A rise in real rates in India will be inevitable, says Morgan Stanley

The RBI has been managing interest rates at levels lower than warranted all through this cycle (since recovery began in 2009). This can’t go on, says Morgan Stanley

A rise in real rates in India will be inevitable considering the outlook for US real rates and the US dollar. The key to risk asset performance will be the government’s policy reforms to reverse distortions in the price of land, labour, and capital, improving the productivity dynamic and helping GDP growth to accelerate by supporting a rise in the ratio of investment to GDP. This will be critical to bring back the virtuous circle wherein real GDP growth is much higher than real interest rates. This is the observation of Morgan Stanley analysts in their research note on rising interest rates and its effect on GDP growth.


Morgan Stanley argues that the RBI has been managing interest rates at levels lower than warranted all through this cycle (since recovery began in 2009). A central bank’s dharma is to provide the appropriate counterbalancing force in the overall economy to achieve optimal growth and inflation outcomes for maximization of economic welfare.


On the recent decision of the RBI to increase interest rates, Morgan Stanley feels that it is the correct thing for the economy. Though private investment did not respond to low real rates, the RBI's accommodative monetary policy gave the government continued support to run a high fiscal deficit – one of the key factors behind high inflation. While high government deficits meant a decline in public saving, negative real rates for savers caused a further decline in household saving. As savings declined faster than investment, the current account deficit kept widening. In the context of the government's inability to quickly augment public saving by aggressive pro-cyclical fiscal tightening, hiking real rates was the only credible way to demonstrate a commitment to reduce the saving-investment gap.


The Morgan Stanley research note in its conclusion says that even as we expect saving to rise and investment to slow over the next 12 months, the current account will still be in deficit (i.e., India will still be short of saving). Hence, trends in US real rates/the US Dollar will remain the key driver of domestic real rates. “We thus believe the key will be to lift real GDP growth with policy reforms and change in expectation of the returns on investment for entrepreneurs by systematically addressing the issues related to the business environment,” says Morgan Stanley.


On the other issue of inflation, the government must take policy decisions to improve on all the factors driving inflation upwards, which include: (a) aggressive government spending (largely revenue in nature); (b) a large, sustained increase in rural wages (largely reflecting the externality of the national rural employment scheme) and (c) higher global commodity prices, particularly oil, at a time when India's mining sector output was constrained (d) negative real rates for savers.



Santosh Kanekar

4 years ago

This article ignores the fact from 2008 Indians have been steadily investing in Real estate and that is why private savings has reduced as much money is locked into real estate

Indian banks’ loan growth continues to be high at 17%, says Credit Suisse

Credit Suisse analysts continue to remain cautious on the corporate lenders as both asset quality and growth will come under pressure, they say in their research note. Also, continued growth in stress segments would mean that current asset quality issues are unlikely to dissipate quickly

Even as the GDP growth in moderated to 4.4% in 1Q, Indian banks’ loan growth continues to be relatively high at 17%, according to Credit Suisse in its research note. The credit multiplier (to real GDP) for the economy therefore is now running at 4x compared to its last 10-year average of 2.9x. Factoring  in  the WPI moderation,  the macro  slowdown  is  even more  stark  with  growth  down  8  pp  from  last year’s  levels.  The  contrast  has  been  especially  striking  in  the  past  six  months,  as  the incremental loan growth as a % of GDP growth has moved up to about 100% (versus the past 5-yr average of about 61%).


The  recent  pick-up  in  loan  growth  to  17%  in  August  from  15%  in  July,  can  be  partly attributed to the tightening in money markets and corporates’ shift away from instruments such as CPs (commercial paper). However, even adjusted for the CP issuances, loan growth is relatively high at 15%.  Another  potential  explanation,  argues Credit Suisse, could  be  the  substitution  of  foreign  currency borrowings  with  rupee  debt  by  corporates,  given  the  sharp  depreciation  in  the  currency. However, ECB (external commercial borrowings) borrowings data does not corroborate this and even in the month of July, ECB issuance was relatively high at $3.7 billion.


The divergence in credit growth versus GDP growth is shown in the following chart:


According to Credit Suisse, in addition  to  the  relatively  high  growth  rates, a growing  problem is that  a  large  share  of  incremental  growth  continues  to  emanate  from  high stress segments. Most banks have  increased  their  focus on  the consumer segment and growth  here  has  picked  up  from  14.5%  to  17%  year-on-year.  However, for the overall banking system, the retail contribution is still relatively low at about 30% of incremental loans. On a YTD basis,  the  infra  segment  has  contributed  about 45%  of  incremental  loan  growth.  There has been an increase in instances of re-financing for over-leveraged companies.


Continued growth in stress segments would mean that current asset quality issues are unlikely to dissipate quickly.  Credit Suisse analysts therefore, continue to remain cautious on the corporate lenders as it is expected that both asset quality and growth will come under pressure.


The following chart clearly shows the growth observed in stress segments:


Morgan Stanley Mutual Fund plans to launch a mid-cap scheme
Mid-cap funds are known to be risky and much depends on the quality of stocks present in the portfolio. 
Morgan Stanley Mutual Fund plans to launch an open-ended equity scheme—Morgan Stanley Midcap Fund. The investment objective of the scheme is to generate long-term capital growth from an actively managed portfolio of medium capitalisation equity and equity-related securities, including equity derivatives. The scheme proposes to invest 65% to 100% of the assets in mid-cap companies. Up to 35% of assets would be invested in companies other than mid-caps and up to 35% of assets would be invested in debt and money market instruments.
Mid-cap stocks deliver huge returns when the economy is in growth mode. They are often considered the blue chips of tomorrow. But they are also more volatile. Wrong timing and/or poor stock selection can decimate returns over the short term. Investments in companies like Unitech, Torrent Power, Opto Circuits and Gitanjali Gems would have gone down by more than half their value from the beginning of January 2013 to the end of August 2013. On the other hand, over the same period, companies like, Reliance Communications, Hexaware Technologies and Tech Mahindra have gone up by 63%, 49% and 47% respectively.
This mid-cap scheme will invest a major portion of its assets in mid-cap stocks and the rest may be in larger companies. There are many examples of mid-cap funds that end up investing in large-cap stocks to stabilise returns. (Read: Small- and Mid-cap schemes: Cushioning the fall)
The scheme would invest in companies which have a capitalisation which falls within the range of the highest and lowest market capitalisation of the stocks which are the constituents of CNX Mid-Cap Index. The benchmark index of the scheme shall be the CNX Mid-Cap Index. 
When launched, this would just be the third mutual fund scheme from Morgan Stanley Mutual Fund. Its other two schemes—Morgan Stanley ACE Fund and Morgan Stanley Growth Fund, have put up a decent performance compared to their benchmark over the past one-year, three-year and five-year periods ending 30 August 2013.
Over the past one year, while a majority of large-cap and multi-cap schemes have delivered positive returns, mid-cap schemes have declined in value. Except for five schemes, the remaining 17 schemes from the mid-cap category have delivered negative returns. HSBC Midcap Equity Fund has been the worst performer in this category.
The red highlights denotes underperforming schemes compared to the benchmark
The scheme would be managed by two fund managers—Jayesh Gandhi and Dhaval Shah. Jayesh Gandhi has been with Morgan Stanley since August 2007 and has over 15 years of experience in investment management and equity research. Dhaval Shah joined Morgan Stanley in April 2011. He has over 8 years of investment experience.
Other Details of the scheme
Minimum Application Amount [first time in the scheme]: Rs. 5,000/- plus in multiples of Re 1/-
Minimum Additional Application Amount: Rs. 1,000/- plus in multiples of Re 1/-
Exit Load: 1% if redeemed/switched on or before the expiry of one year from the date of allotment; otherwise: Nil
Other Expenses
Maximum total expense ratio (TER) permissible under Regulation 52 (6) (c) (i) and (6) (a) Upto 2.50%
Additional expenses under regulation 52 (6A) (c) Upto 0.20%
Additional expenses for gross new inflows from specified cities Upto 0.30%




4 years ago

When they are not able to create wealth through mopnster BULL RUN
how they ncreate wealth through this fund .Dont invest.

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