industry in credit was ~35% in the first phase and came down to 30% in the second, indicating slowing overall investment, and the NPA overhang too affected lending to this segment. Manufacturing’s share declined from 44% to 37%, while retail’s rose to 24%. Therefore, a buoyant economy is a must for investment and credit growth, and interest rates may not matter much.

Even in the current context, after the May hike of 40 bps, the incremental credit-deposit ratio rose from 65% to 113% by the eve of the August policy. The credit-deposit ratio has also improved from 71.9% to 73.1%.

Therefore, once the economy is in the growth phase—looking likely now, based on the high frequency indicators—repo-rate rise won’t impede credit growth. Besides, as seen in the movement so far, the 90-bps hike has led to less than commensurate increase, of just 25-35 bps, for non-repo-based borrowing. For repo-based borrowing, SMEs would be a question mark, as they get affected, but may have to continue paying higher costs. For retail borrowers, interest rate cycles are part of the story, and hence a 15-20 year mortgage will witness these phases. Owning a house is more important than the financing costs which will traverse both the phases in equal measure during these tenures.

There is much ado about credit policy announcements: Mint 19th August 2022

 We seem to make a big deal of all monetary policy decisions, devoting pages of editorial space and long broadcast hours on television to it, unlike what we see in advanced economies

Once the policy is announced, there are pages devoted to its impact, with almost every ‘who’s who’ offering a slice of this analysis. This goes on for days, with bankers being quizzed on the policy impact. Will the rate hike lead to lending rates going up? Will lending fall? Will we enter a recession? Most of these questions have a logical or a non-committal answer, but everyone wants famous names to endorse these banalities. Is this specific to India, or is it a phenomenon everywhere in the world too?

One can look at the world’s three main central banks (i.e. of the US, Eurozone and England), and track what happens there. One commonality is that the credit policy announced 8 times annually is a virtual non-event. There is less of sound and fury, and given that it’s just about the policy rate and some projections of inflation and growth, the discourse there is shorter. The broadcast media has coverage for an hour or so after the bank’s press conference and newspapers have a few columns dedicated to the impact on stocks, bonds and currencies. It is concentrated more on how these markets have been affected immediately, rather than a medium-term view on values.

Therefore, high-intensity policy coverage is peculiar to India and starts from the way in which the discourse is presented. The intensity can be gauged from the time devoted to the Monetary Policy Committee (MPC). In India, this is a 3-day affair, with the final announcement in the morning of the third day. In case of the US Federal Reserve, it is two days, while for the European Central Bank (ECB), since it typically holds meetings every two weeks, a decision declaration is a single-day event. The Bank of England has a process by which data is given to policy committee members one week before, and a discussion ensues. A second meeting takes place on the Monday of the policy week, and a final meeting is on Wednesday before it is released on Thursday. Policies tend to be discussion heavy.

These policy committees are differently structured. Our MPC has six members, three of them from the central bank. The Fed has 12 members, including representatives of all individual boards. The ECB Governing Council is larger, with six executive board members and 19 representatives of member country central banks. The Bank of England’s panel has nine members, including four external members. Hence the Indian MPC is relatively small.

Also the length of the policy statements differ. The latest policy of the Reserve Bank of India has three releases. The first is the governor’s statement, which has 2,856 words. There is the MPC Resolution statement, which runs to 1,155 words. To this, add RBI’s statement on development and regulation measures, which is around 900 words. While there would be overlaps between the first and the other two, this total of 5,000 words is the highest.

This is so because these releases present not just policy actions, but also a fairly detailed view on the state of our economy—headwinds, tailwinds, global developments, etc. Curiously, the governor’s statement is more of a recent phenomenon, as earlier the MPC Resolution would serve the purpose. Therefore, the presentation of the policy also differs from that in the past. The covid pandemic was instrumental in a change in approach, as a lot of assurances had to be provided that could not be done in a formal MPC Resolution statement. Since 2020, the governor’s statement has also been ending with a relevant quotation of Mahatma Gandhi, which was not the case earlier.

The last US Federal Open Market Committee statement, in contrast, had just around 270 words. It offers the action taken with reasons and a brief take on the economy’s future. There are no revisions or mentions of quarterly forecasts, as is in our case. There’s also an implementation note of around 570 words. The Fed focus is its press conference, where a more detailed background is provided before a question-and-answer session.

The ECB too has a short statement of around 800 words which combines both the monetary policy decision and way forward. Here too, the president speaks more before the press conference through preliminary statements that are not more than 1,500 words. The Bank of England’s statement is a little less than 1,000 words; it is to-the-point on policy decisions and the way forward. In India, a large part of what the RBI governor speaks about in his statement is a prelude to the press conference here.

Given the amount of time spent by the MPC in reaching its decisions as well as the wider economic scenario that is deliberated upon, credit policy in India is actually a comprehensive updated analysis of the state of our economy, and is hence of great use to financial markets as it resets the tone for the months ahead. In this way, it is more than just a monetary statement.

Is ESG being reduced to an eyewash? Hindu Business Line 12th August 2022

 

Environment, social and governance goals are unrelated to each other. The monitoring systems should change

ESG is quite a buzzword today and the regulators and the regulated alike all looking to ensure compliance. New financial products have entered the fray and even the government had spoken of issuing green bonds in the Budget. But are we going too fast?

It must be remembered that the acronym, standing broadly for environment, social and governance, connotes three different, unrelated issues and ideally should not be looked at in unison. The reason is that the motivations and consequences of non-compliance have a different set of implications for society.

Governance is a micro level issue while the environment is global, as the consequences of climate change are now visible to everyone the world over. Social responsibility is more in the domain of ethics.

Whenever there are compliance issues the attempt is to have objective yardsticks to measure them. Credit rating agencies such as CARE or CRISIL are already immersed in this endeavour which is good for the system. But clubbing all three together runs the risk of bundling objectives which are diverse and could lead to convoluted results.

Companies may have very high governance standards but could be environment unfriendly given the nature of the business and hence giving a combined measure of performance can be misleading. The solution is to unbundle these three and look at them separately.

One of the negative outcomes with ESG is there is a lot of ‘washing’ which takes place in all the components. Washing refers to companies doing what is required to send the right signals to gain favour of the evaluator while paying only formal obeisance to the set standards. Annual reports of companies have eloquent statements on how they comply with all the three objectives quite comprehensively.

Contradictions galore

For example, a company will write on the concern for environment and speak on the use of energy-saving bulbs or recycling of water. But the basic activity of a construction or chemical company would be highly polluting. Executives keep flying across the world for striking deals, and it is well known that air travel and environment are always at odds.

Use of bottled water is common in all companies which talk ‘green’. Fancy glass buildings are known to be environment unfriendly but are the order of the day for all new commercial constructions. Such contradictions tend to exist in the ‘washing’ process.

It should be remembered that companies are entities run on the principles of capitalism. Their job is to make good returns for the shareholders, and the rest becomes secondary. Normally, everyone would like to operate on the right side of law and regulation but the boundaries for that have to be defined. Most companies follow the law in letter but often not in spirit.

The government has in the last few years made it also mandatory for them to keep aside 2 per cent of their profit for social spending. Such activity is the job of the government and not companies, which are already paying taxes to the state.

Yet, most of them do declare their spending on such activities in their Annual Report and often end up treating it as ‘business compliance’. Therefore, annual reports may not be the best source of information on the true nature of these activities. For companies, keeping special teams to tackle the environment or social responsibility merely increases their costs; this may not be the ideal way of achieving compliance.

The issue with governance is also similar. There are regulatory disclosures which ensure that there is the right composition of Directors and also that there is a certain level of attendance which is ensured. There is also a rule which makes Directors take a qualifying exam. Therefore, from the regulatory end a lot has been done.

Governance problems crop up when there are issues over ownership, when it is an unregulated entity, or when there is a crisis — as was the case in the financial sector including both banks and NBFCs. This is when it is realised that governance has been breached in spirit.

At times a strong head of the organisation or an owner gets in well-known names as Directors but ensures that they remain malleable to their wishes.

Complex exercise

Therefore ESG evaluation is complex and not straitjacketed. Often, most companies pay obeisance to regulation and cannot be faulted. What is suggested is that these three objectives need to be evaluated independently. There need to be rigorous standards for environment compliance which go beyond what is written in Annual Reports. Practices pursued within the organisation need to be studied through personal visits to gauge how truly ‘green’ companies are.

This can be done by rating agencies or research institutions which are paid by the government to ensure there is no conflict of interest. They would be more like how regulators carry out inspections in the financial sector.

Social responsibility ideally falls outside the purview of capitalism as there are inherent contradictions. Companies which build schools in villages see nothing wrong in laying off staff in the name of efficiency and hence make a mockery of the concept of social responsibility. The government should instead increase the corporate tax rate by 2 per cent and use this amount for fixed projects such as equipment in public hospitals, or furniture in village schools.

Similarly, governance evaluation should be given the skip; while there are rules to be followed, it is hard to get everyone to follow in spirit. What is more important is that when there are scams in companies, the Directors need to be moved out from similar positions in other companies. This can be a signal for performance.

Otherwise, these micro issues which pertain to companies are more internal in nature and need not be clubbed with environment and social responsibility.

At any rate having a consolidated ESG evaluation should not be attempted.

govt-freebies-putting-fiscal-balances-under-pressure: Debate in Economic Times 9th August 2022

 When passing economic judgements, the way things are presented matters a lot. For example, today, the buzz is around freebies where state governments have been chastised for giving free sewing machines, cycles, or power to different sections of society putting fiscal balances under pressure.

But when there is something like the performance-linked incentive (PLI) scheme, in which companies need to show a certain level of performance to claim the benefit, it is applauded. Similarly, the reduction of the corporate tax rate is taken to be positive as it spurs growth and is not deemed a 'freebie' - notwithstanding that such concessions have not led to higher investment.

The issue is really all about terminology and communication. If one looks at, say, the Pradhan Mantri Garib Kalyan Anna Yojana (PM-GKAY), a free food scheme that benefits over 800 million people, there has never been a complaint against such an expense. But when it comes to the public distribution system (PDS) - really the same concept - there has always been criticism about wrong targeting. But if 800 million people get benefits from free food, it means they require it. So, PDS or food subsidy is necessary.

A rose by any other name would smell as sweet. But this does not seem to hold in economics. The moment a government scheme is called a subsidy, it is frowned at. It is applauded if it's an 'incentive' or tax. When free bicycles are given by states, it is not unproductive as the cycle industry (mainly in Bihar) benefits from this outlay. The same holds with sewing machines (made popular in Tamil Nadu). Hence, if the schemes were called 'women' or 'girl' empowerment schemes with the prefix of a leader, it could have passed the 'test'.

Again, when one looks at PLI, it sounds fair, as the beneficiaries have to produce a certain quantum of goods. But free power to farmers should then ideally go under the umbrella of 'incentive' with wheat and rice being the 'targeted industries'. The fact that farmers get free power enables them to produce at a lower cost, which gets reflected in stable prices. This is the ethos behind the fertiliser subsidy, too.

An argument made is that free power has led to farmers running their pump sets for too long and lowering the ground-level water. But, then, the 14 industries provided with PLI also have emissions that affect the climate.

There is also a stigma attached to farm loan waivers, less umbrage on non-performing asset (NPA) write-offs. In fact, loan waivers are from taxpayers' money, while NPA settlement is effectively based on deposit money where savers keep getting a lower interest rate, and borrowers pay more on loans due to banks being forced to balance lending with deposits.

If NPAs were low, then fewer provisions would be made, and banks would operate on lower spreads, and thus pass on the benefit of interest rate to both savers and borrowers. But governments bear the brunt of criticism here when the budget is used for settlement. If the same set of farm loans were settled through asset reconstruction companies (ARCs) or bad banks, the emotion would be different.

More recently, a debate on service charge by restaurants has come up. A charge for a service, if acceptable, can then be extended to all services. One visits malls, supermarkets and banks for various dealings. If a restaurant can charge this amount, so should we be open to other suppliers having a service charge.

Restaurant associations have challenged the Central Consumer Protection Authority's (CCPA) July 4 guidelines prohibiting restaurants from automatically levying service charges, which the Delhi High Court will be hearing in November. They have argued that service charges go to the staff. But don't they all get salaries or wages? Unbundling labour costs and pushing it on customers sound unethical.

It is also argued that everyone knows what they are in for when they enter the restaurant and can desist from revisiting if services are not good. This logic can be applied by other services, too, if the argument is accepted. The government has rightly said that the hospitality industry can include all these charges in the regular menu rates. Hence, here too, terming the cost as 'service charge' opens the door for debate. The airlines already have been imposing a convenience fee above the fare. Clearly, we need more transparency here.

on ETNow: India Development debate 5th August 2022

 https://www.timesnownews.com/videos/et-now/shows/is-50-bps-hike-the-new-normal-for-central-banks-india-development-debate-latest-news-video-93378333

Credit policy: What lies ahead? Financial Express 6th August 2022

 This particular round of policy-setting by Reserve Bank of India (RBI) was always going to be critical for the economy for many reasons. The high-frequency indicators available so far point to the economy doing rather well on, which is reassuring. At the same time, the markets have been quite volatile, though they turned positive on the eve of this announcement. Stocks are up, the currency is stronger, and bond yields are lower. This sounds too good to be true, juxtaposed with the inflationary concerns of households confronted with high prices. The external environment doesn’t sound too encouraging with the “R” (recession) word—even the “S” (stagflation)one—being reiterated in discussions.

RBI has been quite steadfast in its battle against inflation, and hence has gone in for a significant 50 bps rate hike. This is based on two premises. The first is that inflation is a worry even if it is under control at around 7%. There has been no change in the forecast here for the year, which remains at 6.7%. But the fact that it is still out of range of the MPC’s tolerance zone and will be so for the next two quarters is reason enough to get aggressive here. The other premise is that growth is on target. The forecast here has not changed, and it stands at 7.2% for the year. The fact that India remains the fastest-growing economy is significant for RBI because it makes decision-making easier. Interest rates have a dichotomous impact on the economy. While higher rates can bring down excess demand forces and hence inflation, they can also come in the way of growth if the cost of borrowing goes up. This is a constant struggle for central bankers. But once there is a conviction that growth is on the right path, it becomes easier to tackle inflation in a more aggressive manner, which is what the policy has done.

How much further will RBI go? Here, there can be varied opinions. If inflation remains high for all three remaining quarters, there will evidently be pressure to keep increasing rates. Another 50bps hike looks imminent and logical and will take the rate to 5.9% by the end of the cycle. This will still not yield positive real interest rates with inflation at 6.7%, but the negativity will be curbed. The OIS 1-year rate, which is what the market players hold sacrosanct, points to 6.25% or its whereabouts, and hence this theory says that the repo rate should get aligned at this level. Another theory espoused is that (while it is not designed this way) there is a relation with the Fed rate, and if the Fed decides to push up its rate to say 3.25% or so this year, given the historical difference of 350-400 bps with the repo rate, the latter should definitely cross 6%. Therefore, there are many guesses going around.

What will higher rates mean for the economy? Deposit-holders can heave a sigh of relief at the announcement, though the earlier rate hikes have not quite moved the needle at the ground level for them. The response of the banking system needs to be noted here as decisions will be taken depending on their flow of funds relative to the demand for credit. But some upward movement will definitely be there.

For borrowers, it will be a mixed bag. For those with rates fixed to the repo , there is no escaping the higher cost. Home loans and loans to SMEs tend to be linked to this benchmark, which will cause more pain to the borrowers. The days of easy money will be over as capital gets priced properly—the pandemic had led to rates coming down sharply as RBI took a stance of doing everything to save the economy. The cycle had to change anyway, and it was only a matter of time before it got reversed.

However, for the larger borrowers, where lending rates are based on MCLR, the increase in cost will be marginal as this benchmark is formula-driven, and when the deposit rates do not move up commensurately, intuitively, it can be seen that the base will also rise very gradually. Therefore, these companies will be better off than those who borrow on the basis of the external benchmark.

For other market borrowings, the situation will be very different. Government bonds have shown a different tendency since the last policy, where the increase in the repo rate had finally got the yields down by 25-30 bps on the eve of the policy. Clearly, these yields are driven by other factors such as liquidity in the system, policy actions of other central banks, fund flows, and so on. Therefore, the increase in cost would be less than 50bps and more likely in the range of 20bps on an average basis. This is good news for the bond market where rates tend to be benchmarked with G-Sec yields and, hence, the AAA and AA rated companies, which are the large borrowers in this market, would face a more gentle interest cost curve due to this increase in repo rate.

Central banks worldwide seem to be united in fighting inflation, quite like how they did everything for growth for two years when the pandemic started. Clearly, going too easy on liquidity infusion had provided a push to inflation that seems hard to control, guided as it by other factors such as the Ukraine invasion. RBI was quite dexterous while being accommodative and hence does not have the same challenges as the Fed, which also had the backlog of the QE rollback, a legacy of Lehman. The gradual but firm rollback by RBI hence stands out in this story.