Well these days everything seems to be up and up. Commodities, equities, crude oil and allied, building materials and what have you. So are interest rates also trending northwards in India ? Let’s explore the intricacies.

What’s with the US

In the United States interest rates are being retained at the current upward range of 0.25%. But US benchmark Bond yields climbed from the erstwhile 0.9% in December 2020 to the current 1.625%. Rising bond yields signal flight of capital from riskier asset classes (like equities in countries like India) to safer US securities offering improving returns. This is further fuelled by the overall sentiment of acceleration in the US economy. A planned vaccination programme, huge accumulated savings and a further injection of $1.9 trillion into the system are all coercing the economy into heating up, driving prices upwards.

That said, will it mean a telescopic withdrawal of foreign investments in the Indian stock market ? It might just be so, at least for the short to medium term. And at least till such time the US Bond yields don’t plateau.

The Dilemma for RBI

RBI is faced with dual challenges. The latest figures show retail inflation at 5.3% and inching towards the boundaries of the central bank’s proposed policy direction of containing inflation at 4% with a tolerance of 2%. This binds the RBI’s Monetary Policy Committee to tighten interest rates. But that would affect the Government and industry alike. Not to forget that the Government this year is expected to be the biggest borrower in order to fund budgeted expenditure.  And higher interest rates would burden the Government the most.

What’s complicating matters further is that after a positive growth of 1% in December 2020, the Index of Industrial Production (IIP) slipped back to a -1.6% in January 2021. This slippage compels the RBI to reduce benchmark rates even lower to provide stimulus to the parlous economy.

So the best RBI can do is to retain interest at current levels although the economy is goading the central banker to reduce interest rates.


Well, it really seems so. The Indian and the US bourses breached the all time high in 2020 and are all set to climb new scales. But is it really peaking ? Or is it just optically so ? Let us find out.

The Dow Jones touched  1000 on November 1972. It is currently at 30600, at the end of 2020 (or thereabouts). So it is an annual climb of 7.35% per annum for the last 48 years. Impressive as per current interest rates of 0.93% in the US, but not something that is outlandish. As many may feel. In fact, US 10 year Bond rates peaked at 15.4% in 1981.

In India the benchmark Nifty Index of the National Stock Exchange began in 1996. It started trading at 1000. Currently it is at 14000 at the end of 2020. Roughly in about 24 years. That’s a climb of 11.65%. Realistic but not astounding returns. (The peak interest rates in India were at 19% or thereabouts sometime in 1992.)

So much for a booming Stock Market !

Outlook 2021

Outlook 2021

The Coronavirus pandemic has devastated the global economy. Prior to the onset of the virus, most economies were showing signs of a marked deceleration. Notable among them was of course India. The effects of staccato, incisive interventions on the economy were beginning to take effect and growth kept plummeting downwards.

India was clocking an impressive 8.02% growth in 2016. But that kept cascading downwards and was sequentially at 7.04% in 2017, was 6.12% in 2018 and 5.02% in 2019. By the time the virus hit, India was already living at a frugal, almost untenable GDP growth figure. 

At the end of the current fiscal, India would be witnessing a GDP degrowth of anywhere between -7.5% and -10.2% (based on estimates by some prominent economy watchers).

As we stand, at the last week of 2020 and glare ahead, what do we foretell? Do we go with the V- shaped recovery theory? Do we understand what impact this incessant printing of currency in major economies can create in global markets? Well, let’s look at these in some detail to elucidate and forecast what is in store for us in India.

First of its kind 

Before the others, the first thing that we need to recognise is the unique nature of the current global lock jam. Never before has the world ever experienced a demand as well as a supply led recession. Not in 2008, not even in 1929, during the Great Depression. This is the first time that the whole world’s factories came to a grinding halt on the one hand and with very few customers in the market able to purchase the stockpile of earlier production on the other.  Thus, this was both a supply side and a demand side halt of the world economy.  And this went on for almost 9 months for a substantial portion of the global economy.

Hence, any theory that tells us that this is going to go away quickly is bound to be fraught with pitfalls. Let’s just look at the stock market, only as an example, as a way of understanding how long it took during the 1929 crash. The Dow Jones Industrial Average (which tracks blue chip corporate stock price movements through a meaningfully calibrated weighted index) was at around 5200 when the crash happened. Well, it took till 1958 to recover from the shock of July 1929 and surpass that index level. That’s 30 years!  If history is any hindsight to go by, we are going to face an even tighter crisis in 2021. Let’s not fool ourselves into wishing away that things will claw back to normal. It probably won’t, at least not in a jiffy.

This is not to suggest that there will not be growths. Of course, there will be. We could have a near 2% growth in the US and a 4% growth in India. But that kind of a growth rate will be woefully inadequate for a large and populated economy like India. Yes, a handful of players will make more money than they ever did by cutting down costs all across. So corporate sector earnings will rise. That will lead to higher share prices and market capitalisation. But the length and breadth of the economy will undergo hardships and turmoil of the kind not seen by most of India.

The unorganised sector, which remains the backbone of the Indian economy has been decimated. Hit so hard at the knees that even standing up is becoming difficult. Many small businesses have wound up. And many more are surviving at sub optimal, below par levels. It will take a long time before any meaningful recovery happens.

Currency Printing

One cannot help but wonder how America, Europe, Japan and others are handling their economies with so much of currency printing. Why aren’t these economies falling to bouts of super high inflation? How are they able to beat the basic demand and supply equation, that is at the root of all economics? Why more currency in the market is not leading to high inflation. Well, the answer is that although over time, this immense intervention is going to cause imbalances. But in the short run, since the velocity of circulation has dramatically come down – the actual amount of money in circulation has not improved enough to cause inflationary pressures. You could see the signs simmering in rising food prices, steep commodity and metals prices but not yet on the whole economy.

A look at the US savings rate will show you the picture. United States has been a consumption economy for a long, long time. Living the ‘American dream” has been the go word for Americans. The US government wanted to add the stimulus to the economy so that Americans continue to spend and thus revive the economy. But that did not happen. At least not to the extent anticipated. The current national savings rate in the US was a whopping 34% in April 2020. The stimulus money was not entirely spent by the recipients. The overall environment of gloom and doom forced Americans to save more. Borrow less. So, there were piles of cash, even with Banks.

In India, however, the situation is different. India did not resort to the kind of money printing that many other countries did. As a result, on an average, the Indians have much less cash in hand for spending. Savings rates have also shown a decline. For the average Indian, ostentatious consumption is on a decline, post a bout of ‘revenge’ purchasing after the lockdowns were lifted. Although, at the top 10% of the population, where incomes have actually not declined steeply and where most have accumulated forced savings due to the prolonged lockdown, the opening up presents an opportunity for expensive purchases, staycations and extended holidays to exotic destinations. Real estate, except for 4 major locations in the country is downbeat. Although, one expects a modest revival in this sector once businesses start coming back and the overall sentiment improves.

During 2021, one does expect a revival in the overall employment scenario in India. That can lead to increased retail lending by banks and NBFCs. This in turn can lead to better environment in economy facing businesses like FMCG, durables, residential property markets and personal mobility markets to name a few. Agriculture is expected to contribute better than before and would be responsible for partial employment of the rural population, providing them protection against deprivation.

But it will be a long and treacherous return to normalcy. 2021 will be a year of grind. As things stand, at the end of the year India should be able to claw back close to the 2019 levels.