Thursday, December 29, 2011

RUPEE Depreciation – “A shock or an Inevitable Event”

Rupee depreciation in the recent times has created a panic situation in the economic environment of the country. People and the economists want the RBI to intervene and curb the forex reserve outflows but is it really a long term fixation of the problem or just a short term fix? That is the question which can be answered by the macroeconomic conditions of the country.
The rupee fall was inevitable, as the ingredients for the rupee plummet were present in the economic conditions for some time and rather they were getting stronger by the each passing stroke of time. For the last year, portfolio flows have slowed down or even partially reversed, current account deficit is about to shoot beyond  3% target, euro zone crisis has reduced global liquidity, a lot of borrowings from 2007 are due for repayment now, our inflation has been high that has been reduced now and FDI has slowed down drastically. So, rather than handling the “Rupee” fall we should look into the underlying factors and should try to manage them for the further degradation.
Now, data from the RBI for rupee’s trade weighted REER against a basket of six currencies reveals a different picture. Till end October, the rupee had appreciated by over 8% over the average of 2004-05 and over 6% over the average of 2009-10. So, the long standing fact is that the rupee was overvalued for quite a long time and its fall is a long standing adjustment.
And most of the underlying causes i.e. inflation, euro zone crisis or repayments are either beyond our control or the effective measures have already been taken. So what is that which can bring the momentum back on the positive track? Ans:  Boost Inflows and the confidence (intangible but extremely important aspect) and for these two factors to kick start;

·         We need fiscal control and easier interest rate scenario coupled with boosting inflows,
·         Initiate Supply-side reforms and get the confidence induced back into the system.

FDI has always been the weak point for the India’s economy and we need to correct it now. It represents long term forex reserves and to improve it we need to take some tough decisions in quick succession. So far policy ambiguity has led to the investors’ weakening confidence and if it is aggravated then it would really become an appalling situation.
Rather Rupee fall can be used as a catalyst to address these deeper economic issues and get India back to the growing trajectory.
We need to act now! 

Thursday, December 15, 2011

!!!! Equity to Shrink !!!! ????

Volatility in the global market, unprecedented recession risks earlier and now the double dip worries coupled with the shrinking production has dented the sentiments of the investors across the globe. The dent in their views and approach as well as the changing demographic scenario in some part of the world has impacted the equity market the most and that too in a negative manner.
Barring an extraordinary change in investor behavior in the largest emerging economies, the role of equities in the global financial system will likely be reduced in the coming decade as per the new report from the McKinsey’s stable.  As emerging-market households attain a level of income that enables them to purchase financial assets, they are becoming a powerful new investor class, whose choices will help determine global demand for different asset classes. The actions of these new investors will, in turn, shape how businesses obtain the capital they need to grow, how other investors around the world fare, and how stable and resilient economies will be.
The financial assets held by the investors in the developing economies are growing at three times the rate with which they are growing in the developed economies.  By the end of the current decade, investors in developing economies will hold as much as 36 percent of global financial wealth, or between $114 trillion and $141 trillion.
 Investors in developed countries hold 30 to 40 percent or more of their financial assets in equities, but the investors of the emerging economies keep three-quarters of theirs in deposit accounts. While the use of equities in developing economies to finance growth and build savings is increasing, this evolution is taking place slowly. This likely results in a shift in the global allocation of financial assets toward deposits and fixed-income instruments and away from equities in this decade. This shift is being exacerbated by aging and other trends in the developed world that are dampening investor appetite for equities. As a result, equities could decline from 28 percent of global financial assets in 2010 to 22 percent in 2020.
But why the growing economies don’t go for equity investing? In a country like ours where majority of the investors are small or are for short term there must be a trusted, reliable and transparent market with strong protections and systems to provide easy market access. Rules and regulations may be are in place in emerging markets today, but enforcement is often unreliable.
In the meantime, even though total investor demand for equities will grow over the next decade, it will fall short of what corporations need by $12.3 trillion. This imbalance between the supply and demand for equity will be most pronounced in emerging economies, where companies need significant external financing for growth.  In Europe, however, allocations to equity are already falling, while the need for additional equity is rising for banks that must meet new capital requirements, making a significant equity gap likely.
The market will adjust to close this gap—but it will do so through a higher cost of equity to companies, which may prompt many firms to use less equity and more debt to fund growth. This will have ramifications for the global capital markets system, economies, and businesses alike.
Rest it’s never easy to predict what will happen in the coming decade, so better tighten your seat belts and get ready for a roller-coster financial ride, which is up the sleeve for sure.

Wednesday, December 7, 2011

“Options” option for Farmers?

India is an agrarian economy and more than 15% of our GDP is driven by agriculture. Farmers across the country are the spine of this sector and therefore for the maximum welfare for this community government usually comes out with new strategies/plans to appease them. And in this sycophancy whatever plans or policies are framed, the real beneficiaries are the deprived lot because of the leakages in the system and corruption across the entire process.
On the same lines of coming out with new strategies for the upliftment of farmers, a year ago an amendment bill was introduced in Lok Sabha and is examined by the Standing Committee for Department of Consumer Affairs for the introduction of ‘option’ trading in commodities, in addition to futures.
‘Options in goods’ as a method of commodity trading was banned sometime in mid 1960s because  that time uncertainty in the output, demand supply mismatch and high level of food inflation was prominent and ironically the same situation even prevails today. But the government is ardently supporting to induce ‘Option in goods’ because it would provide farmers with risk management tool which would be more suitable than ‘futures’ as they are not required to monitor the futures prices on a daily basis till the contract is settled.
Government belief could turnout to be fallacious as 80 percent of Indian peasantry constitute of small and marginal farmers who does not trade on futures on a daily basis. But one question which comes to fore when we talk about farmers and agriculture is “What exactly a farmer wants to produce to his/her full capacity?” and for sure the answer is a big NO to a risk management tool with which they can play. The answer to the above question is the infrastructure to protect their product from the climate uncertainties, the input availabilities in abundance and getting the right amount for their produce. These requirements are the very basic things to be corrected first before consolidating more systems on the weak fundamentals.
 ‘Options in goods’ type of risk management tool already prevail in the system as Minimum Support Price (MSP) which deals with providing guaranteed financial support when a farmer faces adversities. It safeguards the farmers’ interest with minimum financial requirement which he/she should get for his/her produce. This acts the same way as an Option would do when in place. So why the government wants to add another layer of guarantee over an existing layer? Why not the government should focus on consolidating the existing MSP system? Why not the government focus more on eradicating the supply chain leakages and making the system more transparent?
I personally feel that addition of ‘Option in goods’ would definitely incur some crore of rupees to make it completely functional, so it’s better to use that monetary resource on consolidating the existing structure rather than creating again a new cycle from the scratch. On the farmer’s point of view they want the correct price for their produce in the market which can only be possible if the right quantity reaches the correct place and for that ‘Options’ are not needed certainly.

Sunday, December 4, 2011

“INDIA to BHARAT” – The Changing Trajectory

The highest density of Mercedes cars in India in terms of per capita ownership and in terms of dealership is in Ludhiana, a poultry business in Coimbatore, a power equipment and turnkey solutions provider in Sangli, Indore based Prakash Snacks and many more like them have a lot in common: headquartered in non metro cities, run by entrepreneurs that are hungry for success and have risk taking appetite and also have received private equity funding. Private Equity funds are beginning to recognize the potential of the non-metro markets. It has started to acknowledge the mettle of entrepreneurs in these Tier II cities by showing confidence in their thoughts and the business plans and funding for their dream projects. Examples like: • Pedigree American venture capitalist Sequoia Capital has bought $30 million stake in Indore-based Prakash Snacks, makers of Yellow Diamond brand potato chips, as large financial investors aggressively chase tier-II food and beverage brands appealing to India's broader consumption story. • Fidelity Growth Partners invested $20 million in Shreem Electric Ltd, a power equipment and turnkey solutions provider in Sangli, Maharashtra. Examples like these have started to be come to fore in the last 18-24 months and these private equity (PE) deals show how capital has begun flowing to companies in low-income states and smaller cities. According to a recent study and rankings bi IFC is was apparent that five out of top nine cities in ‘ease of doing business’ are in non-metro cities, it also highlights the aspirations of the entrepreneurs from these cities to make it big which clearly attracts private equity to the real Bharat. Though funding the companies from these cities has its own set of challenges which results in small number of investors in these regions. Firstly the deal sizes on an average are smaller as compared to the metro cities, which brings to fore the gap in the confidence by the investors, though the confidence is getting established with each passing day. Secondly there is a lack of proper management system to be followed. The depth in the management decisions is quiet shallow and so the business relies mostly on the quick decision making processes and the entrepreneurial zeal but not on the system and processes. And lastly there is a requirement of higher level of commitment by the senior management of the businesses because PE not only provides the finance but also adds value, understands the entrepreneur’s mindset and emotions which could be different from the metro-city entrepreneur. Even though with these gaps still hampering the flow of investment in these regions, it still wide opens the door of opportunities for PE to invest their money in non-metro cities as the opportunity saturation point level is about to reach its highest mark in the metro cities coupled with the testing times in this economic turmoil environment. So with the robust demand for and growing understanding of the entrepreneurs’ businesses in these small cities attached with the flow of funds from Private Equities, the trend is now evident - Reaching the Real Bharat for the Real Opportunities.