Sunday 22 December 2013

Taper proof

Thanks to RBI and FM, the specter of imminent fed taper couldn’t haunt markets as it did back in May. 

In what served as a nightmare for Indian economy back in May, when turned real was treated as a business as usual. The much discussed and feared US dollar tapering by Federal Reserve, first announcement of which shook the cores of rupee is finally set to begin from New Year.  Dollar inflows are to be narrowed down in the markets but thanks to the improved level of Current Account Deficit, the difference between outflow and inflow of the foreign exchange, rupee wouldn’t lose its stand against dollar. 


US Federal Reserve Chief Ben Bernanke on Thursday announced to cut down on its monthly dollar minting program by $10bn, bringing it to $75bn dollar. Fed, with an effort to spur growth, had been pumping in cheap money to the tune of $85bn in its economy on monthly basis which in turn also benefitted emerging market economies wherein US investors parked that cheaply acquired money for better returns. India was one of the beneficiaries of this program. However, Fed Chief announced to taper off liquidating dollars in May 2013. Mere his words were enough to scare the investors though final decision was yet to be taken. Foreign Institutional Investment (FIIs) began flocking out depreciating rupee’s value against dollar, which touched its all time low in August at Rs. 68.85 per dollar. It is only after drastic measures taken by Reserve Bank of India and Finance Ministry to attract dollars and cut down on imports that rupee could be strengthened.

In this background, it is surprising that panic-stricken response shown by markets back then didn’t come to pass now, now when taper is certain and just round the corner. To compare the current scenario from May, India is better placed at all fronts. First, the time and pace of taper was uncertain then which is not only clear but bearable at $10bn reduction a month. Secondly, India’s foreign reserve and CAD have improved a lot. The unprecedented surge in gold imports of earlier times could be controlled including few other non essential and expensive imports. CAD narrowed sharply to $5.2 billion, or 1.2 per cent of GDP, in the July-September quarter of 2013-14 which hovered around 4-5% in the previous quarters. In addition, RBI’s move taken in Sep 2013 to ease it for banks to run Foreign Currency Non-residents (banks) deposit scheme has also played out well. Under FCNR (B) scheme NRIs do not face currency risk; the currency risk is borne by banks. RBI had helped banks reduce this risk so that they attract more of NRIs to make use of this scheme and don’t stay away from offering it in the tight domestic currency scenario. 

These measures apart from turnaround in exports have made Indian economy resilient enough to face imminent outflows of dollars. Initially rupee might lose traction against dollar but that wouldn’t be severe and wouldn’t sustain for long. Considering US economy is back on growth trajectory, fed taper can instead be positive for India in a sense that demand boost in US will drive export growth of Indian export enterprises having business in US. That is double dose good news for them as lately they are already reaping benefits of surge in exports.

The specter of Fed Reserve taper is no more there to haunt. India’s external front is under control for now. It is time that all efforts are put to reduce notoriously high inflation, the pivot of economic growth cycle and thus boost industrial production bringing jobs and growth in the country.

Saturday 21 September 2013

Trinity Trick

While Rajan’s monetary policy review did ensure to handle two of the trinity trilemma i.e. sinking rupee and rising inflation but the last one i.e. meek growth demands Government action.

With US Federal Bank postponing quantitative easing withdrawal and with debutant RBI-Chief Raguram Rajan coming up with pragmatic monetary policy, positivity seems to have enthused in Indian economy. On one hand the breather given by Fed-Chief Ben Bernanke has ensured that Foreign Institutional Investments (FIIs) will remain intact till December, on the other, RBI-Chief’s move to hike repurchase (repo) rate has signaled that notorious inflation will also be guarded. Consequently with external and internal stability, the rupee-volatility will soon be the thing of passé.

RBI has raised repo rate i.e. the rate at which banks borrow from RBI for short-term credit to 7.5% from 7.25%. Simultaneously, it has reduced Marginal Standing Facility rate, a special and expensive borrowing window for banks, to 9.5% from 10.25%. Usually hike in repo rate translates into increased borrowing cost for banks but considering that MSF is the effective policy rate since July which has been lowered, cost of borrowing for banks has actually come down. The idea behind this move is to provide fresh air to banks currently suffocated with cash dearth but at the same time prepare them for the ensuing normalcy when repo rate will regain its position as effective policy rate. In that case, during normal circumstances, even if repo rate is increased from current level of 7.25%, it will be less than the present rate of MSF, thus there will not be any dramatic impact on banks’ cost of borrowing.

Another positive implication of repo-rate hike is that the subsequent arbitrage advantage in interest rates will attract more foreign investors, something which is needed to shore up foreign reserves. Increase in repo-rate also suggests RBI’s hawkish stand on inflation front. Fighting inflation through increased rates is justified as it is undoubtedly notoriously high inflation which fuels the vicious cycle of economic slowdown. Though it will hurt the already languishing growth with expensive loans and all but lower inflationary pressure is required even if it comes at the cost of short-term growth.

The so called impossible trinity trilemma of sinking rupee, rising inflation and meek growth has to be dealt with now. While Rajan’s monetary policy review did ensure to arrest sinking rupee and control rising inflation but meek growth cannot be strengthened solely by RBI. It does need policy-push and legislative reforms something which demands Government action. Effective monetary policy will come to a copper as long as it is not backed by prudent fiscal and legislative policies and expecting fiscal and legislative prudence on the part of Government in an election year is like asking for moon. Therefore, thumbs up to Rajan, a question-mark on Government’s intent!

                          

Monday 9 September 2013

Raghu Reform Rajan

 Mr. Rajan’s beginning is definitely commendable. He might have travelled across the half way too quickly but covering the other half would not be easier.

“If you can trust yourself when all men doubt you, But make allowance for their doubting too” following lines from the poem ‘If’ by Rudyard Kipling is probably the best message newly appointed RBI-Chief Raghuram Rajan could convey to everyone bewildered with current economic turmoil. Through his maverick maiden speech, he effectively addressed the hopes of each stakeholder but how much walk of his talk will take place is something yet to be seen.

Slew of measures, in order to provide fresh breather to banks, have been proposed by Rajan. For instance, well-run scheduled commercial banks do not have to acquire permission from RBI in order to set-up new branches. Also, no fees will be charged for this purpose. That underserved areas don’t remain neglected, RBI will make sure that banks open up branches in those areas in proportion to their expansion in urban areas. Apart from this, he also emphasized to expedite the process for issuance of new banking licenses. A committee chaired by former RBI-Chief Mr. Bimal Jalan will be looking into the applications after an initial review and compilation by RBI staff. The process is stipulated to be completed by Jan 2014 i.e. the new licenses should be issued by then, if the deadline is not extended any further. In a bid to set up robust banking structure in the country, differentiated licenses will also be issued to small banks and wholesale banks. Large urban cooperative banks will be converted into commercial banks.

Rajan also took into consideration the growing Non Performing Assets of the banks due to loan-defaults and subsequent Corporate Debt Restructuring. He took a hard line on owners of those companies and said they do not have the divine right to stay in charge unmindful of how badly they mismanaged their enterprises. Banks aren’t supposed to bear the brunt of their bleak business scenario. Thus CDR norms are certainly going to get tougher now. To the relief of cash-strapped banks, Rajan intends to reduce their requirement to invest 23% of their deposits in Government securities which is known as Statutory Liquidity Ratio. It reduces the amount of cash available with banks to make loans.

For the benefit of citizens, finally an RBI-Chief will be launching Inflation-indexed savings instruments pegged with Consumer Price Inflation (CPI), not WPI as it is former which reflects the actual inflation being borne by consumers. A national grid-based Indian bill payment system will also be launched, where households will be able to use bank accounts to pay school fees, utilities, medical bills etc. This will make payment anytime anywhere a reality. Also, a pilot will be conducted to enable cash payments using prepaid instruments issued by non-banking entities and Aadhar-based identification. An application for encrypted SMS-based funds transfer that can run on any type of handset will also be examined by a technical committee.

Acknowledging that access to finance for the poor and for rural small and medium industries is hard, Point of sales devices and mini-ATMs will be set up by even non banking entities so that financial inclusion leading to inclusive growth can be feasible.

As monetary policy is the first and foremost responsibility of RBI, a committee under the chairmanship of Urjit Patel, in three months, will be suggesting measures to strengthen the monetary policy framework. Measures such as liberalization in forward market and internationalization of rupee etc. have certainly spurred the confidence of investors that India is not afraid to take bold decisions concerning with financial markets.

They say that ‘well begun is half done’. Mr. Rajan’s beginning is definitely commendable. He might have travelled across the half way too quickly but covering the other half would not be easier. All eyes are now set on 20th Sep i.e. the day when he will be coming up with his first monetary policy as RBI-Chief. All the best Mr. Raghuram Rajan!! Hope you setting-off to tread on the other half-way is a success. 

Tuesday 27 August 2013

Seeing the Silver-linings

India’s export business is bleak and currency depreciation is a tried and tested formula to boost it, rupee’s fall CAN be translated into export-growth, CAN turn out to be a positive for Indian economy. 

And the rupee goes past 66 per dollar! An all-time low! Its swinging motion in the range of 61-66 per dollar has become a cause of concern for Finance Ministry and Reserve Bank of India. Though their panic-stricken remedies adopted to cure rupee’s free-fall do suggest that economy might go down into dumps if currency doesn’t stabilize but considering that India’s export business is bleak and currency depreciation is a tried and tested formula to boost it, rupee’s fall CAN be translated into export-growth, CAN turn out to be a positive for Indian economy.

Scrambling to tame burgeoning CAD and thus halt rupee’s slide, Chidambaram hiked import duty on gold, silver and platinum to 10% and also hinted to raise duties on non-essential luxury items such as air-conditioners, refrigerators and expensive watches. It has also asked state-run financial institutions to raise funds abroad through quasi-sovereign bonds, and liberalized rules on overseas commercial borrowing so that more dollars can be brought in India. Not only FM, but monetary policy supremo RBI is also up with its efforts through its liquidity tightening measures. It restricted banks’ easy access to money so that bank-financing for speculators who create pseudo dollar-demand in currency market, can be curbed. Apart from these, RBI also put drastic capital controls on Indian residents and companies to stem the dollar outflow. Now only $75000 can be remitted by resident-individuals which is a steep fall from earlier limit of $200,000. Also, no Indian company can invest more than 100% of its net worth in foreign countries which could earlier invest 400% of their net worth.

Unfortunately nothing translated into rupee’s stability and it went beyond 66 per dollar. What was supposed to work for rupee didn’t help it, rather backfired hitting the economy with collateral damage. On one hand increased lending rates due to liquidity tightening is eating on the already dilapidated growth, on the other recent capital and import controls have fuelled the panic arose out of rupee’s fall. Not only foreign but even Indian investors are now losing faith from Indian economy.

Now that much has been tried to stem rupee, it is time that it is left to take its own course. Rupee’s fall is just a phase of wheeling vicious cycle which by itself would come down to a stable level. Indian credit rating agency CRISIL has in fact predicted that rupee will stabilize at rs. 60/dollar by March 14.

It is time RBI and Govt. accept that they are short of arsenal to protect rupee. They must instead look for ways to make the best use of rupee depreciation. Japan and South Korea in sixties and China in nineties had deliberately weakened their currency in planned manner to boost export, which actually paid them well. In fact, rupee’s fall has begun making positive impact on India’s export-business.  Exports rose by 11.64% in July. Also, rupee’s value against dollar is at a level which gives it competitive advantage in exports as compared to currencies of other countries including China. The most important point to consider is that export-boom, if it at all it happens, can eventually ease pressure on rupee through an increased flow of dollars.


Hence it is time that cheaper rupee is converted into export-drive. It would not only perk up India’s internal sustenance but also help restore investor-confidence in Indian economy.

Saturday 17 August 2013

Oh Onion!!

All you need to know about onion-price-rise

If you can’t imagine your meals without onions, get ready to either loosen your pocket or learn to not loosen your tongue!! The spectre of rising onion-prices is back to haunt and will keep haunting for at least few more weeks to come. Here’s a look at what you need to know about your favorite kitchen-ingredient:

Why the price-escalation?

Last year, drought in Maharashtra, the biggest onion producer in the country, already led to production-shortage and this year due to untimely rain in the same state including Rajasthan, Andhra Pradesh and Karnataka destroyed the liliaceous plants whose edible bulbs i.e. onions are the major mainstay of Indian cuisine. However, an internal note prepared by the Ministry of Consumer Affairs says "It was observed that there was only 5 per cent lower production of onion during 2012-13 as compared to 2011-2012 and storage was less by only 2 lakh tonnes. But there was a sharp decline of market arrivals by around 20 to 40 per cent during June-July, 2013 as compared to 2012. It seems that the stored onion was not released to the market timely and either farmers or traders are making undue profit by creating artificial scarcity. Accordingly, prices increased almost double the level as compared to 2011-2012."

Thus hoarding by opportunist suppliers and farmers is another major reason behind prices going north apart from shortfall in production.

What is being done by Govt?

Government has imposed export restriction on regular variety of onions by setting Minimum Export Price at $650 a tonne. It has also eased quarantine norms, especially those of fumigation so that onion-imports from Pakistan, China and Egypt can be facilitated. Anti-hoarding drives are also on at wholesale markets, thanks to which supply in the last couple of days has improved. Apart from this onions are being sold at less than Rs 5-6 from retail prices in Government fair-shop outlets.

Will the prices go down any time soon?

Yes but marginally! As recent exponential price-rise has resulted in demand-slowdown and measures taken by Govt. have led to improved supplies, prices will surely stabilize but merely at measly lower peak than today. It will hover around between Rs 50-80. They will come back to normalcy only after new produce lands in market and which is likely to happen by October 2013.

Economic impact:

Consumer Price Inflation, the one being borne by us, has come down to 9.6% in Jul 13 from 9.9% of the previous month. But due to surge in onion price including other vegetables, CPI is likely to go beyond 10% in the months to come as food articles account for 50% weightage in CPI.

Political Impact:

Political cost of onion is too much to afford for Government. Given that Assembly elections in many states including Delhi are looming and Lok-Sabha election is also in the offing, onion price rise is likely to become a significant election issue. Government will try its best to not let people shed onion-tears but its efforts won’t pay out much given the agitation and furore created by opposition. For instance, major opposition party BJP is selling onions at Rs 10 per kg in Odhisa in order to raise protest against Government.

It is notable here that it was the failure of BJP to control spiralling onion prices in 1998 which led to the victory of Sheila Dixit, current Chief-Minister of national-capital, in Delhi assembly polls. One never knows how things will turn out after 15 years in November!! Victory-cause itself might prove to be the failure-cause for the Delhi Chief-Minister.

Thus, onion, historically being a politically sensitive commodity, will give a tough time to Congress in coming elections.

Collateral damage:

As onion is one of the two trend-setter vegetables in food basket, other being potato, onion price rise automatically leads to escalation in prices of other vegetables.

 Tidbits:

Ø  Lasalgaon at Nasik in Maharashtra is the largest wholesale onion market in Asia. Currently    onions here are trading at Rs. 42 per kg.
Ø  Delhi Govt. has facilitated onion-sale at Rs.50 per kg from 1000 points across the city.
Ø  Few restaurants in B’lore have taken onion-dosa off-the-sale for time being.
Ø  A tyre-seller in Jamshedpur is providing free onions on the purchase of a truck/car tyre.

Thursday 15 August 2013

Happy Inception Day, Thought Couture!!

I am highly thankful to everyone who followed, admired, guided, mentored and corrected my efforts with Thought Couture to improvise it further.

Today when whole nation celebrates our 67th Independence Day, I have an exclusive reason to feel elated. Today, my humble beginning with financial analysis on Thought Couture is celebrating its first anniversary. It is its inception day.

Consistently keeping up with writing on business issues on weekly basis was certainly not an easy task. By the grace of God and support of my parents, I could keep my commitment with Thought Couture intact. Writing on 48 issues, ranging from gold, growth, FDI to inflation and rupee, helped me understand economics in better and fruitful manner and also helped me to get into India’s premiere journalism college i.e. Indian Institute of Mass Communication.

I am highly thankful to everyone who followed, admired, guided, mentored and corrected my efforts with Thought Couture to improvise it further. I hope you all keep showering your blessings so that my journey on Thought Couture touches many more milestones.

Happy Inception Day, Thought Couture!!


Monday 12 August 2013

Gear up Growth!!

 it is better to not let growth go off-track because if it cripples rest will fall apart. Exchange rate volatility is to some extent bearable not growth slowdown.

Finally it is worded by trusted sources like ratings agency Crisil, Morgan Stanley and Bank of America- Merrill Lynch that India is heading towards sub 5% growth i.e. the so called Hindu rate of growth. Their predictions are crucial as these are taken as yardstick by foreign and local investors to judge India as investment destination. Unfortunately RBI’s liquidity tightening measures meant for supporting rupee couldn’t do that but it surely worked to cripple growth prospects of the country. Now Govt. and RBI are in dock whether to focus on symptoms i.e. rupee fall, inflation or choose to operate cause i.e. low growth. Cure for one is pain for another. Indian economy has thus stepped onto a vicious cycle, getting off from which is a tough call!

Undoubtedly it is rupee’s weakness against dollar which is the major concern and that is what RBI did by making it tougher to reach out to cheap loans so that speculation in currency could be curbed. But increasing lending rates worked soar for consumers by reducing their purchasing power and for industrialists by reducing their investment power which could have otherwise translated into higher growth. It is worth to mention that India’s GDP is currently running at 5% which is already very low given its potential yet instead of boosting it; it is being made to suffer even more.

One of the important reasons for weaker rupee is falling external fund-flows i.e. FDI or FII but the tricky part is that it is GDP rate in itself which is widely considered to be an important parameter to look at before investing. Having said that, India can never attract foreign-inflows keeping growth at bay and thus can never get to a stabilized exchange rate. RBI’s outgoing governor Duruvvi Subbarao rightly said that India has become a victim of impossible trinity i.e. it cannot have stable exchange rate, free movement of capital and independent monetary policy at the same time.

India has been exuding unfavorable sentiment for many months in past. While demands to lower down interest rates were pervasive, RBI had to go for the opposite. Now Industrial production is surely going to go even down in the absence of weak domestic demand due to decreasing purchasing power. Not only demand, India also suffers from supply side bottlenecks. Thus there are sheer lack of positives which can stimulate growth.
While monetary policies by RBI do play an important role but govt. policies and the way govt. functionaries work also influence foreign investors to a great deal. Not only falling growth but issues like exorbitant land price, red-tape in environmental clearances, higher power and fuel tariff etc also dampens the hope of profit one can gain via investing in India. Thus fixing loopholes on the part of RBI and Govt. alike is must. RBI did fire its attempt but in vain. Now Govt. seems to be taking efforts by easing FDI norms and Special Economic Zones (SEZ) norms, but this will also do no good. Govt. must understand that FDI isn’t going to come in as long as profit prospects are not palpable by foreign investors which are not due to legislative deficit, infrastructure challenges and most annoying one i.e. the dereliction of duties. Being in an election year is an added suffering.

With the announcement that Raghuram Rajan is going to be the next governor, all hopes are rested on him that he will roll back monetary tightening measures in order to let banks breath so that growth can be rescued but at the same time he will have to check that rupee doesn’t lose much ground against dollar. A difficult task as short-term external debts are coming to maturity, funding of which will require dollar putting downward pressure on rupee.

To conclude, accepting that it is certainly a tough job to make a balance between ruining growth and weakening currency in current circumstances, it is better to not let growth go off-track because if it cripples rest will fall apart. Exchange rate volatility is to some extent bearable not growth slowdown. It is time that RBI and Govt. fix the nail at the right place instead of hammering around on wrong places.

Monday 5 August 2013

Rupee's Fall and RBI's Tattered Safety Net

Rupee’s value is going down. Why? Let’s take classic demand and supply formula!

Rupee’s value is going down. Why? Because India’s Current Account Deficit is widening, it’s no more a prosperous investment-destination, Foreign Institutional Investors aren’t investing, whosoever have invested are moving out, speculative trading adds false pressure on rupee and the most  cited reason, Fed Chief Ben Bernanke intends to taper-off monetary-easing from US economy. Seems all Greek and Latin? Too much to dissuade you to understand rupee-economics? Be brave! Read on!

Let’s take classic demand and supply formula! At any given time if the demand of dollar is more than that of rupee, it creates dollar-scarcity and rupee-liquidity. Less is always expensive, plenty is cheap. That is why rupee depreciates i.e. you pay more in rupee against one dollar.

Now, who all are demanding dollar? Where do we need it?

1)    People like you and me have to pay in dollars for all our imported tech gadgets, luxury items, foreign education etc.
2)    India’s huge import business demands dollars. Importers have to be paid in dollars.
3)    Investors willing to invest abroad need dollars.
4)    To maintain country’s Foreign Exchange Reserves, dollar is needed
5)    To pay foreign debts incurred by corporate and Govt., dollar is needed

Who all are demanding rupee?

1)    Rupee is needed everywhere in domestic economy. In banks, households, companies etc.
2)    Foreign investors willing to invest in India
3)    Indian Exporters
4)    Opportunists ogle on rupee for speculative trading.

Why demand of dollars surpasses that of rupee?

Indian is an import-driven country. 80% of our oil demand and 100% of our gold demand is met through imports which are the largest two imports of India. For some reasons, indigenously produced materials and products like wheat, rice, coal etc. are also imported in the country. Given that India’s export business is bleak, dollar outflow is always more than its inflow. In the parlance of economics, this imbalance i.e. the difference between total imported and exported goods, services and transfers is known as Current Account Deficit (CAD). India’s CAD is currently 4.8% of GDP. So the logic is, as long as India’s import dependence doesn’t get controlled i.e. its CAD doesn’t go down, rupee’s value will remain volatile.

Now that you are aware with the sources of rupee and dollar demand and also know the most significant reason affecting rupee, let’s come to why sudden downfall in INR, why sudden fuss around it?

In the aftermath of global recession in 2009, in order to boost American Economy, American Federal Reserve Chief Ben Bernanke went for monetary-easing i.e. good chunk of dollars were minted and made available to Americans on zero or negligible interest rates. American investors invested their cheaply acquired funds in various countries and made profits thanks to higher interest rates in those countries. In India many foreign investors invested their money in Govt. securities and debt market and acquired gains through interest rates provided on securities and stocks. Investment by them is known as Foreign Institutional Investment. Recently Fed Chief announced that he will taper-off monetary easing i.e. no more cheap money will be available to American investors. Interest rates will rise. In that case they will have to pay interest in their own country. If gained interest in other countries is meager or less than the paid-interest in their own country, no point for them to invest abroad.  Differential between interest rates either leads to arbitrage advantage or arbitrage loss. FIIs are moving out of India after this announcement because they are wary of arbitrage loss. Foreign investors obviously moved out with funds in dollars, steep scarcity of dollar suddenly emerged and caused rupee to fall.
Now let’s understand what RBI is doing to perk up Rupee:

If rupee is to be strengthened, dollar-demand has to be reduced. Dollar-demand by foreign investors cannot be controlled by RBI, dollar-demand for import business cannot be reduced so easily, dollar-demand by consumers or corporate is also somewhat out of control of RBI and dollar needed for Forex can also be not compromised. That said, RBI can only control speculative trading creating false demand of dollar.

What is speculative trading in currency market and how does it affect rupee?

In currency market, predictions are made as to how much rupee will fall or gain against dollar. Sensing the market sentiment, investors rather speculators invest in the currency which wins them profit. Needless to say they sell rupee in order to buy dollars. As good number of these opportunist speculators seeks loans from banks to convert rupee in dollar, it unnecessarily boosts rupee liquidity and creates shadow dollar-demand.

Conclusion: Though RBI took few measures to suck this liquidity out of the banking system so that banks cannot easily lend but given that rupee is still hovering around above 60, RBI has to admit its measures have been failed in its core objective i.e. to strengthen rupee. On the other hand collateral damage of increasing lending rates is all set to dampen the growth prospect of the country which is already running slow.

INR 60-61 against dollar is perhaps the new normal which cannot be reduced as long as the major cause of its weakness i.e. import dependence isn’t reduced. To surmise, excessive dollar demand can only be curtailed through internal sustenance i.e. self-sustained economy at an optimum level can only protect currency.




Monday 29 July 2013

Super-powered SEBI

As SEBI didn’t have to face many hurdles on getting its proposals accepted by Govt, it must play with its newly gathered cards efficiently so that no corner can levy criticism against its functions.

Heartiest congratulations to Securities and Exchange Board of India (SEBI) for its post-silver jubilee gift from Government!! Through Securities Laws Ordinance, 2013, finally SEBI received what it long wished for in order to effectively practise its regulatory responsibility. This ordinance vests SEBI with sweeping powers which will go a long way to establish it as one of the most powerful market watchdogs in the world. It’s interesting that such an important and long-awaited legislation was quietly promulgated by Govt. through ordinance route at the time when nation remained focused upon Sen-Bhagwati slugfest, Food Security Ordinance and evergreen Modi-Rahul debate. As SEBI didn’t have to face many hurdles on getting its proposals accepted by Govt, it must play with its newly gathered cards efficiently so that no corner can levy criticism against its functions.

Although there is already a section contending that draconian powers have been accorded to SEBI which might be misused but given SEBI’s meek attempts to attack on fraud companies in past, escalating its influence as market regulator had become a necessity. For instance, in the recent dispute between SEBI and Sahara, former could not yet convict latter due to its inability to recover funds latter accumulated by illicit schemes. But now, not only can it penalize such defaulters but also realize penalties by attaching and selling their immovable properties.

In a major development, new law has empowered SEBI to access investigative information from non-listed entities too which don’t fall under its purview and also from susceptible investors. Until now, it could ask for information only from regulated entities, listed companies and banks. Moreover, it is now authorised to launch search and seizure operations at company premises it suspects of wrongdoing. No approval from magistrate will be needed; SEBI Chairman’s consent will be enough. Also, now SEBI can monitor phone call data without court intervention, something which it long sought for in order to investigate claims of insider trading and manipulation in the country’s capital markets. Though it is still bereft of power to tap phone calls and access mail transcripts yet getting call records including its discretion to launch search in seize exercise will help its investigation team to connect the dots better.

Keeping in view chit funds fraud especially that of Kolkata-based Sardha group, amended act now provides legal sanction to SEBI to monitor and take actions against those illegal collective investment schemes(CISs) whose capital base amounts to more than 100 crore. Although it doesn’t have jurisdiction over CISs floated by registered chit fund companies, mutual funds and Non-Banking Financial Institutions but all such, if found illegal and contains corpus beyond 100 crore, will be regulated by SEBI. Ordinance also mandates for establishing special courts to speed up the trial process so that the backlog cases can be cleared up and new cases can be expeditiously wound up.

Though amended SEBI Act is excellent and definitely furthers the objective of making regulatory system effective, few of its provisions might be conducive to ambiguity in regulation. For instance, now that SEBI can question non-listed entities and also has power to define what constitutes as CIS, institutions regulated by RBI such as banks, NBFCs etc and chit fund companies, nidhis regulated by state govt., in special cases, will fall under the ambit of SEBI too. Such loopholes in the absence of detailed guidelines might lead to regulatory confusions in financial market among various regulators.

Thus the ordinance empowering SEBI with far-reaching powers is a welcome move by Govt. in order to protect gullible investors from fraud investment-collectors. But given that SEBI’s jurisdiction has now gone beyond stock market, it must stay cautious so that no clashes of powers, no turf wars incepts with other financial market regulators. Now, it would be interesting to wait and watch how SEBI delivers on effective governance with its newly acquired regulatory powers.


Monday 22 July 2013

Rupee Dearer Growth Sufferer

Dear Mr. Subbarao, your last monetary policy review as Central Bank Governor can be exceptional if only you could dare to lower down policy rates in order to get our slackening growth back on fast-track. That’s the only panacea Sir while rest is just nostrum.

Rupee Rescue Mission on the part of Reserve Bank of India (RBI) is on. While it can’t admonish foreign investors on their exit-spree but at least it can twist ears of internal perpetrators putting downward pressure on rupee. RBI, in order to prevent speculation in currency market causing pseudo demand of rupee, tightened liquidity via putting restrictions on banks to avail and let availed easy access of money. Also, RBI is of the view that concomitant raise in interest rates giving arbitrage advantage to foreign investors might persuade them to stay invested in Indian debt market. However, these measures have been taken at a time when market was hoping for a rate-cut and has gone highly discouraged on the prospect of increased borrowing cost. Given that one week has gone yet no major improvement could be seen on rupee front, it seems that these measures instead of bearing fruits will rather end up crimping country’s growth which is already running at its decade low.

To explain in detail, following three key steps have been taken by RBI governor D. Subbarao to tame rupee volatility. Firstly, he has put a cap on overnight transaction between RBI and banks and also among banks themselves. The overnight borrowing limit for the system now stands at 75,000 crore for the entire banking system. Earlier there was no such limit. “The allocation to individual banks will be made in proportion to their bids, subject to overall ceiling.” Secondly, in case any bank falls short of liquidity, it will have to borrow money from RBI at steeper rate through Marginal Standing Facility (MSF) window. MSF is an emergency liquidity facility under which banks can borrow from RBI for short-term by pledging government securities. MSF rate, which is 1% above the repository rate (7.25%), has been raised by 200 basis points and now stands at 10.25%. Thirdly, RBI intends to sell bonds worth 12,000 crore under its Open Market Opertaions (OMO) i.e. auction of government securities in secondary market. However, it could only suck out Rs 2,532 crore through OMO, which is about a fifth of the Rs 12,000 crore as bond investors are looking for higher yields which RBI refuses to accept.

Ironically, though these measures didn’t help much where those were supposed to but their after-effect will surely lead to banks’ balance sheet getting embattled. Banks are already suffering losses at loan-recovery front due to enormous extent of Corporate Debt Structuring (CDR) of various companies and current raise in lending rates won’t bring them more borrowers. Thus their profit earned by interest on loans might not increase in the proportion of their liability to pay interest on deposits leading to Net Interest Margin (NIM) coming negative. Also, due to tightened liquidity, banks will have no other option but to resort to escalating deposit rates in order to rein in their capital shortage. Apart from this, higher borrowing cost will not only affect consumers’ purchasing power but also make it tough for industries to keep up with production in the want of cheap credit. It’s worth mentioning here that India’s industrial production has already slumped to negative side if compared to last year and is all set to slide down more.

Now that RBI’s rupee- rescue mission is being faded out as a non-event with no major development in sight, RBI is stuck in catch-22 situation where neither can it terminate these measures abruptly, nor can afford to go on with it. It seems that rupee’s rout has become a structural challenge and nothing much can be done to stem its volatility. Only lessons can be learnt that huge reliance on foreign capital while domestic economy is off-track can bring serious repercussions at any time with no preparation beforehand to tame them. It is pertinent to improvise on internal resistance against maladies as external weather can’t be controlled. On this note, dear Mr. Subbarao, your last monetary policy review as Central Bank Governor being held on 30th July can be exceptional if only you could dare to lower down policy rates in order to get our slackening growth back on fast-track. That’s the only panacea Sir while rest is just nostrum.


Monday 15 July 2013

FDI: Foreign Deferred Investment

It’s pertinent to avert the on-going crisis rather than disguising the truth and marketing concurrent economy that has no buyer even on discount.

Pompous road shows cannot charm smart global investors, Mr. Chidambaram. Stop running from pillar to post to woo them and openly accept the acerbic truth of Indian Economy’s battered state. Foreign inflows are drying, imports are rising, and Current Account Deficit is widening, to top them all, even Indian Rupee is sinking.  No sane investor would head to India in current circumstances. Wasn’t it enough insulting, Mr. Chidambaram, that two US trade representatives bluntly endorsed negative sentiment about India just a couple of days after your so called road show at US? It should be. It’s pertinent to avert the on-going crisis rather than disguising the truth and marketing concurrent economy that has no buyer even on discount. Foreign Direct Investment is needed. No doubt. But, what is more needed is to generate self-convincing investment sentiment which would naturally draw foreign investment at home. Won’t you agree Mr. Chidambaram?

For reforms on FDI front, you recently constituted a committee under the chairmanship of Economic Affairs Secretary Arvind Mayaram which recommended raising the FDI cap in various sectors such as defense, multi-brand retailing, telecommunications etc in order to spur investment. You are all for this FDI-cap-hike binge but it’s highly unlikely if it would impress investors as it is more profit not more control what they are looking for and current economic situation is not in the position to offer that. Thus, it doesn’t matter whether 51% FDI in multi-brand retail is allowed or 74%, whether 100% FDI is permitted in telecom or less than that, overseas companies won’t consider India as investment destination as long as investment sentiment in the country doesn’t approve.

Did you notice that serious investors are getting repelled from India while, worryingly, corrupt and crooked ones who are approaching it? It’s a further damage to India’s reputation that Foreign Investment Promotion Board (FIPB) rejected three FDI offers as they happened to abuse India’s Double Taxation Avoidance Treaty with Mauritius. Given the brazen internal corruption, perhaps India is globally perceived as a country where malign business practices can be readily sustained. You must change this perception.

No doubt it’s non-transparent, corrupt and poor governance which has created clouds of uncertainty around Indian economy.  That doing white business in India is risky has become a general notion. From 2G scam, coal scam to recent jet-Ethihad deal, no overseas deals are bereft of controversies. Any sincere investor looking forward to setting-up long term business in the country would expect transparent and stable laws but India is a country where policies can anytime be transformed and deals can be withdrawn. Therefore, as long as there is no transparent and expedite governance model to execute foreign deals, India would remain a turn-off investment destination for overseas investors. After all who would want to stuck in arduous mis-management maze such as India has! Right, Mr. Chidambaram?

India is a federal country where consent of state governments is required for any policy to fructify. It is animosity between center and state governments which, many times, leads to hassles in the implementation of any scheme. For instance, 51% FDI in multi-brand retail had been approved long time back in December 12 but no proposal for the same has been filed yet as final decision whether to allow FDI rests with the state governments and most of them are unwilling thus unforthcoming  to welcome foreign retail giants in their particular state. This non-supportive approach of state governments also works as a turn-off for investors. You would certainly second it. Right, Mr. Chidambaram?

You must also know that  Indian rupee’s roller-coaster movement, country’s chronic high inflation and expensive credit due to higher interest rates eat on the real returns on investment. Also their indirect impact causing fluctuation in energy prices, land shortage, skyrocketing land tariff, time-taking approvals at various stages etc are few other infrastructure bottlenecks which dissuade global investors to set-up business in India.

Therefore, being a sensible Finance Minister, you must hit on exactly where the problem lies, which you very well understand but hesitate to accept. Don’t you know that spending on populist schemes like Food Security Bill will only aggravate macroeconomic challenges? Aren’t you aware that it’s cronies and corruption which repels serious foreign investors from India? Also, you very well know that trumpeting false about India as investment destination or your efforts to increase foreign investment limits are meant to come to copper. Seemingly it’s better to accept that India’s internal governance challenges can never be worked upon. Forget about foreign Direct Investment. It’s Foreign Deferred Investment till the time suo-moto rejuvenation of India's macro-economy doesn't take place. That’s what you want to convey, Mr. Chidambaram?



Sunday 14 July 2013

Food Insecurity Bill

despite seething failure of Right to Education and Right to Work due to the same reasons feared for Right to Food, if Government could still dare to experiment with NFSB, salute to its vigour.

Salute to Sonia Gandhi!! It is thanks to her that UPA-acclaimed panacea for India’s chronic malnutrition has been finally taken up; now that President has signed on Food Security ordinance. Overwhelming it is to witness the restlessness of UPA-2 that it, for the sake of millions of poor, did not even let democratic principles become hurdle in the promulgation of National Food Security Bill and pushed it through ordinance route despite opposition’s lambaste that Monsoon Session of Parliament is just few weeks ahead. Who cares the bill has been hanging in balance for the past four years! Current haste of UPA in the election year will at least refurbish its image among good chunk of gullible voters. Who cares that Indian economy is in tatters and can’t bear the brunt of subsidies! At least ours is a benign, people-centric Government whose prime motto is to remain politically correct not economically. While rupee-slide, inflation-rise and growth-fatigue might attract criticism of economist-elite but doesn’t matter! At least political benevolence when election is looming will influence the election-time-elite i.e. destitute populace enjoying political freebies.

Far-sighted UPA is praiseworthy that through NFSB it sanely transforms its social-obligation to provide food security to its population into their legal right to ask for it. For the first time any food subsidy scheme legally entitles whopping 67% of Indian population to avail 5kg rice, wheat and coarse grains from Govt. at respectively 3,2,1 rs. per month. Though it will raise the food subsidy bill to 1.2 lakh crore from 90,000 crore but at least 67% of the population will remain indebted and grateful to UPA’s munificence. It is commendable that Govt. is willing to feed (fund) the king of populist schemes though its Exchequer cannot afford to feed even a feeble-soldier-like populist scheme. UPA’s confidence and optimism must also be praised as it could rely on creaky Public Distribution System. Who cares that it has often been blamed for massive pilferage, at least people can now move to courts if they get denied of subsidized hoards, thanks to Centre and state level Grievance Redressal Mechanisms. Heart goes out to this right of people. PDS will not be fixed. Identification of beneficiaries will not be improved. But complaint can be lodged if Right to Food is not availed. As if complaint or for that matter punishment will bring food security to people! A person whose condition binds him to depend on Govt. bounties in the first place can ever be in a position to fight against govt. authorities/bureaucracy?  Well if UPA assumes so, one can’t help but believe so!

62.3 mt of food grains will be needed per year to meet out to scheme beneficiaries. Needless to say Govt. will become the biggest buyer of food from farmers distorting the already dilapidated agriculture market in the country. Who cares that Indian food market will be practically nationalized, at least Govt. will have enough food freebies to woo number of poor voters. Indian Government is bound to not conform to global trend of setting in competitive participation of private players in food market. After all, it will unnecessarily improvise food purchase-sale system in India, paving way for sufficient incentives to farmers and quality of food on cheaper price to consumers. Also, it would curtail Govt.’s monopoly over food market, something which should not happen as it is the interests of people in power not that of consumers, farmers or poor which ought to matter under the revered regimen of UPA.

 A section of people might argue that there is no dearth of food subsidy schemes in India. It is only poor identification of needy and poor implementation of schemes which causes subsidies not reaching to who it is meant for. They might further contend that fixing the loopholes of PDS and getting authentic poverty estimation through Social Economic and Caste Census (SECC) data or any other means is the pre-requisite for any food subsidy scheme to fructify the desired results, but they are missing out on most important logic. While such steps might actually bring in food and nutrition security for undernourished but would not guarantee votes. Why to bother, why to invest time in such social-welfare which does not accompany political-welfare.

Given the fracas over ordinance route and a widely held belief that UPA alone is likely to reap the benefits of implementing a populist scheme, rival state governments will remain hell-bent to tone down the positive impact of NFSB, if any, in order to not let UPA point-score. Who cares that Center state animosity will be the biggest cause why NFSB will prove to be an expensively disastrous scheme; at least it serves the political purpose of different political parties. Thus, despite seething failure of Right to Education and Right to Work due to the same reasons feared for Right to Food, if Government could still dare to experiment with NFSB, salute to its vigour. Long live Sonia Gandhi! Long live UPA!



Sunday 30 June 2013

Double Trouble

To maintain forex stability at the time of QE withdrawal and maturation of external debt is going to be a tough call for Government.

Reserve Bank of India recently reported that India’s external debt i.e. loans borrowed from foreign lenders has reached to as much as 21.2% of the GDP ($390bn) as of March end. The news has come in the backdrop of depreciating rupee which has already crossed the psychological 60 due to dearth of dollars in the country and might even go up given the series of internal and external structural challenges. Though the recent Current Account Deficit data standing at 3.6% of GDP for Jan-Mar quarter as compared to 6.7% of the previous quarter has rekindled the hope of strengthening rupee but rising external debt and their soon-to-come maturation period certainly spills water on this hope as repayment of these debts has to be made in dollars, thus causing upward pressure on rupee.

External debt mainly consists of External Commercial Borrowings (ECBs), NRI deposits and short-term credit. Worryingly, the share of short-term debt stands at 44.2% of the total debt which has to be repaid in the next one year. By the same time American Federal Reserve will also be tapering off quantitative easing (QE) as announced by Fed Chief Ben Bernanke few days ago. During American recession, under its QE policy, Fed was pumping $85 bn dollars in the economy on monthly basis which is going to be rolled back as American economy is back on the recovery path. India being the biggest beneficiary of American QE will now turn out to be the biggest loser as its major source of capital inflows i.e. Foreign Institutional Investment (FII) is likely to be ended by mid 2014. In fact, impact of this announcement is already palpable given the free fall of rupee for the past few weeks as many foreign investors have been selling out their bonds and stocks from Indian market. To maintain forex stability at the time of QE withdrawal and maturation of external debt is going to be a tough call for Government.

While Govt. has no say in decreasing or increasing FIIs inflow but it must try to control external borrowings. Cheaper foreign money prompts India Inc to borrow funds from other countries while lending rates in India are skyrocketing with no sign of coming down due to high inflation. Although external borrowings has a positive side too as it stimulates dollar inflow in the economy but relying on ECBs, short-term credit or NRI deposits etc. for forex stability is dangerous due to its being highly volatile. Now that the value of rupee against dollar has been sharply falling, it might lead Indian companies to pay their foreign debts sooner than later as their repayment amount in dollar terms is piling up due to exchange rate vulnerability towards rupee. Their dollar-demand for repayment will further cause rupee to weaken against dollar. Considering this, RBI along with Finance Ministry would better adopt measures to maintain internal stability rather than becoming victim to external sector vulnerability. Yet RBI recently eased ECB norms in order to attract dollar-inflows. It can be temporarily acceptable for short-term boost to rupee but certainly not a viable option given the risk factor associated with it.

India’s heavy dependence on imports is the root cause of its weak currency which is also the bedrock of rising inflation i.e. the prime cause of economic slowdown. India stands at fifth position among countries having largest coal reserves yet it is one of the biggest importer of coal due to poor coal-mining in the country. Also more than 80% of India’s oil demand is met via imports. It is also the biggest importer of gold which had raised India’s CAD to unprecedented level. However, gold import could be curbed by bumping up import duty on the same but it is difficult to divert people’s attention from this yellow metal for its being a sure hedge against inflation. Stringent measures have to be taken by Finance Ministry and RBI to mitigate India’s heavy reliance on imports as direct and indirect impact of rising commodity prices and services chargers not only surge inflation but also raise production cost thus making export products costlier leading India to lose in competitive export market from other countries offering cheaper products.

India is stuck in a gruesome vicious cycle. Solution of one problem works as the catalyst for another. In this backdrop, finding a balanced solution and thus shifting to virtuous cycle is a herculean task for Government. Tough times for Indian economy and the lesson must be learnt that heavy dependence on precarious global economy while being in throes of weak domestic economy is not prudent. A robust, domestically sustained economy can only bear the brunt of sudden emergence of internal and external turbulence.