How times change: when lockdown restrictions were imposed last year, most economic analysts predicted a stock market slump, a cratering in property prices, and close to zero inflation (marching in lockstep with a three hundred year low in interest rates). But just look at what actually happened instead…since March last year, the Dow Jones has soared from 19,173 to its current high of 33,962, and on the subcontinent the NIFTY 50 has performed even better: rocketing from 8,083 in April 2020 to 15,662 today (www1.nseindia.com). Property prices on the subcontinent rose by between 3% and 5% over the same period, and inflation (the key benchmark of consumer demand) has surged to 6.3% in India (the highest in six months). So what’s going on here…why should economic resurgence coincide with a period of unprecedented political and social instability?
So far as India is concerned, there are two factors at play, and they both have their roots in that headline inflation figure we just mentioned (6.3% to save you looking back): first of all, with nerves of steel, the Reserve Bank of India (www.rbi.org) is maintaining its robust, near term interest rate strategy, with the all important repo rate (the rate at which banks lend to other banks) pegged at 4%, and likely to stay that way for the foreseeable future: the reverse repo rate is also sitting comfortably at 3.35%. And if that sounds underwhelming in a news schedule full of Boris Johnson and Dominic Cummings, just think about it for a moment…the Federal Reserve is maintaining a 0% rate, and over in Threadneedle Street, the men in suits on the Bank Of England’s Monetary Policy Committee (plus two women, since the arrival of Citigroup’s Catherine Mann last month), UK rates are solidly pegged at 0.1%. In other words, currency traders can borrow for nothing in Washington, and next to nothing in London, and then invest at up to 4% in New Delhi.
The result is nothing if not predictable…
Textbook Arbitrage
You don’t have to be Warren Buffet to spot the margins…certainly not if you’re a currency trader worth your salt.
That’s one of the reasons India now has the fifth largest foreign exchange reserve in the world: $608.99 Billion as at 21 June, sitting just behind China, Japan, Switzerland and Russia, all of which have a long history of inward investment and none of which, you will have noticed, are the United States or the United Kingdom. Aggressive, bargain basement, interest rates come with a price tag…and the Reserve Bank of India isn’t likely to forget that anytime soon.
All of which means the subcontinent now has eighteen-month’s worth of balance of trade cover, giving it an unprecedented level of protection against “unforeseen external shocks” (to adopt the words of Nirmala Sitharaman, India’s Finance Minister): which adds up in turn to a long-term platform for macro economic growth. Because, and this still needs to be said, arbitrage is temporary, but railway systems and roads last a hundred years.
But, I hear you say, you mentioned two factors for growth…what’s the other one? Well, the other one is India itself…
A Perfect Storm for Growth
Consumer demand is the beating heart of any modern economy, and when it comes to demand demographics India has it all in spades: the fastest growing population on the planet, wealthier than ever before, soon to be the biggest in the world, and more tech savvy than ever: a coiled spring, capable of triggering growth at simply staggering levels (call it inflation if you will), even in the middle of a global pandemic.
Just think what that’s capable of doing once the spring is released…
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