With inflation falling, the inverted yield curve ( 10 year yield a point below the short term 8.7% yield) could well be a good thing for india. the rupee depreciation could however keep importred inflation hot for India's traders and manufacturers, esp as the Fuel basket is still up on the high ledge at 15.5% . The livemint Friday report has good data to back its inferences too, but even if we do not follow the RBI copybook ( playbook elsewhere :) )  and set our own inflation target it could well go under 6% as and when Fuel also tackles the base effect. Prices have stabilised and bond market liquidity healthier as seen in the 8.7% yields at the short and long end a good 25 basis points below the yonder peak of two weeks ago. 

Forinvesors yields coming donw on the inflation ride mean large inflows into bond and then gilt funds to shore up the neglected funds industry where AUM has dropped from 7.5 Tln in 2009 /2010 to 6.75 Tln this year a slow deterioration as all the bank rolled money for money market mutual funds was exited. For banks and large treasuries however, with the money market fund closed and RBI auctions likely to be discontinued, there would be a limbo while they decide where to deploy their idle cash for quick gains, perhaps in longer term Floating funds eventually 

Rate cuts could come sooner, therefore the talk of recession as Capital4 author Deepak Shenoy highlights back in June could well be baloney. In our case inverted curves mean that banks can use that extra tey keep with RBI even if CRR cuts are not effected and bring back the short rate as and when IIP improves based on lower inflation. Believe me, no one else has the luxury of 40% of the banking system's funds lying with the Central Bank anywhere int he world even if you could go back a hundred years thru the hyperinflation cycles in Germany and LatAm or the recession cycles in Brazil and Venezuela and Russia

China has a more well defined shadow banking system, our own professionals torn between the brand of organised businesses and stock markets and the penny pinching savings they need to build a home nest. We still have a cash based economy like Italy's south which will apparently keep adding to our tax basket at its own pace regardless of how many investigative journaliusts or how many amnesty schemes are created and expired 56 new tax treaties later there is no inflow from that system into the economy and our taxed remain the lower percent population of the country. Typically, these factors influence the fixed income market which moves on the supply and demand of money, but that shadow cushion in China and elsewhere ( incl in Europe where it has yielded  a15% tax on Swiss deposits) is much more in control

 

 

Posted via email from The India Investment Post