India's Golden Conundrum

Indian’s love for gold is spiritual where it is revered as God’s currency. It is only astronomically higher prices which can resist them to buy it. Falling prices are just what India wanted at a time when festival and wedding season is ensuing.

The king of metal Gold is again going south. It touched a 14-month low on September 20, 2014. Such a scenario induces people away from gold to flock into financial instruments. The metal will no longer lure Indians is what analysts believe but India’s thirst for gold will take eternity to be quenched.

Falling gold prices might lead people in other countries to ditch the yellow metal but Indian’s love for gold is spiritual where it is revered as God’s currency and people feel proud of owning it. It is only astronomically higher prices which can resist them to buy it. Gold demand slumped magically when import duty was hiked to 10% in order to control current account deficit. Now that prices are falling, it will be seen as an opportunity to purchase it on low in the hope of price-rise. Long-term return outlook of a common investor in India is always bullish on gold.

Current account deficit (CAD) narrowed sharply to $7.8 billion (1.7 per cent of gross domestic product) in the Apr-Jun quarter of FY 2014-15 from $21.8 billion (4.8 per cent of GDP) in the year ago period. The fall was strongly led by slowdown in gold imports which halved to $7 billion in the April-June quarter from $16.5 billion in the same quarter a year ago. However, the gold imports in the preceding quarter i.e. the Jan-Mar quarter of FY 2013-14 amounted to US$ 5.3 billion. 

To compare the two data, gold imports actually risen on quarterly basis. The reason is because RBI had eased some gold-import restrictions in the month of May which instantly drove the people to invest in gold. This uptick in demand is reflected in the gold import data of Apr-Jun 2014.

It is true that the gold investment at this juncture does not seem viable. Gold futures are trading lower. Improving global economy does not bode well for the metal, to boot. Stronger dollar is also contributing to Gold’s southward journey as gold is used as a hedge against movement in the US dollar, which means its prices will move inversely to change in value of dollar. Indian gold prices move in tandem with global prices depending on rupee’s value against dollar. Since India imports the yellow metal, a weaker rupee cushions a fall in gold price while a stronger local unit makes the metal cheaper. Given improving economic conditions, rupee may not depreciate much against dollar.

That said, why to invest in a declining metal when stock markets are doing well and lower inflation is making returns on savings schemes positive? The answer lies in a trend seen last year. Gold prices had fallen dramatically in Apr-Jun quarter of 2013. Questions were raised if it safe to invest in this yellow metal but coming true to the conscience of Indians, gold hit a record high of Rs.35,074 per 10 grams in August 2013. Hence, it is no hyperbole that Gold is the safest haven amongst all.

With the ensuing festival and wedding season, India’s gold buying binge is likely to be bumper. Low prices at this time are just what India wanted. Irrationally higher import duty had enforced them to stay away from the metal for long but now is the opportunity to buy it on dips. Thus, India’s golden problem is not yet resolved and it is too early to claim that the country’s CAD is normalized. India’s lure for gold can be suppressed but cannot be died in any case. 

Too early to bet big on markets

A reality check of current market conditions sparks good reasons to stay cautious while boarding the bus of current market rally.

Splendid times seem to have unleashed in Indian stock markets. Nifty touched a lifetime high of 8000 on 1 September and Sensex hit 27,225.85, an all-time high on 3 September. Nobody had the foresight to predict such levels for benchmark indices a year ago. But now, our fortune tellers aka technical analysts are certain that the bulls will ride faster and farther from these levels in the days to come.

For Navneet Munot, CIO, SBI Mutual Funds, Sensex hitting 10,000 in 10 years is not unrealistic if India Inc can deliver growth of around 15 per cent per annum, which, according to him, is not an unreasonable expectation over a long period.

However, taking these predictions with a pinch of salt is advisable for retail investors as their hard-earned money is involved. Their predictions might be true but a reality check of current market conditions sparks good reasons to stay cautious while boarding the bus of current market rally.

Needless to say domestic as well as foreign investors are betting on Prime Minister Narendra Modi-led NDA government which has successfully trumpeted its reform-oriented approach in every nook and corner of the world.

Now is the time to analyze whether the positive sentiment lurking around is hope driven or solid result driven. Looking at contracted July IIP data at 0.5% versus the 3.9% of June (revised higher from 3.4%) is enough to warrant that it is too early to stake bets on newly formed government. Though CPI inflation mildly cooled to 7.8 per cent against 7.96 per cent in the previous month but food inflation inched higher to 9.42% versus 9.36% m-o-m.

The week ahead is going to be eventful. First, markets will take stock of IIP and CPI data after opening bells tomorrow with simultaneously eying on WPI data expected to be out at noon. They will be taking note of advance tax payment by listed corporate, which is also due to be released tomorrow and will provide clues about Q2 September corporate earnings.

On Wednesday market mavens will eye crucial US Federal Reserve's monetary policy review. Woe betide the markets if Fed goes for an early rate cut as it will make Indian markets vulnerable to FII outflows leading to correction on Sensex and Nifty.

For investors who do not understand technicality of markets, it is sensible to wait for macro data of following months to come which does not reflect the overhang of UPA government’s tenure so that no confusion is felt whether the slowdown is of UPA’s making or NDA’s failure. Let the time confirm if the Modi-driven seemingly impactful India story is a fact or just the work of a fiction.   

Power Plight

The fruits of privatization must be savored by consumers. If CAG audit of discoms reveals otherwise, the bleak side of privatization will be re-affirmed. 

The power spat in the national capital has been temporarily avoided thanks to Supreme Court. On Friday it ordered Reliance Infrastructure owned BSES firms to pay 50 crores to NTPC, India’s largest power generation utility, within two weeks. NTPC had recently threatened BSES firms to stall power supply had they failed to pay their dues in the stipulated time. Collectively BSES-Rajdhani and BSES-Yamuna owe 300 crores to the NTPC. However, in a reprieve to them, SC has settled the matter at much lower payment till the next hearing due for March 26.

The modus operandi of power sector in Delhi is complex. Amid accusations and cross accusations of corruption and poor governance, it is being hard to identify the malady ailing the power sector. BSES firms assert that the Delhi government is required to pay them subsidy amount so that they can recover their operational costs. They also contend that once government pays them under-recoveries, they will make payments to NTPC. To this Aam Aadmi Party led Delhi goverment hits back stating that the distribution companies are not making losses. They just tamper with their balance sheets to show losses on paper but actually they are incurring profits. The Delhi government has also clarified that the subsidy amount due to discoms from it shall be adjusted against the receivables of government-owned Delhi Transco Ltd, the power transmission company, and the generation utilities, Indraprastha Power Generation Co. Ltd and Pragati Power Corporation Ltd.

Monetary activism

To douse the inflationary fire,the recommendation by the high level RBI committee must be worked upon with urgency and earnestness. 

India’s central bank, the Reserve Bank of India (RBI) is up with yet another concerted effort to combat the notoriously high inflation. A committee headed by RBI Deputy Governor Urjit Patel has recommended pegging monetary management with the Consumer Price Index (CPI) instead of the current practice of the Wholesale Price Index (WPI). Observers believe that the move is commendable since it is the CPI which directly affects the consumers, unlike the WPI. The recommendation, if accepted, will line the RBI in tune with the global central banks which target CPI as a nominal anchor.

However, there are reservations against this proposed step. Food and fuel inflation constitutes more than 50 per cent of the CPI. It is being pointed out that food and fuel price volatility will be difficult to accommodate in the policy decisions once CPI becomes the reference point of monetary policy. This seems a valid point. Nevertheless, instead of taking this into account what causes frequent variations in food and fuel prices in the first place is what one should look at.

Let’s first discuss the food prices. Though weather conditions have a role to play, government policies and supply side bottlenecks are the principle protagonists in the big picture. Without specifying how it would generate enough foodgrain to run, for instance, the Right to Food Security programme, the government chose to go ahead and implement it. Disregarding how it would meet the revved up demand due to increase in rural wages by MNEREGS on the ground, it is still choosing to run it. Also, no justification has been given as to why the Food Corporation of India (FCI) continues to hoard massive quantities of foodgrain, much of it is often left to rot and consumed by rats. Nor is there a grip on opportunist intermediaries either who hoard and block the food chain supply to inflate prices for purely vested interests driven by profit and greed. No legal action seems to follow in these cases of organised horading. Fluctuation in onion prices late last year is the best example of such deliberately manipulated price inflation. 

Coming to fuel prices, no government anywhere in the world can foresee fluctuation in international crude oil prices. The internal mechanism of setting up prices factors in such fluctuations. Unfortunately, India’s internal mechanism itself is faulty. There is no clarity on fuel prices which have been highly subsidized by government. Whether the benefits of subsidy reaches the needy or is enjoyed by the consumerist rich is a chronic debate. The case of subsidising diesel for swanky SUVs etc, is a glaring example.

That said, the food and fuel prices fluctuate due to the non visionary approach of the government. The failing of government should not be imputed as a hurdle on the progressive path of treating CPI inflation as the nominal anchor.

CPI inflation stood at 9.9 per cent in December. If it becomes the nominal anchor, it is feared that interest rates will have to be hiked dramatically to bring it under control. This is not something the government would like to hear at in the current phase since all it wants is to spur growth while an apparent economic slow-down stalks it relentlessly. It is true that the war against inflation is fought on the cost of growth. But, before citing this inflation-growth debate as a criticism, it is important to read the Urjit Patel committee report in-depth. The committee recommends targeting CPI at 4 per cent within the two years with the wiggle room of 2 per cent in either direction. It does not make a case to raise the repo rate in the next monetary policy review.  What the RBI panel is really looking at is to bring CPI inflation down to 8 per cent over the “next 12 months” and to 6 per cent the following year. Going by the Patel committee’s formula, a repo rate hike is therefore not in order at least until early 2015.

India’s Economic Affairs Secretary Arvind Mayaram has called the focus on CPI a “premature step” but there is a strong case for India’s monetary policy to be steered by CPI inflation. It is this inflationary trend which really impacts domestic households and influences their investment decisions. There has been much dispute between a government demanding growth and ‘inflation warrior’ RBI. It is high time to bring a decisive end to it.

Taming inflation is important even at the cost of growth because the virtuous cycle wheeled by a controlled inflation will spontaneously infuse growth in the economy; but the vice versa is not possible. Therefore, the recommendation by the high level RBI committee must be worked upon with urgency and earnestness without losing time.

Divestment Dilemma

Government will have to understand that   

diluting government control on PSUs by stake sales or getting them to divulge their profits as bonus is not the way to fund fiscal deficit.

With another fiscal year coming to an end in three months, the government is staggering hard to achieve its divestment target in public sector undertakings. Divestment in PSUs is important for maintaining the budgeted level of fiscal deficit but given the unfavorable market conditions at present and general elections looming in, a successful divestment program is highly unlikely. That government has 5,000 crore in its kitty with 40,000 crore to garner before the end of FY 14, is of ample proof how serious it has been to achieve this target.

Ideally the purpose behind divestment is to scale up the efficiency of firms by privatization. As per Anshuman Tiwari, the economic analyst and financial editor of Dainik Jagaran, “There is history of debates in India on purpose of PSU divestment. Divestment is the process to infuse efficiency in PSUs via reduction in government control and making them widely held but lately governments have been employing it to raise funds when they fall short of revenues to meet its fiscal deficit target.”

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.

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!

                          

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 20^th 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. 

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.

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.

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!!

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.

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.

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.