India: Monetary Economic Clock
Summary
Hard on the heels of China's recent hike in reserve requirements, India followed suit yesterday. We take a brief look at this act in the context of the Economic Clock® - and then tell you what to do about it, now that the Economic Time® is changing in at least three economies...
Topics Covered
- What happened
- Implications for the Economic Time®
- How to make money off this idea
Background
1. What happened
Yesterday, India's Central Bank, the Reserve Bank of India, raised its Cash Reserve Ratio (CRR) by a walloping 75 basis points, to 5.75%. This is now the proportion of deposits that banks must hold with the Central Bank.This means that they have less money to lend to customers.
2. Implications for the Economic Time®
This move clearly was designed to soak up excess liquidity. In simple terms: if banks now have to place 5.75% of their deposits with the Central Bank, they have less deposits that they can on-lend, right?
So, in the diction of our Economic Clock®, India is heading towards an "excess demand for money". This is bad for the stock market, as it thrives only if there is an "excess supply of money" around.
The Central Bank wants to create an excess demand for money because there is an excess demand for goods: it forecasts wholesale price inflation of 8.5% by March of this year.
Now have a look at the Economic Clock, in which we have re-positioned the Economic Times of India, China and thus Hong Kong to the "strong sell" quadrant.
3. How to Make Money Off This Idea
- Always consult your financial adviser first.
- Short these three markets: the outlook for a worsening Economic Time® will hurt these threes' stock markets.
- In particular, avoid banks in these three economies: if the Central Bank is allowing them to lend less - by virtue of increasing their reserve requirements - then how can they lend more?
- Short particularly the large-cap stocks, as these are the stocks that can be sold most easily.
