How loose has the Reserve Bank of India’s (RBI) monetary policy been?
The sudden spurt in wholesale price inflation has, of course, lowered real yields (that is, yields adjusted for inflation). However, a comparison of real 10-year government bond yields with those of the US and Europe and with regional markets shows that real yields in India are at the higher end of the spectrum.
In China, the US, Singapore, Vietnam, Hong Kong and Thailand, the yield on the 10-year government bonds, after adjusting for inflation, is in negative territory. But, in India, the real yield on 10-year government bonds is 0.8%, which shows that RBI has been more proactive than most other central banks in the region in its tightening measures.
What signals are the markets giving?
In the bond market, the 10-year government bond yield is almost back to where it was before the cash reserve ratio (CRR) hike, indicating ample liquidity in the market. The bond market doesn’t seem to be unduly worried about further tightening.
In the foreign exchange market, the rupee has depreciated against most currencies this year and the real effective exchange rate (the exchange rate adjusted for inflation) index, which tracks the value of the rupee against six major currencies, was at 108.48 on 14 March, well below its peak of 115.91 reached last October and almost back to its March 2007 level of 107.4. Clearly, RBI could do more to let the currency appreciate, using it to contain inflation.
In the stock market, the interest-rate sensitive auto sector has underperformed the market. While the Sensex on the Bombay Stock Exchange (BSE) is up 8.6% this month, the BSE Auto index is up just 1%. The BSE Realty index has done better, but it, too, has underperformed the Sensex. Banks have been badly hit, particularly the public sector banks, with net interest income falling and because of the CRR increase.
The problem is that in the commodity markets, prices continue to rise. Crude oil prices have reached $120 a barrel and the UBS Bloomberg Constant Maturity Commodities index is up around 6% this month. A sliver of hope is that the dollar could stop falling, which will cool commodity prices. The dollar index, which tracks its performance against a basket of major currencies, recently hit a one-month high. But, for the dollar to continue to strengthen, the US Fed must signal it’s done with future rate cuts in its meeting this week. The stance of the US Federal Reserve, rather than any action by RBI, will be more important in containing commodity prices.
Hindustan Unilever: impressive growth
When Hindustan Unilever Ltd had reported record growth numbers in the December 2007 quarter, the pertinent question was if growth rates would sustain. Well, growth has risen from even those levels. The firm’s net sales grew by 19.1% year-on-year, higher than the growth of 16.8% in the December quarter. According to Capitaline data, this is the highest quarterly growth rate in more than nine years. Volume growth, too, was impressive at 10.2% (8.4% in the December quarter and 6% for the whole of 2007).
What’s more, the rising volumes and the resultant economies of scale helped the company maintain margins despite the pressure of rising input costs. In fact, raw material costs fell by about 80 basis points as a percentage of sales. The key soaps and detergents segment grew revenues by about 20% and profit by as much as 34%, thanks to lower advertising expenses within the segment. The personal products division grew revenues by an impressive 23.5% and profit by 25%, addressing concerns that growth of this division had slowed. Almost all other segments saw profit fall, but then the contribution of these segments to total profit is less than 10%.
The company’s impressive results are already reflected in its share price, which has outperformed the market by about 37% this year. The shares have risen by about 13% at a time when the markets fell by 17%. Based on the company’s 12-month trailing earnings per share, Unilever now enjoys a price-earnings multiple of more than 28 times. Core earnings growth stood at 22% last quarter, one of its best in recent times. That makes the stock look a tad expensive, but then the company has always traded at a premium valuation relative to earnings. Analysts expect growth to continue to be in double digits in the near future, but after the recent outperformance and considering the rich valuations, it’ll be surprising if the stock continues to beat the market handsomely from here on.
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