Stock markets rallied last week for three reasons. One, central banks remained dovish, primarily the US Fed which has stopped its rate hikes and the reduction of its balance sheet. India’s RBI cut interest rates by 25 bps. Two, Chinese PMI index rose above 50, to 50.8 in March, from 49.9 the previous month, indicating that, perhaps, things were not as bad as everyone felt in its manufacturing sector. Three, the US-China trade deal is in the final leg of negotiations and should be announced soon.

Central bankers have been kicking the can down the road for years, and, with their low interest rates and plentiful supply of money, have created bubbles in assets such as equity markets, bond markets and other markets.

Preparing for recession

The purpose of a tightening cycle of interest rates, along with a reduction in size of their balance sheets, as earlier announced by the US Fed, was to prepare for the next recession. Central banks need higher rates to be able to drop them to stave off recessions, and so the raising of them now, was essential.

So the risk of kicking the can down the road are two. One, it distorts the can (monetary markets) by keeping interest rates, which are the signals, artificially low. Two, it reduces the ability of a central bank to respond to a crisis.

But central banks are too worried about the immediate fallout on markets of a rising cycle of interest rates, and have caved in to market concerns. It is kicking the pain down the road.

Indian stock markets are also riding high, despite the uncertainty of incoming general elections. The RBI has cut the repo rate by 25 bps, but has cut GDP forecast. It has also pumped in money through a dollar-swap mechanism. GST collections in February are at ₹1.06 lakh crore, the highest ever. The forecast of a less-than-normal monsoon dampened sentiment, but for a short while.

FII money is also driving up the market, but is concentrated on large caps, hence, whilst the BSE Sensex was up 17 per cent during 2019, the mid-cap index was down 3 per cent and the small-cap 11 per cent.

What are the concerns of investors? Well, despite several rules and regulations by SEBI and other supervisors, there is, honestly, no investor protection. Scamsters can buy favour from politicians and influence investigations. In the Saradha scam the CBI complained to the Supreme Court that the CBI investigative team was stopped, and roughed up, by the State police!

Similarly, in the NSEL scam, the story now emerges of FTIL (now renamed 63 moons) the parent of NSEL, had rented a farmhouse belonging to Rahul and Priyanka Gandhi at a huge rent, paid in advance.

Both cases, which are open and shut, are thus being dragged on. No investor protection.

The second risk for India is rising oil prices. This columnist has often wondered how the US shale industry, which has not produced free cash flow (enough to make the capex needed to stay in business) has been always able to borrow to make capex.

The rally could be taken as a chance to reduce exposure because the new government would have fewer surplus resources to kick in the investment cycle.

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

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