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The Golden Crossover

, June 17, 2014, 0 Comments

In technical parlance, shorter term moving average (SMA) crossing above the longer term moving average (LMA) is considered a bullish sign; as the SMA reflects more recent price action, the crossover is seen as an indication that the pair will move in the direction of the SMA. Reverse happens when the SMA falls back beneath LMA – the Death Cross. This is a confirmation of a bearish built up. The crossovers lag current events, as the move is already underway for some time, before it gets manifested in the form of the crossover. Even though they are not lead indicators, they accurately capture the mood of the trending markets.

Crossovers mark important shifts in momentum and support/resistance regardless of the average period under consideration. Considering the crossovers and only the crossovers with the accompanying momentum shifts in an entirely different context with different indicators (not averages), presents an interesting case study.

Financial 2009 was the ‘Death Cross’ moment for the Indian economy. This was the year when avalanche from Western financial markets hit India resulting in growth plummeting. Fiscal stimulus to hold up against the storm resulted in high fiscal deficit and consequent high inflation. Inflation as

The Golden Crossover-MarketExpressmeasured by Consumer Price Index (CPI) marched above the GDP growth rate and this happened at around 8%. Inaction on part of the Government in withdrawing the stimulus led to even higher inflation rates. GDP growth shot up for next two years, as if decoupled from the rest of the world. But the steroids had taken their toll, leading to subsequent sharp drop in GDP growth rates in financials 2012, 2013 and 2014.

Please note the crossover level was high at around 8%. The momentum of the inflation was so severe that it peaked at a much higher level of 12% in 2010 and stayed above 10% for more than a year.

Circa Q4 2014: GDP growth is languishing at 4.6%. The country’s economy expanded by 4.7% in 2013-14, the second successive year of sub 5% growth. The economy posting two consecutive years of below 5% growth is the worst performance of Asia’s third-largest economy in over two decades.

With inflation remaining consistently high for over five years, the price paid by the economy has been high too (growth has dipped to below 5% for two consecutive years) and this effect will last long, long enough till the inflation has cooled down to a more tolerable level, say 6-7% range.

So, when does the ‘Golden Crossover’ moment happen for the Indian economy? Anytime soon?

Measure of retail inflation – the CPI, was above 8.5% in April 2014. RBI has targeted to bring it down to 8% in Q4 FY 2015 and further to 6% in another year. On the other hand there is still no sign of recovery in the economic growth, even though it has bottomed out. GDP growth rate is expected to stay below 6% in FY 2015 and between 6.5-7% in FY 2016. If we take these numbers as sacrosanct, the crossover is unlikely before FY 2016, another 12-18 months; and it has to happen in the range of 6.5-7%.

The event has to be viewed as an inflexion point that reverses the anomaly that crept into the Indian economy five years back – a scenario where growth trajectories and relative positions of GDP and prices got swapped. Inflation crossed above the GDP growth rate and assumed the path which ought to have  been of the economic growth. At a more practical level, monitoring of crossover events ensures the practitioner of economics to simultaneously track inflation and economic growth with their accompanying momentum.