Will Fed’s QE taper talk topple Rupee again?

When U.S. Federal Reserve chairman Ben Bernanke spoke of reducing bond buying quantity (Presently Fed is buying $85 billion per month and the program is popularly known as QE, quantitative easing) first time in the month of May, markets were surprised and spooked.

U.S. Benchmark 10 year treasury yields jumped more than 100 basis points within a short duration, equity markets throughout the globe slumped, hot money from emerging markets started flowing out, developing countries’ currencies tanked and Indian Rupee was the worst performer of the league. Rupee touched historical all time low of about 69 per dollar in August from as high as 53 per dollar in May.

After continuous speculation in the markets, markets were prepared for QE tapering in September, but Fed took a cautious call not to taper and surprised markets again.

Following 2 successive months of Non Farm Payrolls jobs data around/above 200,000 and unemployment rate falling to 7%, there is again speculation of tapering in the markets. Timing and quantity of the tapering is a debatable question but will that talk of tapering cause volatility in forex markets again? Will Rupee again tank to such drastic level with such aggressive bearish bets.

I think, pace and level of volatility what we saw after Chairman Bernanke comments in May were too fast and too much and that may not repeat if tapering happens also. Obviously there will be some reversal in recent gains attained by Rupee as whenever U.S. sneezes rest of the world catches cold! So there may be slide in the level of Rupee but with not such aggressive pace and the level, seen earlier because of the following five reasons.

Priced in the market

Tapering news was new when Chairman Bernanke spoke about it in the month of May. After that various regional-Fed presidents either talked against it or in support of it. Markets participants started analysing for and against the tapering. Markets were prepared for tapering in September month’s Federal Reserve meeting itself. So this time whenever it happens or mere talk of tapering may not cause such drastic moves in Rupee markets as it is already priced in the markets that eventually tapering had to be done, it’s just a matter of time and quantity.

Bond yields

When Bernanke talked about it first time in May, Benchmark 10 year treasury yields were as low as 1.6% and now they are trading at 2.8%. Talking about Indian government 10 year bond yields, they were around 7.5% in May and now trading at around 9%. Both the countries yields are elevated levels indicating tighter liquidity scenario in coming months and looks like they are prepared for tapering.

Current account

Indian current account deficit (CAD), the difference between outflow and inflow of foreign exchange, was one of the worst among the emerging countries. But CAD reduced substantially over the last quarter. India's current account deficit narrowed sharply to $5.2 billion, or 1.2% of GDP, in the July-September quarter of 2013-14 on the back of turnaround in exports and decline in gold imports. Thanks to RBI and governments moves to curb the gold imports and improvement in exports helped by Rupee depreciation as well as recovery in global economy. The current account deficit was USD 21 billion, or 5 per cent of the GDP, in the second quarter of last fiscal. On Sequential basis also CAD improved from $26.9 billion in previous quarter.

Bottoming out of growth rate

India’s gross domestic production growth rate on decline from 2010 peak and it seems that it is bottoming out around 4.5% - 5% levels. GDP expanded 4.8% in the three months ended 30 September, compared with 4.4% in the preceding quarter. From last 4 quarters Indian GDP is hovering around 4.675% (4.8%, 4.4%, 4.8% 4.7% in reverse order) indicating the bottoming out of the Indian GDP growth rate.

Rajan effect

After Raghuram Rajan became RBI governor, markets showed confidence in his ability and credibility to curb the inflation, bond market reforms, clear communication with market participants and forward guidance. His strategy to attract Dollar deposits through FCNR route helped Rupee to regain some of the losses in the forex market. His shifting focus towards CPI inflation from WPI inflation is good for Indian economy in longer run, even though it may hurt in immediate future. After yesterday’s CPI inflation of around 11%, Rajan may increase repo rate by another 25 basis points in next week’s meeting, which indeed in turn helps Rupee as hot money will be chasing for high yields.

Do policy makers have any other option?

After recent Federal Reserve meeting, when Chairman Ben Bernanke’s commented about tapering of bond buying program, global financial markets have become very volatile. U.S. benchmark 10 year treasury yields touched 2.8% recently from 1.6% in early May. Hot money started flowing out of emerging markets (EM) following some kind of theme like sell EMs and buy U.S.!

As a result of this majority of emerging countries’ stock and bonds sold-off, currencies started depreciating. Being part of globalized world now, India too is going through all these market phases. Apart from global issues, India has its own problems like large current account deficit, corruption and scandals, policy paralysis making it as non-favorable destination for investment at least for now. Indian growth, measured in terms of GDP, slowed to 5% levels from above 9% levels, Industrial Production data is not showing recovery signs, Consumer Inflation still very high and whole price inflation started inching up again; currency depreciated more than 12% in 12 weeks. 

Indian central bank, RBI is under pressure to support the growth, curtail depreciation of Rupee, monitor the capital flows and has to maintain its independence. RBI is exactly in “impossible trinity”.  

Consequently government and RBI took several measures to curb the currency depreciation and capital flight from India, like hiking gold import duty couple of time, banning importing of bullion coins and medallions, asking gold importers to keep 20% of total imported gold for exports and exports-purpose, domestic liquidity tightening, reducing the limit for Overseas Direct Investment (it’s like Indian FDI abroad) from 400% of the net worth to 100% and so on.

Many commentators are now criticizing these recent policy moves and intervention in market. It’s not the question of either supporting or opposing them, whether policy makers have any other option which will help them in near term? Of course there should not be any second thought on long term plans to correct the fundamentals; but what about immediate future as Keynes famously said “In the long run we are all dead”. 

This brings back the old question, whether markets are efficient or in other terms does efficient market hypothesis holds true? Going by Keynesian concepts and economic boom and bust cycles it does appear like markets need an invisible-hand to guide them and calm the nerves. But that again depends on how big that invisible-hand is, how far it is non-conventional in its approach and how much market is ready to listen to it and trust. Only time will tell!

Interesting readings

I was thinking of writing about "over dependency on Monetary Policy" from a month ago, but somehow couldn't do it. 

But never mind, a week back I read a nice report and a blog about same, here is the blog and full report of BIS (Bank of International Settlements)  

About same topic under different prospective, read a nice article in mint about Monetary Policy's lag and limited effect in Indian Inflation case.

Coming to GDP growth topic, Manas Chakravarty has collated some interesting facts about India's GDP growth and its rate compared to Indian states and Union Territories.

4th quarter GDP 7.8% vs 9.4% on YoY

click here for more information

Can hawkish monetary policy alone, control the inflation?

Indian central bank, Reserve Bank of India is meeting on 3rd May for monetary policy meeting of 2011-12 and expected to increase interest rates by 25-50 basis points to rein the inflation. At that time RBI governor Mr. D Subbarao might wonder about the above question as he already increased the interest rates, 8 times in last one year or so. But still many analysts believe, RBI is behind the curve to curb the inflation pressure, as Inflation measured by CPI is in double digits (or near by) through out the year. A year back RBI’s comfort zone of inflation was 5.5% and now it has been revised multiple times and more recently to 8% from 7%. Because of this condition there is a talk going on about Indian economy overheating and India not able to handle the growth!

Economist, Sir John Maynard Keynes and Keynesians believed that “changes in the interest rates do not directly affect the prices and inflation is due to pressure in the economy”. They feel that supply of money is a major, but not the only, cause of inflation. They might be right or wrong in the case of other parts of the world but in Indian case it looks like they are correct. Indian inflation may be due third form of Inflation, i.e. Built inflation and neither Demand-pull inflation (increase in demand) nor Cost-push inflation (drop in supply)! In Built-in inflation, people expect higher prices for future from past experience and also supported by price/wage vicious circle.

The very basic point about inflation is, going by the definition, “its rise in the price levels of goods and services in an economy”. Considering the definition, let’s look at the causes of the inflation in Indian case.

First, inflation can be due to erosion in the buying power of the trading medium, i.e. country’s currency. The best example is recent hyperinflation of Zimbabwe where-in, 1 million Zimbabwean Dollar was equal to 1 American Dollar! But Indian rupee, in last two-three years traded against the major currency, i.e. Dollar in a band of Rs. 44 to Rs. 48 per Dollar. So there is not much scope for this argument.

Second, the Cost-push inflation due to sudden drop in the supply side of the economy. In a globalised world, supply side shocks may not lasts too long, particularly not two years and so (as Indian Inflation is in double digits for almost two years). Take recent example of Onion price, due to shortage, prices doubled and even tripled for a month or so, but once the supply resumed, prices cooled off. The same logic applies to Oil prices also whose price spiked due to Middle East crisis and hopes of recovery. If Oil price spike is only because Middle East crisis and not due to recovery, then it’s very difficult to sustain at this level!

Third, Demand-pull inflation due to rise in the demand because of higher expendable income helped by higher income and supported by higher spending by private and government. According to one school of thought, “Demand inflation is constructive to a faster rate of economic growth since along with favorable market conditions, it will stimulate investments and expansions”. They say, higher growth comes with higher inflation and we need to learn to live with that, if we want higher growth.

The Demand-pull inflation along with Built-in inflation is the most feasible reason for the Indian inflation from above mentioned three types of causes. Digging even further tells us that inflation is a part of the broad economical cycle and very structural in nature. So to curb this kind of inflation, there should be combined efforts from RBI (in monetary front), Governments (in reducing fiscal/current a/c deficit by reducing spending), lesser Borrowed inflation (from across the border in terms of imports), people’s mentality and so on. Finally we must remember nothing is decoupled in an open economy!

Good articles...

While browsing through Ajay Shah's blog, found couple of articles are good, so thought of sharing with you guys...

Mr. Deepak Lal's article in Business Standard regarding "Capital Controls" is very good reading material on interlinked macro economics. One piece of the article is as following...

"The current account deficit is by definition the difference between a country’s savings and investments, matched as a matter of accounting by equivalent net inflows or outflows on the capital account of the balance of payments. Current account deficit worries are, therefore, about the size of the capital inflows, which, Ceteris Paribus, will supplement domestic investment and raise it above what could be financed by domestic savings. This should raise growth rates, if the investment is productively employed. It clearly was not the case in the US, where the inflows primarily went to finance the politically-determined entitlements in the sub-prime housing market to Ninjas (borrowers with no income, no job and no assets). But, in India, which has vast infrastructure investment needs, capital inflows would be productive and the size of the corresponding current account deficit should not be a matter of concern to policy makers."

Ila Patnaik's article in Indian Express on GDP growth and Inflation. Will be a good reading on presently going on hot topic of Indian Economy Overheating. For more posts on Indian economy overheating, click here: 1, 2 and 3.

India needs purchasing power rather than subsidies

Recently Tamil Nadu faced state elections and both the main parties were talking about 1 kilo rice for Rs. 1 and other subsidized food products. I have taken Tamil Nadu's example because of recent elections, otherwise subsidies are abundant everywhere in India.

What I wonder is, governments fix the minimum support price for the food article to support the farmers, buys it from the farmers for the support price and same governments sell them to its citizens in a subsidized prices like of Rs. 1. Its same for the oil and its by-products also. So who is going to take care of the deficit of these transactions and how long is it going to work on just blame-game?

India faced a severe Balance of Payment (BOP) crisis in 1991 due to higher fiscal deficit and some external shocks like oil crisis and wars. At that time India had forex reserve of 1 billion dollars which was sufficient to import for just one week. Since oil and wars were/are not in our control totally, no point to elaborate on those issues. But what Indian central and state governments could have controlled is the deficit problem. Due to socialistic era and combined with populist budgets like above mentioned ones (particularly started in southern and eastern states) caused irreversible deficit to the exchequer. And surprising fact is still we are following the same old route towards a possible BOP crisis even after seeing other countries taking development mantras.

Now, in this LPG (Liberalized, Privatized and Globalized) era, India's much publicized recent problems are PDS (Public Distribution System) and Inflation. Due to subsidies, majority of the PDS quantity is sold in the black market without letting the targeted person to claim it.

To avoid the PDS problem central government has started an ambitious project called Unique Identification Number (also called as Adhar) under the leadership of Mr. Nandan Nilekani. But the fundamental problem of "deficit" remains the same even after UID or Adhar project.

India aspires to overtake the China, over a period of next 25-30 years, but with the kind of policies is it possible? India's debt to GDP is more than 70% where-as China's is about 20%. India's foreign reserve is about 300 billion dollars where-as China's is more than 3 trillion dollars. According to recent IMF data available, China's GDP at PPP (Purchasing Power Parity) per capita is more than 35,000 dollars per year where-as India's is around 3,300, thats almost one tenth of China!

Governments should really think of improving the PPP- instead of subsidies. And PPP can be improved only if everybody gets regular jobs to contribute towards the GDP. Again jobs require education, different skill sets and more, which in turn can generate jobs. Governments should think about taking up projects like converting Narrow Gauge to Meter to Broad and single line to double to four line railway tracks, not just increase the trains. Why I am mentioning railway project is because projects like National Highway (by Vajpayee government) and railway track doubling are through out India and can generate lot of employment and at the same time can improve the infrastructure of the country.

Japan's lost decades=China's gained momentum

I was browsing through last week's mint articles and I found the below graph.

Mint Article:The decade in banking

Last week I read an article in mint, so thought of sharing some interesting facts... Click here for full article...

• The Indian banking system could remain insulated from the global credit crunch and its impact in the wake of the fall of US investment bank Lehman Brothers Holdings Inc. on the strength of its high capital-to-assets ratio and low bad assets.
• The collective net profit of the industry was Rs7,100 crore in 2001. By 2010, it had risen eight times to Rs57,109 crore.
• Bad assets, as a percentage of loans, were 6.83% in 2001. This has come down to 1%.
• The net worth of the industry—capital plus reserves—during this period has risen from Rs57,146 crore to Rs3.56 trillion.
• The ratio of operating cost to total assets has come down from 2.68% to 1.87% and return on assets rose from 0.57% to 1.05% between 2001 and 2010, highlighting the industry’s efficiency.
• In 1991, the year India moved ahead with a process that it had begun in the mid-1980s and embraced economic liberalization, the loan outstanding in the industry was Rs1.24 trillion, about 24% of the nation’s gross domestic product (GDP). By 2000, it rose to Rs4.6 trillion, but as a percentage of GDP still remained about 25.75%. In the last decade, the loan book grew to Rs32.4 trillion, a little over 55% of India’s GDP.
• The overall number of branches has gone up from 61,724 in 1991 to 67,061 in 2000 and 81,802 in 2009 (the latest data available), but the average population serviced by one bank branch has dropped only marginally, from 15,000 in 1991 to 14,000 currently.
• In 1991, there were 35,134 rural branches, accounting for close to 57% of the total national branch network. In 2000, this number dropped to 32,673 and 48.7% of the branch network. By 2009, it dropped further to 31,549 and 38.6%. During this time, branches in metros rose from 6,191 to 8,957, and finally, to 14,761 (from 10% to 13.4% to 18%).
• In 1991, there were a little over 100 million deposit accounts in rural India— 31% of the total. By 2000, their number rose to about 126 million, but the market share slipped marginally to 30%. In 2009, the number rose to about 199 million, but as a percentage of total number of accounts, it remained the same—30%—as the overall number of deposit accounts rose from 355 million in 1991 to 662 million in 2009. The share of metros (in terms of accounts), however, rose from 19% in 1991 to 20% in 2000 and 23% in 2009.
• In 1991, there were about 32 million loan accounts in rural India—52% of total accounts. By 2000, this dropped to 25 million and 46%. In 2009, the number rose to 34 million, but as a percentage of total number of accounts it slipped further to 31%. In these two decades, the share of metros rose from 6% to 33%. In terms of money raised through these accounts, rural India’s share slipped from 21% in 1991 to 13% in 2000 and 11% in 2009, while share of metros rose from 40% to 56% and 60%, respectively.

Is Euro following fate of Bretton Wood’s Gold standard!

Before going to Euro, I would like to touch upon the Bretton Wood’s Gold Standard for the benefit of my readers. Bretton Wood’s gold standard came to existence from a war (2^nd world war) and ironically dissolved with a war (Vietnam War). After 2^nd world war, to build the International economic stabilization, certain countries came together to form a monetary system for trading, exchanging mutually tradable currency and etc. The main designers of this system were Briton’s Sir John Maynard Keynes and America’s Harry White. Even though Keynes had an Idea of new reserve currency called “Bancor” but that idea has been rejected by White and others, indicating people moving towards US rather than UK! So countries which came together, agreed to peg their currency to US dollar and US dollar in turn will be pegged to Gold, $35/Ounce and formed the organization called IMF (International Monetary Fund). The entire system was based on some condition for member countries like subscription quota for membership, trade deficit maintenance like balance payment issues and etc. But after some time due to macro economical cycles, certain changes in the world economy like, recovery of Europe, Cold War between US & USSR, globalization of banking/currency system, fast emergence of Japan, Vietnam War and balance of payment issue with US made the cracks in the gold system, making it to fall out in 1971, by then US president Nixon unilaterally withdrawing the pegging the Dollar to Gold. Which is popularly know as Nixon Shock!

Now coming to Euro, it came to existence in 1992 for most of the European Union countries as the member. The Euro formation was on some conditions like such as a 1. Annual government deficit: The ratio government deficit to GDP must not exceed 3%
and Government debt: The ratio of gross government debt to GDP must not exceed 60%.
2. Inflation rate: Not more than 1.5% higher than the average of the three best performing (lowest inflation) member states of the EU.
3. The interest rate must not be more than 2% higher than in the 3 lowest inflation member states.
4. Exchange rate: countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for 2 consecutive years and should not have devalued its currency during the period

But at present some of the European countries don’t look to fit any of the above conditions except currency condition for example…

Country	Government Deficit to GDP forecast	Government Debt to GDP	Inflation and Interest Rate
Ireland	10%	120%	0.6% & 1%
Greece	7%	140%	5% & 1%
Italy	4.5%	120%	1.8% & 1%
Belgium	5%	100%	3% & 1%
Spain	7%	65%	2.5% & 1%
Portugal	5%	85%	2.5% & 1%

From the above table we can say all troubled European countries like Ireland, Greece, Spain, Portugal, Italy and Belgium are

àFacing government deficit to GDP is more than 3%, which is the minimum requirement condition for EURO/EU.
à Government debt to GDP required condition is less than 60%, but each country’s debt to GDP easily exceeding the prerequisite condition. And also from country perspective Debt to GDP ratios of 120% (Ireland) and 140% (Greece) are not good. We have present example of Japan’s Balance Sheet problem due to which it lost two decades of growth and witnessed lost decade.
àNow coming to Inflation and Interest rate, see the real interest rate of each country. As ECB decides the Interest rate of the region, countries with different inflation (particularly too high and too low) will be under tremendous pressure. This might push them currency devaluation/revaluation which is again restraint condition

--- will be continued...

Is there a threat of liquidity trap and "W" shape recovery

If you look at the recent developments in the world, I feel there is threat of liquidity trap. (Liquidity trap is a condition where in country or state's economy is unable to stimulus by monetary policy easing.) On 5th of this month, Japan decreased its interest rates from 0.1% to 0 or in other words Japan's interest rate is between 0 to 0.1%. And its not over, Bank of Japan is planning to infuse 35 trillion yen to its economy by means purchasing sovereign assets. For brief details click here.

This is not the only case, United states is also thinking of quantitative monetary easing to improve its struggling economy. US is facing problem of unemployment which is almost 10%. The Fed rate is already 0.25% so considering this, Fed may think of fiscal measures by purchasing of some sovereign funds from government.

These are two major countries (except China recently over-passing Japan) which are struggling to improve their economy happened due to recent financial crisis. Apart from these there are issues going on with European countries & recent currency war between US, China (Pegging Yuan), Japan & Euro currencies to protect

Now the biggest question is whether monetary and fiscal policies will influence the economy EVERY TIME & EVERY PART OF THE WORLD, IRRESPECTIVE STRUCTURAL ISSUES!!!

Because in this recent financial crisis, it originated in US because of its social structure & policies influencing that structure. After 3 years of crisis; and after all the possible steps taken by US & FED, but still its economy is struggling.

Same is the case with Japan, it is in the stagnation from last two decades and had been doing all possible steps (like keeping interest rates "0" from 2001 to 2005 and again keeping it "0" now & jumping into currency war) still its index Nikkie is not able to touch its all time high 40000 plus in 1989.

Whereas India, China, Brazil & other developing countries witnessed slowdown in this crisis but giving signals for achieving new highs in their respective economies as time passed.

Will continue in next post...

Yes! COMMON MAN is getting benefits from FASTEST GROWING economy

Guys this month beginning we had a discussion about the above mentioned topic. And I kept the topic for open discussion, which never happened after couple of responses from Uday & Richa! never mind. Today I read an article in Sunday Times of India by Swaminathan Aiyar.
I advise all my readers to go through that article. For those who cant, for them I am presenting some of the numbers from the article here.

The below numbers from a survey covered all dalit households in two blocks in UP, one in the relatively prosperous west (Khurja) and one in the backward east (Bilariaganj), between 1990 and 2008.

• Pucca houses rose from 18.1% to 64.4% in the east & from 38.4% to 94.6% in the west.
• TV ownership improved from virtually zero to 22.2% and 45% respectively.
• Cellphone ownership increased from almost nothing to 36.3% and 32.5% respectively.
• Fan ownership, curbed by electricity shortages, rose to 36.7% and 61.4% respectively.
• Bicycle ownership up from 46.6% to 84.1% in the east and from 37.7 to 83.7% in the west.
• Ownership of two-wheelers improved from almost zero to 7.6% and 12.3% respectively.
• In times of distress, dalits historically mortgaged jewelery to upper caste lenders. The proportion that does so has dropped from 75.8% to 29.3% in the east and from 64.6% to 21.2% in the west.
• The proportion eating roti-chutney for lunch, socially viewed as low-class food, has fallen from 82% to just 2% and 9% in the two zones.
• The proportion of kids eating the previous night’s leftovers plummeted from 95.9% to just 16.2% in the east.
  
• The proportion eating broken rice fell from 54% to 2.6% in the east, and from 22.7% to 1.1% in the west.
• Per capita availability of dal in India has been falling. So it’s heartening that dalits consuming dal are up from 31% to 90% in the east, and from 60.1% to 96.9% in the west. This may be one cause for rising dal prices.
• Traditionally, dalits were mainly agricultural labourers. In the reform era, they have diversified into non-traditional work. The dalit proportion benefiting from migrant relatives is up from 14% to 50.5% in the east, and from 6.1% to 28.6% in the west.
• The proportion running their own business is up from 4.2% to 11% in the east and from 6% to 36.7% in the west.
• The proportion in agricultural labour has plummeted from 76% to 45.6% in the east and from 46.1 to just 20.5% in the west.
• Per capita income is growing almost 10 times faster than in the Nehru-Indira era, and dalits are sharing the new prosperity.

Here one common thing you can notice in all above mentioned bullet points and that is private sector participation and competitiveness between them. For example from first bullet point, you can notice TV, Cell phone, Fan, Bicycle, Motor cycle, Mortgage (Banking services), Availability of non agricultural avenues are improving common man's status directly and indirectly.

So all this happened last 10-15 years helped by LPG (Liberalization, Privatization & Privatization) which is initiated by then Government in 1992 (Manmohan Singh) & 1997 (P Chidambaram)

The point is, after 1997 we haven't seen any revolutionary reform from the government due to various reasons. So when we are thinking about achieving double digit GDP growth next decade, we cant be complacent thinking history & past reforms, we need to take certain bold steps.

And once government does its part then comes turn of Private sector & common man of contributing to their share.

In today's same STOI, I read an article from Chetan Bhagat. Its also good article, you can have look at it also...

Does COMMON MAN getting any benefit from so called FASTEST growing economy!!!

This is the thought whenever I come home & meet people here in home town. In fact I feel they are hopeless about our country's future! This is not my one time experience, last 2-3 times when I came here & met different people from different background (Age, Income & Family background). I am mentioning all these age, income & family background because I cant draw a conclusion from any one person's thinking from his backgrounds.

So last time when I was in home, I met one of my uncle & from the discussion we had, I thought his thinking is limited so no need to give any attention. But this time when I met one my grandfather & some other people I had same kind of discussion. So from this discussion I am drawing the above statement as conclusion...

In Bangalore or for that matter in Metros we think, we as a country are progressing after seeing so many things like GDP numbers, Infrastructure (presently however may be pathetic it is!),
Private Jobs & their Income level, Stock market, English media (Paper & TV) articles & analysis (because regional TVs & Papers usually don't cover this kind of news because here also I can draw same conclusion that they don't serve this kind because their target audience are not at all bothered about all the above mentioned things). When I start discussing all these above mentioned things with my high funda data, they simply don't agree with me because they have their own concern in some of the below mentioned things like...

1. Inflation

When they say Inflation, they are not aware & worried about the percentage point. Because I also feel that Inflation measurement itself is in so much controversy, so real inflation numbers GOD ONLY KNOWS! So here when they talk about price hike not inflation (because they are not even aware that in simple terms price hike itself is inflation). Their concern is price of almost everything including food articles (even though they are producing some of these & not getting the benefit due to middle man) is increasing much faster as compared their income. Their point of argument is now everything has become purely business & above their reach, be it agriculture, health, education & etc.

2. Government Working Style/Administrative Hurdles

On this they give one whole night lecture & I can also write lot of things. But bottom line will be same, government is not doing adequate what it is supposed do for common man. Be it from giving sufficient facilities (in one article from Swaminthan's I read, government's Rs. 1 worth of facility to common man is costing around Rs. 3.5 crores!!! I was shocked to read this), corruption, bureaucracy, fighting for power, no intentions at all for development & etc.

3. Legal Issues

As we all know how fast we are getting judgments from judiciary system for all variety of cases be it red handed captured terrorist case, be it simple accident cases, domestic violence cases, be it a cop molesting a woman/girl, be it murder case of bar girl by influence people & etc. And even if you get verdict from court also there will always be higher court to re-appeal your case. And surprisingly if you get verdict from highest court also people will go for President's mercy petition! In addition to all these, there are people called as human rights organizations...

4. Other issues like

--> Inter state issues regarding territory, river & dams building to those rivers, current sharing, language, non residents of their state issue & etc.
--> Basic infrastructure needed in rural areas like connectivity in terms of roads & schools, health related medical centers @ etc
--> Naxalism
--> Terrorism
--> Caste ism & related problems
--> Strikes & etc


So Bottom line is:
Anybody's guess!!!

RBI keeps key interest rates unchanged & hikes SLR to 25%

As expected from the growth prospective, RBI kept key interest ratios(CRR, Repo & Reverse Repo) unchanged and increased SLR from24% to 25%. In my last post, I wrote in bottom line that

"So instead jumping to reversing the monetary policies, RBI should give some more time to country to get back into fast track growth rate & then can think of increasing SLR, CRR, Repo & Reverse Repo in a sequential manner".

So by keeping important ratios unchanged & increasing SLR, RBI has given some more time for monetary expansion & at the same time has give the hint that next move will be of CRR to curb inflation.

This is how RBI has reduced key ratio is sequential manner...


As I raised the point of credit growth slow below picture indicates that...

And I raised one more point export & import in my previous posting...

And finally inflation, about which RBI is worrying...


And other highlights of today's policy review from RBI are...

1. RBI increased its March-end wholesale price index (WPI) inflation estimate to 6.5% with an upward bias, revised from its earlier target of 5%.

2. The estimate for FY10 gross domestic product (GDP) growth was left unchanged at 6.0% with an upward bias.

3. The Central bank cut its FY10 credit growth target to 18% from 20% that it had set in the July monetary policy review.

4. The RBI also asked banks to ensure that their total provisioning coverage ratio is not less than 70% and imposed a timeframe of September 2010 to achieve this target. The coverage ratio is a measure of the bank’s ability to absorb potential losses for non-performing assets (NPAs) and is arrived at by calculating the loan loss reserve balance with the total non-performing loans.

5. RBI increased the provisioning requirement for advances to the commercial real estate sector classified as ‘standard assets’ from the present level of 0.40% to 1%, a move that makes lending to the sector tougher.

Mr. Swaminathan's Article in STOI:History reveres the sharif badmash who gets results

The year 2009 marks the 200th birth anniversary of Abraham Lincoln, and also the end of Manmohan Singh’s term as prime minister. Both ended
office with awesome reputations as honest men in highly corrupt eras. Lincoln was nicknamed Honest Abe. Singh has been called sharif Manmohan.

Yet, critics have accused both Lincoln and Singh of being hypocrites who advertised their personal honesty but agreed to dirty deals to promote their political aims. Singh’s elevation to the top post in 2004 was hailed as a historic breakthrough for integrity. Yet, within days he formed a council of ministers that included seven politicians facing criminal charges. The most notorious was Mohammed Taslimuddin, a Bihari ganglord accused of crimes ranging from murder to rape, a close pal of RJD chief Lalu Yadav.

Earlier, when joining Deve Gowda’s government in 1996, Lalu managed to get Taslimuddin made a minister. But following a public outcry, Deve Gowda dropped Taslimuddin. Deve Gowda was capable of feeling embarrassed at such a scandalous appointment. Not so Dr Singh.

He ended his term with an episode just as sleazy. He faced defeat on a confidence vote on the Indo-US nuclear deal. The Left front had ditched him on this issue, and frenzied last-minute efforts had to be made to secure enough defections from Opposition parties to survive. In Parliament, Opposition legislators exhibited huge quantities of currency allegedly paid to buy their votes.

Ultimately Dr Singh won the confidence vote. But so afraid was he of losing another such vote that subsequent sessions of Parliament were declared to be mere extensions of the monsoon session. Not more than one confidence motion can be moved in a single session, so this manoeuvre saved Dr Singh from having to face another vote of confidence, and possible defeat.

Cynics say that all’s fair in love, war and politics, and other parties are no better. They say that Dr Singh was never PM except in name: he simply carried out Sonia Gandhi’s instructions. Does this argument absolve Dr Singh? Hardly. He could have resigned rather than give in to tainted ministers and vote buying. But he chose to go along with these.

A stronger defence is that history judges people by their achievements, not the means they used. Abraham Lincoln in his time was also accused of slimy hypocrisy, and with as much justification.

He is revered today as the man who abolished US slavery. Yet, in 1860 he won the Republican nomination to run for president largely because he was seen as moderate on slavery abolition. His chief rival, William Seward, was an outspoken abolitionist. But Lincoln claimed every state had the right to decide whether or not to have slavery, and that imposing abolition would be unconstitutional. He thought slavery was morally wrong, but constitutionally acceptable. His partymen felt this soft approach would help win the Border States — Missouri, Kentucky, Maryland and Delaware — that allowed slavery but opposed the secession of the South. This was a key reason for his nomination and electoral success.

On assuming office, Lincoln said his quarrel with the South was not on slavery but on secession. The South insisted on seceding, and the Civil War commenced. Then in 1862, Lincoln suddenly abandoned his oft-stated constitutional position and abolished slavery, on the dubious ground that he could ignore constitutional propriety under the War Powers Act.

His Emancipation Declaration abolished slavery only in the rebel Southern states, not the Border States, whom he dared not antagonise. He said, famously, ‘‘I would like to have God on my side, but I absolutely must have Kentucky.’’

But once the Civil War was won, Lincoln abolished slavery in the Border States too. According to one analyst, ‘‘Lincoln used the Border States to screw the South; and having done that, he screwed the Border States too.’’

In Lincoln’s era, the dictum of politics was ‘‘to the victor, the spoils.’’ There was no permanent civil service, so presidents could literally buy political support and much else with promises of office. To win the Republican nomination in 1860, Lincoln struck dubious deals with a number of notoriously corrupt Democrats.

Few people remember or pay much attention to those sleazy manoeuvres today. History remembers Lincoln as the man who won the Civil War and abolished slavery. For the same reason, i think history will remember Manmohan Singh as the man who made India a miracle economy with 9% growth, and clinched the Indo-US nuclear deal.

Gandhiji said the means did not justify the ends. But Yuddhishtra in the Mahabharata thought differently (remember Ashwatthama). Manmohan Singh cannot claim to be Gandhian, but can claim to be Yuddhishtra.

I am back!!!

Yes guys I am back! Almost I took a break of 2 weeks from posting due to various reasons. Lot of things happened in this due-course in National level, International level, Political front, Economic issues like Inflation, IIP numbers, Stock market... Of course I cant cover all the things happened in this 2 weeks but I tried brief what all happened & my views about those...

Starting with my favourite topic "Inflation", it came down to historical low level of 0.44% from 2.43%. Here you can see the drop level is almost 200 basis points which is not a good sign for economy point of view. But is this sign of contraction in demand or just I was arguing with many days like "High Base Effect".

Till today[& now also] I argued that its a High Base Effect which is causing the Inflation to fall so drastically. But If you the see the today's fall of almost 200 basis points & 0.4% drop in WPI may indicating future fall in the demand to various economic conditions. So now the country is going to sustain the growth levels? How the governments create the jobs when Fiscal Deficit is already crossing 8% of the GDP!

And if it is only Base Effect problem what is remedy for this problem? Remember this is not going to end here in this year! Since next couple of months we are going to face deflation [speaking statistically] next year same period is going to high inflated zone. In addition to that next year overall world economy is will be in revival mode so crude oil, commodity prices & by default manufacturing products starts zooming out. So what we will do at that time? How our monetary policy will be?

Now coming back to stock market, last week only 3 days were trading days & I think it gave much needed gap to the falling market. BSE Sensex almost touched 8000 levels & from their we are seeing a bear market rally now. I can say market is trying to find out the bottom around 8000 levels, even though it sounds very early & optimistic looking at present conditions. But if you see the bear market patterns, all bear markets almost lasted for 18 to 24 months. And here from last 15 months we are in bear market, I can say we are at least near the bottom of the market if at not at the bottom! And one more supporting point is till now FIIs have been major sellers & DIIs have been buyers, once the redemption pressure from FII side zero, I think FIIs will return to Chinese & Indian markets.[Already Chinese markets have given 20%+ returns in this year].

Now coming to National Politics front now a days there is too much talk going on about so called "The Third Front". According to me media is giving unnecessary giving too much importance to this circus for bunch of unhappy divorced parties. Actually in Kannada there is one phrase "AATKKUNTU LEKKAKKILLA", that means there are in the play but dont count them! They can never form a stable government & they will not do this time also. If you see the leaders of third front you see all the people are rejected by either by Congress or BJP! See Devegouda who calls himself as secular, allowed his Younger Son Mr. Kumarswami to take over the party & join the hands with so called communal BJP in Karnataka for 20 months. At that these same CPI & CPM leaders threaten Gowda, warned about his end of carrier in national front. And now all are together. And coming to Chandra Babu Naidu, Jayalalitha & Mayawati I think they are playing opportunistic politics rather than doing any ideology! And if you see today's speech of Mr. Karat he is ready to talk to Congress after the election, what is the need to join hands with the 3rd front? And particularly I fail to understand why people like Karat, being a highly educated from JNU behaves like that? And in which era they are living, compare China & India, we are lagging 20 years behind to china in in all developments!

GDP: Sectorwise & Quarterwise

I got this good picture [which very clearly explains the contents of GDP with percentage & respective quarters] from Financial Express.

When I came to about the GDP yesterday, I was surprised/shocked not because of GDP came down to 5.3% from 7.6% in 2nd quarter & 7.9% from 1st quarter, but because of the agriculture sector performance. Since GDP expectation from most of the economists & experts was almost broadly inline with their prediction that it will be in & around the 6% in 3rd quarter due to collapse major banks in the US, liquidity crisis, FIIs pulled out the money & etc. But surprising element was the agriculture sector which contracted the by -2.2% as compared to previous year's same quarter[For agriculture measurement I would like to go with the Year on Year (YoY) measurement because of climatic conditions repeat themselves only once in year, where as I dont believe in other things' measurement like Inflation, Manufacturing, Service & etc. For these kind of measurement I suggest there should be the Month on Month (MoM) measurement because these are short term as compared to agriculture & are very rapid in nature as compared to the crops of the agriculture]. I dont know how the government is going to justify the agriculture numbers. Being 60% of the population working in this field & still producing the lesser outputs as compared to previous years [with normal monsoon] is ridiculous. One side country's population is increasing [only relief factor is rate of birth generation has come down compared to previous decades of Independent India] & our agriculture productivity is decreasing.

And manufacturing sector numbers were in line with expectations only with little bit more aggressively down. This because of tight liquidity policy, slowdown in the world economy, massive scale of layoffs/salary cuts, consumer behavior spending pattern in time of recession & etc... This sector has nothing else but to wait for the revival in the business cycle in the world economy in the "GLOBALIZED & COUPLED WORLD"

Where as if you see the Service & Industry both did quite well, in fact Service sector did much better than that of 2nd quarter.

Now if we calculate the first 9 month GDP it will come to 6.93% [(7.9+7.6+5.3)/3] & to achieve the earlier predicted target of 7.1% we need to have 7.7% [(7.1*4)- (7.9+7.6+5.3)in the 4th quarter. That is quite optimistic figure looking at present conditions. Going by present economic conditions India's GDP growth for fiscal year 2008-09 may be 6.5% to 6.7%.

Now there is lot of pressure amounts on governor of RBI to reduce the interest rates. As government has already come up with the 3 stimulus packages & running with higher fiscal deficit & dont have time & authority to plan & implement the full fledged plans, RBI left with no other option but to force the banks to lend try to push the economic activities in the country.

Business Updates

Today, Rupee hits its all time low of 51.12/14 per dollar.

Indian economy growth slow downed to 5-6 year old pace. 3rd quarter GDP recorded the 5.3% as compared to its previous quarter [Q2] growth of 7.6%.

GDP contributors are:[See the agriculture & manufacturing sector]

Farm sector output is at 2.2% versus 6.9% YoY
Manufacturing output is at 0.2% versus 8.6% YoY
Mining sector growth is at 5.3% versus 4.3% YoY
Construction growth is at 6.7% versus 9% YoY
Industry growth is at 2.4% versus 8% YoY
Services sector growth is at 9.9% versus 10.2% YoY

Duty cuts to boost the economy

Today Finance Minister Mr. Pranab Mukherjee announced the much needed duty cuts in the last day of the interim budget discussion of Parliament.

Excise duty has been reduced from 10 per cent to 8 per cent and the service tax cut from 12 per cent to 10 per cent. And 4% excise cut announced earlier in the stimulus package in December will continue beyond March 31. In addition to these majors, FM also announced Excise duty on bulk cement to be 8% or Rs 230 per metric tonne, whichever is higher and Naptha exempted from customs duty; extends customs duty in Naptha beyond March 31, 2009.

This is much needed action government should have taken before itself. Some people may argue that because of Duty cuts there is revenue loss of around Rs.28000 crore. Ya that's is true in normal conditions. But present conditions require some extraordinary majors to pull back the economy to grow at 7% to 7.5%. Since I think Tax cuts are most effective in boosting the domestic demand as compared to other majors like fiscal & monetary stimulus packages. And in case of monetary relief there will be time lag between the central banker's relaxation & individual banks relaxation which may not as act immediate boosting factor. And the problem with the fiscal stimulus packages, here in India particularly we have implementation problems. And in present scenario governments (Central & States) dont have full fiscal year also for big packages to announce.

These duty cuts are definitely going to help ailing manufacturing units [which are showing negative growth from last couple of months through IIP nos] & service industries. And duty cut on cement is a good relief to the real estate & construction industry which are presently facing the liquidity problems. And if industries transfer these relaxations to consumers then there will be impact on demand side. This domestic demand is India's life line in this crisis time. Since our Indian growth is more of domestic consumption oriented than the export oriented like China. 60% to 65% of our GDP is consumed by Indian population itself. And if governments succeed in boosting the domestic demand then half of the India's problems are solved. Instead of implementing the protectionism policies, government should think about the other alternatives like "Excise & Service Duty Cuts" so that, there will not be international trade retaliations.

And looking at the monetary conditions there is lot of room for reduction in rate cuts by central banker. Since individual banks are keeping there excess money into safe hands of RBI [instead of lending] through Reverse Repo route which is 4% presently. So there should be reduction Reverse repo from 50 to 100 basis points so that banks will look towards the alternatives like lending to Prime Customers.[Since there is risk of increment in the NPAs also] In addition to that there should be reduction Repo rate also so that there is proper balance in the corridor of Repo & Reverse Repo. Ultimately there should be money flow in the economy to boost the economic activities. But I dont think central banker should think of altering the CRR & particularly SLR. Because if we look at the Call Money Ratio it is between corridors of the Repo & Reverse Repo rate, so banks are not facing any problem with the liquidity adjustments between themselves. It is expected that RBI may act by this weekend in easing the monetary majors.

Bottom line:

Lets be hopeful that our Indian economy, counter cycle the present scenario by August/September 2009 with a new government & with its new policies...

News Paper Articles

Today I read some very good articles in Financial Express & Mint.

In Financial Express, Ajay Shah has analyzed
-->The amount of capital flows to India in last 2 years
-->With respect to capital flow, how RBI has controlled the exchange rate
-->Impact of crude oil prices fall &
-->Opportunity for India in this crisis.

With respect to Ajay Shah's writings there is an editorial in the Financial Express.

And in Mint there is a very good article regarding
--> Top 50 Indian Companies (Considering the facts of MVA (Market Value Added), EVA(Economic Value Added), WACC (Weighted Average Cost of Capital), NOPAT, Cash Operating Taxes & etc.
--> Crash of Indian Stock Market to 2005 levels
--> Low interest rate policy of 2003 which helped in boosting the GDP
--> GDP percentages & Total growth in the GDP
--> Flow of money(M3)
--> Indian Companies' Fundamentals
--> There is interesting fact that the author is pointing out is only 15% of the companies out of 500, have created the value rather than size, where as rest of them concentrated for the size.
--> Managing trade offs between the P&L account and Balance sheet
--> Importance of sustained EVA growth & value creation to shareholders.