Predict the Money Supply & Policies, Predict the Markets. Period.

When there’s more money available, people tend to spend more, which boosts economic activity and potentially drives up asset prices, like stocks and real estate.

Conversely, if the money supply tightens, spending may decrease, which could lead to a slowdown in the markets.

That’s money supply. About policy continuations, I’ve a detailed outlook. Following are the two parts of this article about all the detailed picture:

1. Housing Market 2. Equity Market

Alright, let’s begin.

In the realm of financial stability and economic policy, few areas are as crucial and yet as complex as the regulation of housing credit.

Based on RBI’s working paper, let’s evaluate the efficacy of macroprudential (MaP) policies in modulating bank credit to the housing sector in India.

By leveraging a comprehensive empirical analysis, this article is about present findings and broader implications for financial stability and economic growth.

The primary objective of macroprudential policies is to enhance the resilience of the banking and financial systems through pre-emptive regulatory measures.

These policies are designed to mitigate systemic risks and dampen the adverse effects of credit cycles by utilizing buffers built during economic booms.

By complementing microprudential regulations and traditional macroeconomic tools like monetary and fiscal policies, MaP policies aim to maintain financial stability and prevent economic downturns from escalating into full-blown crises .

Since the global financial crisis of 2008, there has been a heightened emphasis on the use of MaP policies worldwide, particularly within the G20’s regulatory reform agenda.

However, questions about the effectiveness of these policies persist, particularly in the context of emerging market economies (EMEs) like India, which have unique financial dynamics and vulnerabilities .

Globally, a wide array of MaP tools has been employed to mitigate systemic risks. Advanced economies (AEs) and EMEs alike have utilized instruments such as loan-to-value (LTV) ratios, debt-to-income (DTI) ratios, risk weights, and countercyclical capital buffers.

I hope the names themselves explain what they mean. So I won’t explain that in detail.

Note the highlighted short forms. I’ve used widely for the sake of space and a quick read.

While AEs have increasingly adopted these measures post-2008, EMEs have a longer history with MaP policies due to their greater susceptibility to financial shocks .

Studies have shown that MaP tools, particularly those targeting the housing sector, have been effective in several Asian countries.

For instance, LTV ratios have been instrumental in reducing mortgage delinquency rates and moderating housing price inflation.

There’s a suggestion that these tools can significantly reduce the procyclicality of credit, thereby stabilizing the financial system during periods of economic volatility.

India has a robust framework of MaP policies that includes LTV ratios, risk weights for housing loans, and sector-specific capital requirements.

These measures have been implemented with the dual aim of curbing excessive credit growth and enhancing the quality of bank assets. Because we know what’s happening in the US. They’re addicted to credit.

Despite these efforts, the effectiveness of MaP policies in India has been a subject of ongoing research and debate.

The study utilizes bank-level quarterly data from 51 major banks in India, covering the period from Q1 2002 to Q3 2020.

This dataset includes all public sector banks, major private sector banks, and foreign banks operating in India, collectively holding over 95% of the market share in housing credit .

The econometric model employed in this paper examines the impact of MaP policies on housing credit growth and non-performing assets (NPAs), controlling for individual bank characteristics such as asset size, liquidity, capital ratio, and funding composition.

Additionally, the model accounts for macroeconomic variables like GDP growth, the repo rate, and the trade-weighted real effective exchange rate (REER) .

Basic analysis reveals several key findings:

1. Tightening MaP policies are effective in controlling housing credit growth.

2. A combination of tighter MaP and monetary policies is particularly effective in reducing NPAs in the housing sector. i.e. A positive relationship.

3. During periods of high GDP growth, the impact of MaP policies is amplified, indicating that these measures can help moderate the cyclicality of housing credit and maintain stability during economic upswing.

Note — The effectiveness of MaP policies also varies across different phases of the business and financial cycles.

The findings of this study have significant implications for policymakers in India and other emerging markets.

The demonstrated effectiveness of tightening MaP policies in controlling housing credit growth and reducing NPAs underscores the importance of these tools in maintaining financial stability.

Moreover, the interaction between MaP and monetary policies highlights the need for a coordinated approach to economic management .

Future policy frameworks should consider the cyclical nature of credit dynamics and the complementary roles of different regulatory measures.

By doing so, policymakers can better navigate the complexities of financial markets and safeguard against systemic risks, ultimately fostering a more resilient and stable economic environment.

Raamdeo Agrawal, a renowned Indian equity investor and co-founder of Motilal Oswal Financial Services, recently made a bold prediction:

India’s market capitalization will double to $10 trillion in the next 4–5 years.

This statement has sparked considerable interest and debate within the financial community. To understand the feasibility and implications of this forecast, let’s delve into the underlying factors driving this projection, the current economic landscape, and potential challenges.

So all this is based on several key assumptions and observations about the Indian economy and its growth trajectory. Optimism stems from India’s strong macroeconomic fundamentals, demographic advantages, and the government’s pro-business reforms.

Additionally, we can see the increasing participation of retail investors in the stock market and the growing influence of domestic institutional investors as catalysts for market growth.

India’s GDP growth has been robust, even amid global economic uncertainties. The country has consistently maintained a growth rate higher than many other major economies.

A crucial factor contributing to this growth is India’s demographic dividend. With a young and rapidly growing population, the labor force is expanding, which, in turn, drives consumption and economic activity.

In my opinion, India will be driven more by Capex than Consumption.

Moreover, the government’s focus on infrastructure development, digitalization, and manufacturing is expected to spur economic growth further. Initiatives like the ‘Make in India’ campaign aim to boost domestic manufacturing and attract foreign investment, thereby creating more jobs and increasing disposable incomes.

I’ve not even added GIFT City and more probable IFSCs. More data, more fund flow in India!

The Indian government has implemented a series of structural reforms aimed at improving the ease of doing business and fostering a favorable investment climate.

Key reforms include the introduction of the Goods and Services Tax (GST), the Insolvency and Bankruptcy Code (IBC), and various measures to enhance transparency and reduce corruption.

These reforms have helped streamline business processes, reduce bureaucratic red tape, and create a more predictable regulatory environment.

Such changes are essential for attracting both domestic and foreign investment, which can fuel market growth and contribute to the overall increase in market capitalization.

India’s digital revolution is another critical factor on an optimistic outlook. The widespread adoption of technology across sectors has led to increased efficiency, innovation, and productivity.

The digital payments ecosystem, powered by platforms like UPI, has revolutionized the way transactions are conducted, making financial services more accessible to a broader population.

Additionally, India’s burgeoning startup ecosystem is a testament to the country’s innovative potential.

More IFSCs = Faster economic growth

With substantial investments flowing into technology-driven startups, there is a growing pipeline of companies that could potentially go public, adding to the market’s overall value.

The Indian capital markets have seen significant developments in recent years. There has been a notable increase in retail participation, driven by the rise of discount brokerages and the availability of investment education.

Furthermore, the penetration of mutual funds and systematic investment plans (SIPs) has brought more stable, long-term capital into the market.

Thanks to pandemic, everyone became financial advisor.

Even Tanmay Bhat! (With all due respect to his fans, I think Rohan Joshi is more funny)

Domestic institutional investors, including mutual funds and insurance companies, have also played a crucial role in stabilizing the market and providing liquidity.

Their growing influence is likely to support market growth and reduce volatility.

While the prospects for India’s market cap doubling to $10 trillion are promising, several challenges and risks need to be considered:

1. Geopolitical tensions, US Debt issue, Trump going to jail, trade wars, and potential recessions in major economies.

2. Structural issues such as income inequality, unemployment, and agrarian distress.

3. Despite significant reforms, regulatory and bureaucratic challenges persist, especially now that NHAI has hiked toll charges. There’s a little dhak-dhak…

4. Financial markets are inherently volatile, and external shocks, whether economic, political, or social, can impact market sentiment and valuations.

Raamdeo Agrawal’s prediction of India’s market cap doubling to $10 trillion in the next 4–5 years is ambitious but not unfounded.

The combination of robust economic growth, favorable demographics, progressive policy reforms, technological advancements, and capital market developments provides a strong foundation for this optimistic outlook.

As India continues on its growth trajectory, the interplay between policy decisions, market dynamics, and global factors will ultimately determine the realization of this bold forecast.

In the spirit of goodness, it is essential to remain cautiously optimistic, acknowledging the potential while being mindful of the challenges.

Thanks for reading the article all the way through the end. I write my heart out here. And I hope this added value to you.

Padhne vale padhenge aur badhenge!

Love you all.

Originally published at https://chroniclebrews.substack.com.