Devaluation war - A 'Never Before Chance' to amend Reform Trajectory

With gigantic pressure on Chinese counterparts to make their economy (export driven) look more robust and attractive, a plunge of more than 3% vis a vis US $ (1.9% -  Chinese govts' push and remainder is markets' reaction) has taken the global economies and policy makers by surprise.

Where on one side US Fed's rate hike was a talk of town, suddenly we have another mega event which has been doing some rounds now across global markets, and that is the "Currency War" which may get trickle down to a situation where economies challenge each others currencies' devaluation for no good. But what happens now? What should India do now? And, why is this a 'Never Before Chance' for a country like India?

With a massive demographic advantage and with lots of push by the GOI (Govt. of India) to enable the Small and Medium enterprises to become a viable business proposition, focussing on this segment more would be of ultra importance. Just launching of schemes and formation of institutes like MUDRA would not make a massive difference but hand holding these small entrepreneurs will. India as an economy would get a much required impetus to touch that 8-10% GDP growth target YOY if and only if we can incubate these small ideas. A logjam in our Parliament would only add insult to injury. Scumming to opposition's' tactics would only drag our last chance to be a responsible superpower on this globe.

Inflation; both Wholesale and Consumer Price Index are under control, crude is dripping below its lowest lows in past few weeks and being a mega importer of energy we are in a comfortable Current and Fiscal deficit conditions, hence, waging a currency war with other global currencies would not be feasible option for India. It would increase our fuel bill and dent out low deficits. Putting us in a catch 22 situation. This situation demands a more focussed domestic approach. Push GST, break the democratically hurting logjam, consensus on Land Acquisition Bill and capping the NPAs is the way we should focus more on.

Chinese government's' acts /US Fed's rate hike/ drag in commodities prices can dent us and impact our economy a bit but to keep the adrenalin running we need to have a stable domestic economy and reforms' agenda running without any man-made disasters(Parliament Logjam). Investors know where to put their money (India is still the most preferred destination among the other BRICS nations) but being responsible is the call of an hour. 

Volatility - An unsustainable Goliath

Last financial year, be it from a January - December period or April - March period, was a year with great returns for investors in bourses across the globe. Indices across globe gave returns of around 15 - 40 % on an average, the best performing asset class for the investors. Metals lost sheen, crude starting plummeting ( Short Bets though minted a lot but took brokers by surprise initially) but bourses were the best return reapers for the brokers/investors.

Though it seems like that bourses would yet again be the best return minting instrument but the imbibed volatility of indices makes it really tricky for a retail investor to track the markets. Algorithmic trading with massive bets makes it really intriguing for the retail investors to gauge the momentum and that is where they burn their fingers. I dont have the precise numbers right now with Retail investors'/FII's or DII's gain/loss percentage, but the implied volatility has kept the small and brittle investors on their toes.

This year with Greece's oust almost inevitable, until a dramatic treaty is signed with the creditors in couple of weeks, US Fed's unavoidable interest rate hike lined up in 2-4 months, China's stability concerns, Yemen's stability and crude's supply concerns and domestic economy's reliance on global trade, it is said to be a year of big bang Volatilities.

In India, the upcoming monsoon's 8-10% deficit prediction would be of a big worry as well. Where on one hand, the effects of Modi's 1 year regime is still not visible on the ground, unsustained nature's bait (unseasonal rains and recent earthquake's destruction) would add on to the already volatile markets.

This year without knowing where the markets would actually move, one thing is for sure that the movements would be massive and would be unsustainable for atleast the retail investors.

BUDGET 2015-16 – A mere display of Intent or enroute to Fiscal Solidarity?

A fortnight after the Budget 2015-16 was read out by the Finance Minister, it can be described as a budget with an enormous display of intent. A Budget that guides what the Indian Economy should achieve but the concrete plan to reach that level is still imaginary (relying on the numbers presented is debatable).

Restricting Fiscal deficit numbers at 3.9% of GDP for 2015-16 and total stake sale in the Public Sector Enterprises at more than INR 69,000 Crores is envisaged through disinvestment. With this fiscal year’s revised target is brought down significantly, reaching an ambitious plan for 2015-16 is questionable.

Reduction in corporate Taxes from 30% to 25% in the coming four fiscal years is a booster for the Private enterprises, this would lead them to invest more in infrastructure and creating capital for future needs. Also there are exemptions being removed, but we need to wait for sometime before we get clarity on the same.

Different governments come with different schemes and the previously established schemes with same objective but with different names get oblivion. An example below of an editorial says all:

“It announces grand new schemes even as others in the same area that were announced just last year are yet to see the light of the day. So we are to have a new Micro Units Development and Refinance Agency Bank, with a corpus of Rs 20,000 crore, but the Rs 10,000 crore entrepreneurship fund for the same sector that the finance minister announced in his first budget is nowhere to be seen.” – EPW Editorial from 7^th March, 2015 publication.

The integrity of the numbers presented in the Budget is always under scanner. Finance Minister believes that our country can grow at 8% of GDP in next couple of years, I don’t think that can it be a reality with a stalled Upper House? Can it be possible with an Ordinance route taken up by the Government? Is it achievable when our PSBs need ~INR1.6 Lakh Crores for capitalization to meet the Basel III standards? You can pose many other questions but the fact of the matter is, it’s imperative to be practical. Through sentiments and intent display an economy cannot grow. The first visible change on the ground is raising the cap of FDI in insurance from 26% to 49%. There is nothing concrete except it. You can ask me to be more patient and give the government some more time but with Land Acquisition Bill stalled and all the chaos around it, I can only be hopeful.

Also, hopeful on the integrity of the fiscal deficit number’s achievement and the disinvestment target’s ambitious numbers. Let’s see where the contours of this Budget lead us to.

Swiss National Bank's currency cap removal and It's effect on Indian Economy

Swiss National Bank (SNB) surprised the global markets with its 1.20Franc(CHF)/Euro(EUR) exchange cap removal. No one factored in such a surprise move and it resulted in Franc's appreciation by upto 30-35% in just few seconds. 

With such drastic step taken by the SNB, in short term, it would definitely hurt their luxurious export oriented products manufacturing as well as the tourism industry. Rapid appreciation of currency in few hours can be detrimental to the export driven economy with huge reliance also on the tourism front.

But was this step necessary to be taken? SNB in its statement made it all crystal clear.

"The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets. This exceptional and temporary measure protected the Swiss economy from serious harm. While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation. Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced. The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified." 

The Quantitative Easing which in next few weeks would become a reality in Europe would further weaken the Euro and so accumulating the Euro on its ballooning balance sheet would be more of a liability. Hence, removing the cap would be a long term measure for sustainability.

What it means for India? Structurally, India is poised for a tremendous growth trajectory with a persistent focus on manufacturing and infrastructure. If required, ordinance route can be used to keep up the pace for developmental reforms (though it is debatable, as ordinances stifle the democratic structure). These factors make India poised to receive hot money that would be disseminated by the QE in Europe. Losing the sheen as a safe investment destination by the Swiss can be a boon for the emerging economies, especially India which has the engines revved up for the coming 3-4 years.

But with the rosy picture comes the unenthusiastic scenario as well. The Hot Money we are talking about is not sustainable money pouring in the economy. It can create bubbles which in turn generates ripples in the economy that may be tremendously harmful. This fact has been reiterated by Dr. Rajan at various platforms and this is where the regulators and the government should focus more upon. Encourage Foreign Direct Investments than Foreign Institutional Investments.

Macro-prudential Policies – Need of an hour!!

Lessons from the recent financial crises put emphasis on the literally adverse and chaotic situation that can arise yet again, if not paid any attention to the cyclical irregularities that emerge in the global financial system. It has been more than six years now and can see a light at the end of the tunnel. United States is on a verge of recovery, unemployment rate is at six years’ low, at around 5.8%, GDP growth is back in the rage of 2.3-3.5% QoQ. Earnings of the people participating in the labour market are also growing a tad and that is encouraging.

One can take a sigh of relief that atleast we have a recovery now(only from the largest economy’s point of view), though it was inevitable, but are we prepared now for another global financial dent? Do we have a cushion (in terms of stress tests undertakings, reserved capital and equity to sustain any sort of financial aberrations) yet to sustain? Here, Macro-prudential policies come handy. Worldwide monetary policies do provide a direction to sustainability, in terms of coping with an unexpected event (read, Quantitative easing) but can there be a prudential policy in place, which can act as a bulwark for the financial system against any unprecedented crises. This is exactly what Governor Lael Brainard (At the Hutchins Center on Fiscal and Monetary Policy, The Brookings Institution, Washington, D.C.) reiterated in her address on 4th December, 2014). She has also focused on the in tandem usage of both monetary policy and macro-prudential policies for safeguarding the globally linked financial market.

Reserve Bank of India has also accepted that it is the Macro-prudential tools which are necessary today for keeping the financial institutional network intact. Urjit Patel’s report also reiterates the same view and hence stressing the importance of prudential tools. The steps taken for these policies are charted of by the Implementation of Basel III Capital Regulations in India. As per RBI’s notification of March,2014, the transitional period for full implementation of Basel III Capital Regulations in India is extended upto March 31, 2019, instead of as on March 31, 2018. This will also align full implementation of Basel III in India closer to the internationally agreed date of January 1, 2019.

Indian Banks are to be capitalized with clear charted way out for enough equity and liquidity capital essential to wither away any crises where survival becomes essential. And to make this a reality, Central bank and the Government need to work hand in hand. But, the way our political decision making process is undergoing a drastic change, we hope that the new government becomes a little prudent and start charting out plans for 2019. The political juggernaut which is being witnessed these days in the parliament with regards to the Hate Speech is something which is not accepted. The entire political fraternity should take responsibility and let the nation move forward. These small political incidents should not abandon the path for a stronger financial stability.

Falling Oil Prices – A Blessing in Disguise, but will the trend Sustain?

OPEC, a group of 12 Oil producing nation did not budge to reduce the production of crude oil touching the mark of 30 million Barrels a day. Making it difficult for the fracking industry in the US to remain relevant economically. This tussle between the two major oil producers of the world is proving to be fiscally healthy for a country like India, which imports 80% of its oil requirement.

Brent Crude and West Texas Intermediate basket humming at around $70 and $66/barrel, makes it really “Acche Din” sort of days for huge importers like us. It would ease our inflation, Wholesale and Consumer inflation, will have positive impacts on our deficits (as reported in ET, dated 29^th November, 2014, Deficit hits 90% of Budget in 7 months) and will give some leg room for the government in restricting the total deficit to 4.1% of GDP in FY15. But is it sustainable? Will this Oil bonanza sustain?

Inflation, both WPI and CPI are easing for past 3-4 months and touched multi years’ lows. With almost an average monsoon and drop in oil prices in this calendar year, the first three quarters of the FY15 has been nothing short of spectacular. Also, increasing pressure on RBI governor to reduce the rates. But will Dr. Rajan blink? Surveys conducted in the fraternity clearly highlights that Dr. Rajan is focusing on culling this inflation for once and all. Urjit Patel’s committee’s recommendation of keeping the CPI tamed at the range of 2-6% till H1, 2016, is being considered by the governor as the long term target. So bowing down at this aberration of lower prices is something which is not expected by the fraternity in the next Bi-monthly monetary policy meet, scheduled on 2^nd Dec, 2014.

 On the other hand, for the majority driven ruling party, BJP, the oil slack could not be better timed. With just 3 months left for the fiscal report to be presented for FY15 and target setting for FY16, north block should consider to make the maximum of the plummeting oil prices (promote renewable sources of energy, this sector needs dire attention of the government). At a time when the prices reflected at the fuelling pumps are market driven, the retail consumers would reap benefits of the slack. Automobile and ancillary units would also make the most of the situation as it is expected that the demand would soar and would bolster their top line.

All in all, drop in oil basket is a huge positive for the country but in order to have a sustained impact, it is important for the government to bolster policies for renewable sources of energy. Reliance on non-renewable energy should be reduced (atleast a committee formation with recommendation on reliance should be reduced to 70-75% of our total requirement is desirable). A 5-year course for reduction in reliance is imperative. Use the drastic deduction in the fuel imports for giving incentives to the public for using constant source of energy.

Look at the positives and contribute in low carbon emission efforts. Tap this time and take some swift action PM Modi. It can’t get better for energy reforms. 

The Tale of 3 Central Banks!

Central banks around the world are going through a phase which need maneuvering every time in order to sustain the drastic domestic headwinds and the harsh external shocks. Across the globe, there are two such central banks which are closely watched always and have given clues of what is about to come in couple of weeks. These references of what is about to come acts as a cushion for the rest of the world to get its financial act together and sustain the changes with ease. However, for last couple of months there have been some changes which has raised eyebrows of economists around the globe and made them think on their toes to counter the unprecedented events from two major developed nations.

On one hand, Federal Reserve is pondering over the much debated issue of "When to move up from Zero-Lower Bound?" with the final taper act in couple of months and on other hand the lack of take-up for the TLTROs (Targeted Long Term Refinancing Operations - under which banks could disburse loans at an interest rate of 0.15% for four years provided they increased lending to businesses or households) will force the ECB into more drastic action, including buying government bonds under a quantitative easing programme. The actions of major developed economies have forced the developing economies to keep a hawk-eye on the easy money flowing in their countries and their after effects. Reserve Bank of India led by Dr. Raghuram Rajan has reiterated the effects of saturation of the present easy money from the economy. It’s depreciating effect on the currency and the bubble creation in Real Estate and Stock Market (with many believing that markets are way over their sustained fundamentals).

In this case foreign investors’ flight for safety would pressurize the currency and when ECB's easy money flowing into the economy would soon become a reality, focusing on the fundamentals for an emerging economy would be the survival mantra. It is a mantra that can help us tackle the external headwinds with enough ammunition. Easing Consumer Price Index at sub 7.7% levels, with our crude basket at sub $100/barrel levels and with monsoon deficit receding at present 10% from a scary 20 plus percentage a month back coupled with pro-reforms action taken by the majority backed governments highlights are strong fundamentals and preparedness to face the external economic pressure with much confidence.

Though as of now the Indian economy has sustained the taper effect quiet comfortably, I am still curious about the after effects of, A) "Flight for Safety" on the domestic economy with interest rates being raised from the Zero Bound level and B) Europe’s easy money pouring into the emerging economies.