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The Indian Express Vocabulary 22nd Jan 2018

Taking stock

Soaring bond yields could end the current party in markets, the government cannot afford to ignore it

Last week, the Sensex crossed yet another milestone of 35,000 points. The index of the Bombay Stock Exchange’s 30 most-actively traded stocks has, in the last one year, risen over 30 per cent. But it isn’t just the Sensex. The BSE-100, BSE-200 and BSE-500 indices are also up 30.4 per cent, 31.4 per cent and 33.5 per cent respectively, compared to a year ago. In other words, this is a rally that’s broad-based and not confined  (सीमित) to select stocks whose prices are being pushed up. The stocks comprising the Sensex are today trading at prices that are 26.06 times their underlying average earnings per share. Such high price-earnings ratios were last seen during 2007-08, when the Indian economy was growing at 9.3 per cent a year, as against 6.1 per cent in the current fiscal. It only points to investor optimism  (आशापूर्ण दृष्टि) — a belief that a growth pickup is just round the corner and the prospects even better for the universe of listed companies, especially after demonetisation and post Goods and Services Tax.

Whether or not the above optimism is justified, what’s interesting is quite the opposite development in the bond markets. The benchmark 10-year Indian government bond issued last May at an initial rate (coupon) of 6.79 per cent was, on Friday, traded at 7.48 per cent. Since bond yields and prices move in opposite directions, it only means that the same security originally priced at Rs 100 now fetches Rs 90.78 (because the fixed Rs 6.79 coupon has to be divided by Rs 90.78 to give 7.48 per cent yield). In the last one year, 10-year government bond yields have gone up by a full percentage point, while hardening by roughly half that for corporate bonds of 3-5 year maturities. Thus, we are seeing bond prices slide even as stocks surge. That clearly is quite unusual. It’s difficult to envisage  (विचार करना ) corporate earnings improving significantly, in a scenario where their margins are squeezed (निचोड़ा हुआ) by rising interest rates — which is happening even without the Reserve Bank of India formally tightening monetary policy — on top of higher oil prices.

 

The single implication from all this, as far as the coming Union Budget goes, is that there is no room for fiscal adventurism (दुस्साहस) . Any significant straying away from adhering to deficit targets is bound to raise yields further, just when signs of a corporate earnings revival are visible. Treasury income losses on their existing bond holdings from soaring yields would spell equal disaster for banks, already grappling (कुश्ती) with bad loan resolution problem. The costs to the economy from these would far exceed any growth gains, ephemeral (अल्पकालिक) at best. The Narendra Modi government shouldn’t sacrifice hard-earned macroeconomic stability, for which it can take some credit, at the altar of populism.

  1. Confined: taken and held prisoner
    Synonyms: apprehended, arrested, captured, caught, captive, imprisoned, incarcerated, interned, jailed
    Antonyms: free, delivered, emancipated, enfranchised, freed, liberated, paroled, released
  2. Optimism: an inclination to believe in the most favorable outcome
    Synonyms: bullishness, sanguinity
    Antonyms: bearishness, pessimism, despair, desperation, discouragement, disheartenment, hopelessness
  3. Envisage: to form a mental picture of
    Synonyms: conceit [chiefly dialect], conceive, conjure (up), dream, imagine, envision, fancy, fantasize, fantasy, feature, ideate, image, picture, see, vision, visualize
    Words Related: contemplate, meditate, muse, ponder, ruminate, concoct, fabricate, invent, make up, manufacture, plan, project
  4. Squeezed: to apply external pressure on so as to force out the juice or contents of
    Synonyms: crush, express, mash, press
    Antonyms: decompress, expand, open, outspread, outstretch
  5. Adventurism: The willingness to take risks in business or politics; actions or attitudes regarded as reckless or potentially hazardous.
  6. Grappling: the act or manner of holding
    Synonyms: clasp, clench, hold, grasp, grip, handgrip, handhold
    Antonyms: release, relinquishment, concord, harmony, peace
  7. Ephemeral: lasting only for a short time
    Synonyms: brief, deciduous, momentary, evanescent, flash, fleeting, fugacious, fugitive, impermanent, passing, short-lived, temporary, transient, transitory
    Antonyms: ceaseless, dateless, deathless, endless, enduring, eternal, everlasting, immortal, lasting, long-lived, permanent, perpetual, timeless, undying, unending
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