Read Between The Lines

Fundamental factors never change overnight. The best example of this is inflation, which has been haunting the economy for quite some time now. Every sane effort to control it has gone down the drain. The constant hikes in interest rates have only added to the misery rather than acting as a measure to counter it meaningfully.

The case with CAD is somewhat the same. The debate over what the ideal percentage should be has been raging. After hitting a high of USD 88.2 billion (working out 4.8% of the GDP) in the year 2012-13, it has been at the top of every policymakers mind. Projections of CAD have changed very month or so over the past two months. Beginning with USD 70 billion, the Finance Minister revised to around USD 60 billion on the back of lower gold imports and recovery in exports.

The estimate was further brought down to USD 56 billion for the year 2013-14, but this time, the revision was from an unusual quarter. Just as the rupee started heading north once again (after having remained stable for some time) panic buttons were hit across policymaking corridors. The RBI governor stepped in and decided to assuage fears and calm nerves.

We haven’t heard from the Finance Ministry in a long time on what the fiscal position of the country is. In fact, much of the firefighting is being led only by the RBI. The RBI governor can take a bow - he has has been battling valiantly on all fronts, be it inflation or CAD or the lower growth in GDP. The fundamentals of the Indian economy haven’t changed and cannot change overnight for anybody to be so sure of what the overall fiscal position will be by the end of the year. In these circumstances, the confidence about the CAD coming down is much appreciable.

But what has happened over the weekend is probably a coincidence. Or is it really? The deal that Iran has struck with the US and other Western powers over its nuclear programme comes in at a time most opportune for the Indian policymakers. Without getting into the nuances of what the deal is, let’s just focus on the relevant context. The deal clears the path for raising the sanctions imposed against the country by the Western world. While Iran definitely stands to benefit out of it, the immediate impact of this has been a reduction in the crude prices. That is the biggest advantage that India enjoys today. Lower crude prices certainly augur well for our economy. The impact on the sentiment has been quite clear as the markets closed the day decisively in the green.

Dr Rajan certainly seems to be having a unique knack of reading global geopolitics and is accordingly taking a stance on the monetary policy of India. His first move had become clear when he had postponed the monetary policy review ahead of the Fed meeting and later used it to his advantage in hiking interest rates. His coming out in the open by breaking traditions and addressing the fears of a rising rupee and also assuring that the CAD was likely to come in even much below the Finance Ministry’s latest estimate is the second instance where he seems to have read the overall global situation correctly.

Judgement of information possession, either way, is certainly is helping the cause of the Indian markets for now. But investors would do well in maintaining caution as a fundamental shift in the fortunes of the economy is still far away. Unless the balance sheet is really out and the situation on the ground makes it obvious that an improvement is indeed happening, take every euphoric rise with a big pinch of salt. As for the Iranian deal, there is lot to be achieved before it really goes through. Watch this space for more on it.