SINGH WINS THIS ROUND IN INDIA

Takeaway: We are inclined to officially suspend our bearish bias until further notice.

SUMMARY BULLETS:

  • With the fresh passage of the multi-brand retail initiative as a catalyst for further reforms ahead, we are officially out of political catalysts on the short side Indian equities from a fundamental perspective and are inclined to officially suspend our bearish bias until further notice.
  • That said however, India’s India’s GIP outlook remains particularly grim, which drastically constricts the margin for error on any slip-ups on the POLICY front over the intermediate term.

This morning we received news that Indian Prime Minister Monmohan Singh secured the “backing” of an integral party within the ruling coalition on his multi-brand retail FDI bill, which should officially be ratified in Indian parliament tomorrow by a count of 253 to 218, per the latest tally. We use quotations around “backing” as the Bahujan Samaj Party didn’t actually support the initiative with votes per se; rather, their abstention paved the way for the Congress-led ruling coalition to push through one of its hallmark economic reforms.

As an aside, the sheer nature of this “victory” is a stark reminder of the difficult road Prime Minster Singh & Co. have ahead with regards to implementing further investor-friendly initiatives over the intermediate term. Political opposition remains great as the ties binding ruling coalition together continue to be quite loose. In spite of today’s events, the retail FDI initiative still hangs in the balance, as State level governments ultimately have the final say on implementation.

Even so, we do side with the forex market’s reaction (INR up ~80bps vs. the USD on the day; at a ~1 month high) in that this event could be a catalyst to propel further reforms and/or, at the very least, positive sentiment and speculation ahead of potential future POLICY maneuvers ahead of the 2014 parliamentary elections (such as opening up the insurance and pension fund industries to FDI as well).

Moreover, this “win” comes on the heels of Singh skirting a no-confidence vote recently (rejected by Lok Sabha Speaker Meira Kumar on lack of support from members). In light of this string of positive news, we are not surprised to see that foreign investor participation in Indian capital markets continues to make new all-time highs.

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On the flip side, we still maintain our view that the confluence of the reforms announced in the year-to-date do very little to correct India’s TREND and TAIL duration GROWTH concerns; nor do they adequately address rampant domestic INFLATION that the RBI has called out on multiple occasions. Refer to our 10/29 note titled: “THE TOPPING PROCESS  IS UNDERWAY IN INDIA” for a detailed list of recent measures, as well as the logic behind our conclusions.

That being said, the SENSEX, which is up +6.2% since we introduced our bearish bias in a 9/20 note titled: “IS IT TIME TO GET OUT OF INDIAN EQUITIES?”, remains bullish from a TRADE and TREND perspective on our quantitative factoring. In the conspicuous absence of further political catalysts, we inclined to officially suspend our bearish bias on Indian equities and the Indian rupee until further notice.

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Not to completely throw ourselves under the bus, the SENSEX is in a bull market (up +21.9%) since we told investors to cover shorts and/or get long in our 6/4 note titled: “BACKING OFF OF INDIA – AT LEAST FOR NOW” and up another +11.9% since we reiterated that call in our 8/6 note titled: “DO INDIAN EQUITIES HAVE ROOM TO RUN?”. For context, that compares to the regional median gains of +14.1% and +5.2%, respectively, over those durations. We’ve obviously paid the price for being too cute by inverting our stance over the past couple of months.

Looking ahead, India’s GIP outlook remains dour (as supported by the Services PMI hitting a 13-month low of 52.1 in NOV) , which drastically constricts the margin for error on any slip-ups on the POLICY front over the intermediate term.

SINGH WINS THIS ROUND IN INDIA - INDIA

As such, if we don’t see any follow through from today’s gains via PRICE and capital inflows, we would not hesitate to hop back on the short side here if this market starts to break down quantitatively. At a bare minimum, however, investors should probably be cautiously moving towards the sidelines, as the POLICY expectations remain asymmetrically skewed to the bullish side of the ledger.

Jumping ship over to Indian monetary POLICY, we will receive NOV CPI data on the 12/12 and the NOV WPI data on 12/14. As previously demonstrated, our models point to higher-highs in Indian INFLATION readings over the intermediate term, a view supported by rupee weakness (down -5% over the LTM vs. +2% for the CRB Food Index and +2.6% for Brent Crude Oil) and ultra-easy monetary POLICY (-1.6% real repo rate; RBI recently monetized $2.2B of INR debt via open market operations).

With reported INFLATION poised to diverge from the RBI’s +4-5% “comfort level” over the intermediate term, there is risk of accelerated expectations for monetary tightening in India – an event not currently being priced into the OIS market, which actually expects one 25bps cut over the NTM.

All told, with the fresh passage of the multi-brand retail initiative as a catalyst for further reforms ahead, we are officially out of political catalysts on the short side Indian equities from a fundamental perspective and are inclined to officially suspend our bearish bias until further notice. That said however, India’s India’s GIP outlook remains particularly grim, which drastically constricts the margin for error on any slip-ups on the POLICY front over the intermediate term.

Darius Dale

Senior Analyst