The Race Towards Zero...

Couldnt write earlier though had been thinking. The race towards a Zero is official now, when I had started to think about it it was still looking "likely" more than an "eventuality". The Fed cut its target Fed Funds rate between 0 to 25 bps, lower than Japan's Central Bank rate of 30 bps. What it implies is though there is liquidity available but its not being made available to those in need of it. Thus remains choked are the arteries of corporates in the US and elsewhere facing zero to negative Cash Flow from Operations and Zero Cash Flow from Financing. A positive Cash Flow from Investments is more of a dream then a reality or a possibility given bearish asset markets. All this translates into more Chapter 11's in US and NPA's or bankruptcies elsewhere.

Our team at office had been talking about this "Race towards Zero" during October, the things are so bad in the financial markets that expecting 25, but getting 10 is far better than getting nothing (a potential Zero). For the time being expectations can be called speculation, reality is a dream come true at a discount and Zero is a nightmare. I was long Equities all this while, I didnt sell them but stopped any fresh purchase since January 2008. Ultimately I discovered that selling is much tougher art to learn than is buying. I thought of going long on Bonds in September eventually I did that in December and for the time being that strategy is reaping good gains. As the race towards Zero interest rates gains momentum elsewhere now that its done in US. Japan has a good experience of a Zero rate environment. It looks very likely UK would follow the suit. Countries like India can not afford to go to Zero but may reduce the rates below the all time lows. The Repo Rate was 4.5% in 2003 sometime in India and I think if that figure is true the present recession would pressurise RBI to atleast hit that mark. The present benchmark rate being 6.5% The irony of the situation is loans are cheap, but companies do not have access to cheaper funds and neither do the customers. Savings rates have started to fall so will the lending. But lending as we expect is going to become very selective now that even the most aggressive banks like ICICI Bank and HDFC Bank have suffered during this crisis. The path will be treaded more cautiously.

This Race will also impact consumers as they will have access to cheaper goods and more freebies, as its better for companies to get a near zero than get nothing for the huge inventories they might be holding. Job cuts are more widespread and scary. Infact thats the most scariest part in the ongoing crisis, the first Financial crisis that I am a part of. As I see things are just becoming worse than better, low rates will not spark a boom but are only to instill some confidence amongst consumers, corporates and investors.

We can blame US and the industrial world for the present crisis but our own companies especially within real estate and financial services sparked a tiny boom in the sector. Tiny in terms of global context only, but real estate companies have to cut prices drastically than normally.

Others will follow the suit like the autos, due to high competition this sector didnt command a larger margin earlier as well. But the margins will shrink, input costs have come down and all these benefits will have to be passed onto the consumer. Similarly for the FMCG good and others.

One thing is for sure, if the Indian regulators and policymakers are serious about growth and let the corporates function more independently Indian inc will emerge more stronger once the recovery begins. I hope I dont have to Run towards zero in terms of finances everything else can be gulped down with a good drink!