Sunday, December 22, 2013

Digesting the Bitter Taper Pill !

Finally Fed Chairman Ben Bernanke along with his committee members decided to slow down their monthly $85 billion asset purchase programme by $10 billion to $75 billion. More than the quantum of the reduction it was the faith that Fed Chief highlighted in the economy's recovery. Lowering unemployment rate, growth in Gross Domestic Product and expected inflationary effects has been the reason behind the act.

When in May Mr. Bernanke hinted about lower purchases there was a palpable negative impact on the emerging economies. Indices plummeted across the region and governments started blaming the Fed for  harsh landing. Sudden sense of a pause in the flow of money in emerging economies and its impact shook the fundamentals of the region. And it seemed as if Fed was manoeuvring their economy and were not prepared for any kind of interruption.

But in past 6 months emerging markets understood and realized that the economic fundamentals of the country should showcase its solidarity and be prepared for the worse as far as hot/easy money is concerned.
And when finally Fed took its stand and started tapering, although in a justifiable manner, the emerging markets acted buoyantly. They were actually prepared.

In India though initially markets reacted negatively and plummeted but lately bulls overshadowed the bears. More than the external factor like Tapering it was domestic inflation data, political climate of the country and the corporate sector's performance that took the driver's seat and guided the markets. Domestic issues had more impact than the International external factors. And I feel in the next six months, the domestic factors would pave way for the economy than the extraneous ones, namely:

  • Corporate Sector's third quarter earning
  • General elections and the sentiments around it would guide the economy
  • Desperate attempts by the ruling party to revive the economy (keeping CAD in control), and
  • Central Bank's actions regarding the Financial year end Monetary Policy stance and Bank license issuances.
So keep gazing the domestic factors appropriately as more than the tapering effect it would be the above mentioned domestic issues that would pave way for the economy to moving forward. Tapering effects has been tapered away and it is the domestic events that one should observe to get nick of the economy's movement.

Thursday, October 10, 2013

US shutdown: A blessing in disguise, if realised!

A political logjam between the Democrats and Republicans in America is a great opportunity for the Indian economy to focus on the fundamentally strong domestic market. Though majority of opinions and views circling in the virtual and print platforms outrightedly mark this event as a temorary euphoric phenomenon which translates into dropping of easy money in the economy but this occasion can be used to strengthen our reach in the domestic market.

In times where government policy framework mechanism is in bad shape and foreign investors are shying away from long term investments ('Walmart' the latest example ) its the appropriate time for the entrepreneurs to capture a stable market for their products and then expand their reach internationally. Heavy reliance on bigger and matured economies like America and Europe is highlighting the incresed volatile bottom lines of the company threatening the going concern phenomenon.

This shutdown is an appropriate event which should force the government to think about the fundamental policy alterations which can make it easy for an enterprise to survive and give masses an incentive to increase their dependence on domestic manufacturers. On the other hand its the desi and foreign entrepreneurs who need to focus more on domestic markets for stability and desired sustainablity.

Relying on export boom and dampening imports is not a sustainable existence formula neither does the debt raising mechanism. So its quintessential to have stability for existence which can be garnered through capturing the ever growing stable domestic markets.

Now its upto the government and entrepreneurs to either cherish the temporary boost or develop a perrenial existence. Looking at an event in what way would diffrentiate the prudent from the  mass.

Monday, September 9, 2013

Sentiment over Substance!!!

Incumbent government has felt the need of pushing the pro-policy sentimental wave across the country and revving up the fast track decision making mechanism for many ultra big projects. I must say that it is a step towards right direction and the govt. must be appreciated for the same. But a question pops up suddenly in mind: Why such swift actions are being taken now? Are only elections the real reason this time? Or is it something else that is pushing the government to take such steps? And will the steps taken prove to be really beneficial for the incumbents?

Definitely the juxtapose between elections and pro-policy wave can be easily linked but is it the only thing which is forcing the UPA to take some immediate steps? NO. Except elections what the congress is trying to do is to paint the tainted image of the legendary party with pro-poor balm. The party of historic greats is trying to polish its tarnished and sullied image by bringing in some phenomenon acts together.

Food for poor and right price for their land (if getting acquired by a corporate) is a great way a party can help the needy to sustain his/her living, the thought process should be applauded but the timing of bringing these processes into execution is ludicrous.
  • On one hand where the Current A/c Deficit is becoming difficult to tame,
  • Fiscal deficit is ballooning because of the currency depreciation and
  • Oil prices soaring because of Syria issue
The government is not taking these factors into consideration and rolling out fat cheques for these good but ill-timed policies. These expenditure would make it difficult for the country to limit its Fiscal deficit numbers to 4.8% of GDP for this fiscal. Though Congress just got a breather with Mr. Raghuram Rajan taking over the helm at mint street which boasted the sentiments of investors and Rupee strengthened a bit but that is not enough.

Looking at the situation it's very easy to understand that the UPA led Congress today is betting over the sentiments of rural over the urban counterpart for the next general elections. As for these poverty stricken citizens the ballooning of deficit is not of much concern but their subsidised meal is of great importance.

 This time its the Ideological clash between the incumbents and the main opposition, if the present government is relying on sentiments for their votes then the biggest opposition should prove their substance to get the majority. 
Verdict of the next elections is in the hands of electorates now to choose either Sentiments or Substance!!!

Saturday, August 10, 2013

Rajan a great choice but Subbarao made a mark…

Raghuram Rajan’s selection as the next RBI Governor is a significant step taken up by the Finance Ministry and Prime Minister in the times when the economy needs a strong push to retrace its growing phenomena. Rajan’s international monetary policies understanding and the global economist view would help RBI to take some immediate steps to enhance the country’s economic stance which could help in bringing stability and positive sentiment across varied global investors. That’s a huge advantage by Rajan’s appointment but on the other hand Subbarao’s tenure was a landmark period for the country’s economic sustainability amidst the global financial tremors.

Though there are some perennial problems which were faced by Subbarao and expected to be the same with Rajan are as:
  • ·         Independence in taking decisions, as in, Governmental interference with the set objectives of RBI has always been on crossroads
  • ·         Inflation versus GDP growth phenomenon has always been on a scanner
  • ·         Monetary policies objectives hampering the Fiscal consolidation plan or vice versa has continuously been a debatable topic

Inspite of all the ideological clashes with the Government, Dr. Subbarao has always been unfazed by the Finance Ministry pressures and did what was essential to keep the Inflationary pressures in control. The global meltdown in 2008 was a character test for Subbarao where the RBI’s stringent policies made the so called globally attractive instruments unlucrative for the domestic economy, resulting in India being one of the countries who came out of the recession in a short span.

Wholesale Price Index has reached two to three years low in the recent past (CPI because of its base effect is still hovering in double digits), Gold Imports are touching new lows which will obstruct the widening of CAD, Dollar reserve has touched the all time high (but could have been a bit more higher) and coming out with proposals of having more banks which would help in achieving the financial inclusion objective.
All these outcomes really make Dr. Subbarao as one of the most revered RBI Governor in the years to come and his prudence and eccentric monetary policy reviews would always be remembered.

On the other hand many critics believe that Dr. Subbarao’s tenure was not that successful because our GDP growth has plummeted to around 5% from a 8% growing nation and corporates don’t get enough leverage to grow with tight monetary stance. But on the other hand, as Dr. Subbarao has always iterated that the Central Bank’s main objective is to cool off the inflationary pressures which would in an indirect manner provide impetus to growth and not directly impacting the GDP growth percentage. This could have happened only if the stagnant policy implementation by the government was avoided. Because both the Government and Central Bank has to work in tandem to achieve the desired growth. An institution on its own can not make the growth engine run for a nation which is so diversified and has more internally inflicted hurdles than the global phenomenon.

Raghuram Rajan will definitely feel a little uneasy with the next Lok Sabha elections nearing but he is undoubtedly a great successor to a great predecessor. There is a lot of action guaranteed on the Mint street in the months to come. Stay tuned.

Friday, June 14, 2013

Is INR’s volatility sustainable?

Last couple of weeks would be marked in the history of INR’s (rupee) unpredictability with respect to the American Dollar ($) as the most volatile phase. In the emerging markets INR was the second worst performing currency w.r.t. American Dollar only after Chinese Yuan.

Going through various reports and analysts’ views it has already been established that a country with approximately as wide as 6% of GDP of the Current Account Deficit (CAD) this currency depreciation would add insult to the already injured economy which is battering with slowing demand for goods and services across globe and reeling with high inflationary effect (CPI) in the domestic economy. Keeping all the factors in mind and considering that the country is facing with the twin deficit problem for quite a long time now (not significantly new problem for past 24 months) what has led to this Indian Rupee depreciation suddenly? Why in the last couple of weeks debt portfolios have been the net sellers and the equity portfolios have been stable with persistent inflows to finance our CAD?

Uncle Sam’s recovery (though slow but steady) has boosted the American Dollar’s appreciation:
  • ·         Fed’s Bernanke has indicated the drying up of the asset purchase which stands today at around $85b/month, involving assets like Govt. securities and Mortgage Backed Securities.
  • ·         Sentimental boost for the people across globe that the American economy is back on track with more number of people getting employment but still the unemployment percentage ranges from 7.5% - 7.8%, well below the target set by Fed before the dry up of asset purchase at 6.5%.
  • ·         And slow yet steady GDP growth coupled with Chinese shaky growth momentum and the Industrial production data clarifies the tectonic impulse.

The only factor why the capital inflows in the emerging markets for last few years had been steady was the low interest provided on the money invested in the developed countries but with the mentioned points above it is believed that the sole advantage of interest rate spread would narrow and the American Securities in the coming period would provide better yields on the investments, leading to drying up of the capital inflows in the EM like India.

This adds up to the worry of financing our huge deficit. RBI Governor has iterated number of times that relying on debt to finance our CAD is not a great idea and it has been proved with the new breeds of foreign traders in the debt market that the volatility on the debt investors is questionable and can affect the domestic currency severely. (FII proprietary debt investors)

Leading to the fact that what India needs at this point in time is a reliable source of financing its CAD which can act as a support for the domestic currency and economy’s revival. This can solely be possible if the foreign investors feel comfortable/safe by investing their money in India for a long period of time through Foreign Direct Investments or through controlling more stakes in the sectors which needs capital like in defense and insurance. This can only be possible if the Govt. is committed to improve the economy’s condition by taking actions on reforms but this seems like an elusive dream now with less than a year left for national elections. 

So its all about external factors coupled with domestic reform paralysis which will guide the rupee in the coming months, so better get used to drastic movements of the domestic currency and take appropriate hedges. 

Wednesday, April 10, 2013

Perennial Europe’s Contagion: What’s in it for India?

Past 24 months have been really challenging for the currency (European) union’s survival. Country after country the contagious economic situation is hampering the revival of union out of this debt trap. It all began with the Greece’s catastrophic economic conundrum followed by Italy’s banking difficulties lined up next by Spain’s complex debt phenomenon, to join the queue was Cyprus reeling under the same tough balancing act between the austerity plan (though thought of trying something new with taxing the depositors) and the bail-out package and now Portugal is feeling the same old debt trapped situation. And I personally feel that this situation will prevail until a decisive political stance between the troika (EU,ECB and IMF) is not reached soon! (Financial union is sustainable)

Now as the European Union week after week highlights its vulnerable economic position it becomes imperative for the growing economy like India to use this (slowing world economy) event strategically and make our domestic market more potent. Though we are globally connected but the cascading effect of the world’s economic problems can be minimized if we cater our domestic burgeoning market effectively and efficiently. Country with 1.3 billion people is a huge market (literally BIG) and with growing interests of international brands to this opportunity coupled with making our domestic industries more capable to cater this humungous demand driven economy is a tough and complex task but this is the sole panacea. To make this task little simpler for the industries it is important for the Government to make the policies simpler although robust yet operational in a speedy manner. Although it sounds theoretical but until the private sector and the Govt. authorities wont function in tandem the desired results cannot be achieved.

The present situation of Indian capital markets where the FIIs have been the net sellers in the last four trading session, on economic background our current account deficit has reached an unprecedented level of 6.7% of GDP, INR hovering around 54 – 55/$ range and with inflation (CPI) still at unsustainable levels the government intervention through right policies is need of the hour. The nearing Lok-Sabha polls which are scheduled next year in May should not hamper the economic mobility of the country as the investors’ sentiments may turn bearish with the slow recovery of American economy on papers.

Be it the two protagonist in Modi versus Rahul (in real terms aam aadmi’s Hand vs the Lotus) for the next 12 months but the economic cycle for the progressive India should be on the move and for this the government has to take some unpopular and tough stance (FDI policies on retail, insurance and pension) keeping in view the sustainability of these measures too.

Until we are internally robust the external sentiments cannot be improved so introspection with not just rhetoric but implementation is the priority for the progressive movement ahead. 

Monday, January 14, 2013

$1 Trillion Platinum Coin OR Hit the Ceiling

If you thought that delaying the solutions by few weeks regarding spending cuts issue of the American Government was essential to ponder upon the right strategy to be used to get over the Fiscal Cliff trouble completely then think again because the spending cut issue would collide now with a gargantuan pain called as raising the Debt Ceiling for the American economy to survive.

The American government could run out of cash to pay all its bills in full as early as Feb. 15, according to one authoritative estimate, and congressional Republicans want significant spending cuts in exchange for raising the borrowing limit. (KUHNHENN, 2013)[1] This dilemma has forced the entire think tanks to come out with a solution that would not drag the issue for a long time and would make it easy for the Federal Reserve and the Treasury to absorb the implications of the economic steps.

The most talked about solution is to mint $1 Trillion Platinum Coins by the Treasury which can then be deposited with the Federal so that it can be used to pay the debt obligations of the government to its lenders. Though it sounds a bit ridiculous to mint a coin of such a great monetary value but there are certain loopholes that actually let the Treasury create coins in whatever value it wants, even $1 trillion. Astonishing but True!!

 The Treasury can't print money on its own, because the money supply is in the strict purview of the Federal Reserve but the restriction lies only with minting monetary notes and not the coins. So that gives the Secretary of the Treasury the authority to mint platinum coins, and only platinum coins, in whatever denomination and quantity he or she wants. (O'BRIEN, 2013)[2] Even a $1 trillion coin is a possibility.  Treasury can after minting the coin can deposit the denomination with the Federal in its account and when the time arises they can meet the obligations and prevent the country from defaulting and get its economy intact.

People have mixed views on the implication of minting such coins in terms of its effect on the economy through inflationary problems. Nobel Laureate and world renowned Economist Paul Krugman backed the idea of minting the coin as well as emphasized that though in the short term inflation won’t impact the implications of the coin minted to prevent defaulting of the country but in long term this can create an issue. Paul Krugman also points out that there's a limit to how much seigniorage (Seigniorage is the difference between the face value of a coin and its cost of production) a government can extract before hyperinflation sets in, and that's certainly far less than $1 trillion. (Weisenthal, 2013)[3]

Though there was a solution in the offing but with the latest update it seems that The Obama Administration has rejected the views of minting the platinum coin to avert the debt crises which means that once again the political phenomenon would settle in and parleys & discussions would go on before a political stand comes out to the fore with consent of both the Democrats and Republicans which seems unlikely in few weeks time. 

Let’s wait and watch the political act to unfold and witness the volatility in the world stock indices as we move closer towards the days of settlement.

[1] KUHNHENN, J. (2013, January 14). Yahoo News. Retrieved January 14, 2013, from Yahoo News:
[2] O'BRIEN, M. (2013, January 8). Retrieved January 14, 2013, from The Atlantic:
[3] Weisenthal, J. (2013, January 8). Retrieved January 14, 2013, from Business Insider: