Goldmine Update – 15/03/19

Private corporate investment plans have fallen for the seventh year in a row on account of economic slowdown, poor project appraisals and huge corporate leveraging, RBI study showed. The bank funds stuck in the projects that failed to take off, abandoned or stalled rose three times to over Rs 10 lakh crore, it added. After FY11, when capex plans were at their peak at Rs 370,600 crore, they are on a continuous decline, falling 44.90 per cent from Rs 269,900 crore in FY14 to Rs 148,700 crore. Even within that space, major part of capex are from cash rich PSU companies. So, private sector is virtually not expanding.

Raghuram Rajan said yesterday that the revolt towards Capitalism is rising in the World due to rising economic disparity. If his prognosis is correct, it might not be good for the capital markets. Even Government and Opposition policies now clearly point towards allocating more direct resources towards the farmers, downtrodden etc. The way both NDA
and UPA are announcing freebies, loan waivers, interest waivers, subsidies, minimum income guarantee etc suggests that Raghuram Rajan is right in making that statement that the days of capitalism are numbered.

RBI will surely cut interest rates by about 25 bps in April. However it may not result in great transmission as the PSU banks are seeing continuous withdrawal of deposits, which could result in asset liability mismatch. Even private sector banks will not see high deposits as the bond markets offer much better fixed returns. The development of fixed tenure bond, NCDs, Perpetual bond, Zero coupon bonds will result in the core business of banking taking a hit sooner than later.

Since large corporates have to borrow 25% of their incremental additional borrowings through bond markets, we could see number of large good corporates come to the bond market.

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