The Fear of Reliance on DEBT !!!!

The Reserve Bank of India’s third quarter 2011-12 review of Macroeconomic and Monetary Developments released on January 23, 2012 assessed that risk aversion in the global financial markets has slacked the pace of capital flows to India and if the pace of FDI inflows does not pick up and FII equity inflows follow their decelerating trend then the CAD (Current Account Deficit) may have to be financed through debt flows in the coming quarters.

As per one of the report by RBI, during calendar year 2011 as a whole, foreign debt inflows amounted to $8.65 billion, out of which almost half of it came in December. And in the same calendar year it is said to have recorded a net outflow of equity investment of almost $357 million. On one side there is a recent revival of FII inflows largely in the debt instrument and on the other there has been a collapse of foreign portfolio investment flows, leading to an overall fall in the external investment in equity. But with burgeoning CAD the conclusion arrived that India has to increase its reliance on debt creating flows to finance its deficit.

Measures such as paving way for Qualified Foreign Investors (QFI) to invest directly in India’s equity market is an explanation by the UPA government to establish the fact that it is countering the formed view of “policy paralysis” and boosting again the positivity in the market.  But they are also driven by the need to reverse the slowdown in inflows of foreign portfolio investment. The decline in FII inflows has been attributed to the development abroad, which required FII to book their profits in India and repatriate their funds to meet commitments or cover losses at home.

One danger is that though the government is trying with different measures to infuse positivity in the market by allowing direct access to equity markets but still it becomes difficult or rather impossible for Indian regulators to fully rein in these global players and impose conditions on their financing, trading and accounting practices, controlling unbridled speculation required by them to be regulated at the point of origin. And, if such investors do come in the Indian market then it would be with the intent of reaping capital gains through short term trades.

Thus to make this measure successful it would mark a transition towards allowing a more speculative base of such players in the market but defending that aspect on the ground that it would help to reduce the dependence on debt is indeed questionable.

MFI’s New Stance of Survival

Plummeting profits, huge operational costs, accumulation of losses and many more negative sentiments are now considered as synonyms when we come across any news regarding the Micro Finance Institutions and SKS Micro Finance takes the lead in this down slope trend. But to stay afloat, microfinance promoters are now sailing into new lending areas: from cycles to phones to gold and houses. This throws up a whole new set of challenges for them as well as for regulators.

About 70 to 80% of commercial funds for MFIs come from banks and much of this is priority sector lending which are 2-3 percentage points cheaper than the normal bank loans. And certain limits of these funds are bound to be lended as microfinance, that is why as per RBI rules clearly states that if more than 15% of the loans are lended for non-microfinance portion then these sectors will become ineligible for these cheaper funds. So it becomes a challenge for the promoters to follow the rules as well as to keep churning profits which are already strained that is why now they have focused on other strategy of tweaking products and operations.

In the way the new loans are delivered, there are three differences from the way MFIs operated:

·         One, the loans are larger,

·         Two, they are being directly given to the individuals, not through groups, who bore initial responsibility of checking credit-worthiness and repayments and

·         They are for asset purchases backed by collateral.

A promoter of one of the MFI from the north clearly states his intention when he says “We will now be looking for people with monthly salaries. Not the moong phali - walas (peanut sellers)”.But this poses a grave risk for the priority sector funds being used for other purposes.

All these years, the microfinance industry promoted itself as a potent means to pull people out of poverty but now, in its bid to survive, the industry is looking beyond the poor. Is this mission drift?

Different promoters have different view: Ujjivan’s founder, Samit Ghosh thinks, “If you start focusing on middle-income households, the focus on the target customer base gets diffused” but if you listen to what Vasudevan of Equitas says “Our mission is how to improve the quality of life for clients who were not able to access the formal financial sector till now. That doesn’t change”

Now as the MFIs are looking to diversify, so the question arises are they doing so out of duress or do they actually see an opportunity to help the poor in the same old way but with different products? This is the question which can be only answered as the time passes. So let’s wait and watch.

“Need for Robust Fundamentals

“India must not obsess with how fast its economy is growing and instead pay more attention to its human development indicators which are worse than even that of Bangladesh”

                                                               -Amartya Sen (Nobel Laureate)

Day in day out, all the national newspapers, journals, magazines, web portals etc are talking about the international economic situation, its palpable effects on the Indian economy, its survival chances and the cushion factors to avoid the major international impact on the domestic markets. It’s all about growth rates, inflation figure, purchasing power figures, GDP numbers and more economic numbers. But does a country’s overall growth depends only on economic numbers? Can a country prosper only with one section of society flourishing at a greater speed than the other? And can the economy only depend upon the production rates or the inflation rates? An assertive NO is the answer to all the above questions.

To make a country move on the right path of progress there are many factors other than the economic figures that play a vital role i.e. The Human Development and the societal gains. It has been starkly mentioned by Mr. Amartya Sen that just running behind the 8-9% growth rate won’t make India’s image in the world more superior until its economic factors pushes the human development and the societal factors in the same direction.

  

We as a nation are bound to break the unenviable record of the most densely populated country of the world and we also feel proud to cherish the demographic dividend which our country would benefit from in the coming future but this can only be possible if the entire population has the basic demands of food, shelter, clothing and education within their reach. And towards this direction the incumbent government has formulated The Food Security Bill which would definitely help the poor for the basic intake of the nutrition and in order to avoid the appalling malnutrition data which shows the backwardness of our human development factor.

Though in the Human Development Index we are growing at a good pace but still there is a daunting task which needs to be addressed. The literacy rate directed towards the Millennium Goal looks elusive. The rate of unemployment is also on a rise coupled with lack of sufficient shelter and food for the 1.2 billion plus countrymen. If the government pays a little more attention towards these aspects and tries to break the reform paralysis, then the magical economic figure of 8-9% growth rate of GDP can be achieved without much effort. These underlying factors’ growth is the real reason for an economy to boom.

So be it 6.9% or 9% GDP growth rate, it would not matter much if the real underlying factors are not given enough space to grow. Let the economy stand on the robust fundamentals.

D.St – At the Absolute Bottom?

3 January, 2011 – 20561 and now on 23 December, 2011 – 15738, that is our Sensex’s performance.

3 January, 2011 – 13454 and now on 23 December, 2011 – 9629, that is the Bankex’s fall.

The above mentioned data forces us to contemplate that has the Dalal Street reached close to its bottom, will it ever go deep down even further and even if it recovers then will it be able to last its surge for a period of time?

After a year which investors would definitely want to forget as index plummets almost 21% over its position earlier, the financial gurus are making comments that the markets are close to bottom but not out of woods yet. They still have a view that index would hover in and around the 16k and 17k mark. Though it is very difficult to indicate the mark on the exact bottom but through Price to Earnings ratio things become clearer.

Concerns about lower economic growth, policy paralysis, lack of investors’ confidence, burgeoning fiscal deficit, surging oil prices and lower industrial production clearly breaks the growing trajectory’s flow and rather retards the growth. And when Sensex and Dalal Street are the topics of discussion then sentiment plays pivotal role and with so many speed breakers sentiments are inevitably negative.

A report by ING Investment Management suggests that for FY12, fiscal deficit could rise to 5.7% of GDP as compared to 5.1% of GDP in FY11. Corporate earnings could slow down further, given the slower economic growth, which means there could be more downgrades from analysts in 2012.

And it is not only the domestic lack of growth which pulls the trajectory down but the global economic scenario which is glooming too plays a great role in this negativity. Be it USA or Europe, both being our largest exporters are severely hit by the downturn. This directly impacts our production system and indirectly our growth too. 1991 reforms if played a positive role in making our country a global contender of being a super power, then it also glued us with the direct impacts of the global negativity.

OPPORTUNITY- D St on the lowest level is also an opportunity for the investors for bottom fishing which gives them a chance to buy stocks which have fallen much below their actual level. These stocks are expected to bounce back as the time moves on and the markets improve, as this is the best strategy in the bear markets. Also investors can eye upon the beaten down sectors like automobiles and banking, which has the ability to come back sharply if the central bank cut rates in the upcoming quarters.

Since the markets are close to a bottom, it still opens a viable option to invest in for the future events. Now markets even when down offers opportunities, it’s the investors who need to smell the right one and keep the sentiment positive.

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! 

!!!! 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.

“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.