Do it yourself

In past few months we have repeatedly highlighted ( see here ) that the current socio-economic milieu of the country is quite reminiscent of the conditions prevailing during Mrs. Indira Gandhi’s decade of 1967-1977. Comparing this with current account crisis of 1991 or Asian currency crisis of 1997 is therefore fraught with risk of looking at wrong solutions. Another evidence to support our fears could be seen in the reports that the government is looking to lower fuel consumption. At the first place, this distorted socialist mindset of curbing consumption rather than improving production and productivity is largely responsible for much of the ills plaguing Indian economy. Now perpetuating this legacy could only bring disaster, in our view. We hope, the government may wait to see the impact of curbs put on gold consumptions in past couple months before rationing petro/diesel or hiking duties on these products. As the squabbling ministers of the Dr. Manmohan Singh’s cabi...

You cannot fool all the people all the time In past 9 years there have been occasions when our economist prime minister and his colleagues have invoked coalition dharma to hide from their inefficiencies, lack of conviction, political convenience, misgovernance, and opportunism etc. This politics of opportunism might haunt them for rest of their life as they would leave the country, especially the poor people who gave them two chances, in deep trouble in many respects – economic, foreign policy, socio-political divide etc. The future generations will ask Dr. Manmohan Singh “If you could put your government at stake to get civil nuclear deal approved; If you could put your government at stake to get FDI in multi brand retail trade approved; If you could put your government at stake to pass Food Security Bill – why did you hid behind coalition dharma when it came to critical economic reforms?” No one will trust when he writes his memoires and tell us that “he wa...

QE tapering One of the major concerns bothering Indian economy is the shift in the US Federal Reserve’s shift in policy stance – from very loose monetary policy to consolidation over next few years. Given that such shift shall be driven by improving economic fundamentals and not inflation, the USD is likely is strengthened by Fed tightening, much like 1999-2000. The concern therefore is that at a time when Indian economy is struggling with structural weakness on account of falling growth led primarily by decline in investments, rising current account deficit, high fiscal deficit primarily due to unsustainable subsidies etc., a further fall in INR vs. USD and consequent hardening of interest rates may compound the problems and further delay the recovery. In our view, it is a valid concern. However, we do not subscribe to the idea that it will lead to any collapse. For one, it is unlikely that any US monetary tightening will be disruptive, as economies outside are...

Indian currency In our view, we shall see correction of speculative and cyclical fall in INR over next 6months and then a gradual depreciation over many years till we are able to correct structural reasons. The depreciation should mostly correspond to CAD and inflation. Last week the finance minister appeared totally flabbergasted by the violent depreciation of INR. We agree with his current assessment that INR may be undervalued at this point in time. But the mute questions are “is this undervaluation without reason?” and “is it sustainable?” Conceptually, like any other tradable thing, the exchange values of a currency vis a vis other currencies depends on the relative demand and supply of these currencies at any given point in time. The recent sharp depreciation of INR vs. USD in recent months indicates that the demand for USD vs. INR has sharply outpaced the supply. There could be several reasons for this higher USD demand versus INR. For simplicity, we may cla...

Current account deficit Our policy makers, regulators, economic commentators and analysts have all expressed their grave concerns over the swelling current account deficit (CAD) of India. However, we have not seen any concrete steps to address the roots of the problem. Theoretically, CAD arising from trade deficit is never a risk in itself. The excess of imports over exports essentially means that our economy is doing better than the other economies who import from us. The equilibrium is achieved through currency and interest rate adjustment. Currency depreciation should normally lead to demand for imported goods falling and exports becoming more competitive and hence bringing trade account to balance. Higher interest rates should attract more inflows, contain inflation, encourage savings and eventually lead to current account balance. The CAD is concern if you do not allow market forces to operate freely, for socio-political concerns. Substantial rise in social sector ...

The popular discourse about “what’s ailing Indian economy and financial markets” during past 6months has been mostly focused on five issues: (i)       Policy paralysis; (ii)     Economic reforms; (iii)    CAD; (iv)   INR (v)    Fed tapering. Apparently, the government, regulator, businesses and investors have expressed concern over these issues from their own perspectives. However, most have refrained from discussing what in our view is core of these issues. Consider the following: Policy paralysis – who caused it? Businesses and investors have vehemently castigated the government over policy paralysis, e.g., inordinate delays in taking critical economic decisions and execution of large infrastructure projects. The government on its part has denied the allegations, though the macro economic data would suggest otherwise. What nobody is telling publically is what caused this paralysis at...

Humpty Dumpty sat on a wall, Humpty Dumpty had a great fall, All the king's horses and all the King's men, Couldn't put Humpty together again. The prime minister, finance minister, their advisors, and RBI governor, all would be wondering why the markets are not listening to them. They have been repeatedly and vehemently exhorting the participants in Indian financial markets and businessmen that there is no need to panic over falling INR, higher CAD, rising inflation, declining growth, etc. They also have been making attempts to convince people that situation is not as worse as 1991. The finance minister also suggested a couple of days ago, that the Indian markets should only be concerned about the events in India and should not react to data and concerns emanating from other economies like US and EU. The following questions beg answers: (a)    Why there is so much emphasis on 1991? (b)    Through measures like imposing custom duty on im...

Every time market volatility rises and prices move sharply, a valuation debate gets automatically triggered. While it is universally acknowledged that the current market price (CMP) of equity stock is based on future outlook, it is not uncommon to hear buy-sell arguments based on historical data. In our view, CMP as determined by the collective wisdom of all the market participants is mostly true and fair value of a particular stock under the given circumstances. However, there are brief periods of extreme market momentum (as the one we are witnessing currently), where CMP may not reflect the collective wisdom of market participants due to some technical factors like involuntary forced supply due to liquidity issues or absence of execution of demand due to non-financial non-economic reasons like some rumors, political uncertainty etc. These deviations from the true and fair value however do not last long and usually get corrected in short periods of time. The valuation ...

“Have faith in God. But never forget to lock your car.” Indian equity markets witnessed substantial rise in volatility and short term momentum last week. There were multiple immediate triggers to cause this. Some hope raising economic data from western world that sparked the fears of Fed tapering the magnitude of monthly bond buying. Some knee jerk reactions from RBI and government raised concerns that clock may be set back to early 1990’s on Liberalized Exchange Rate Management System (LERMS) and Liberalized Remittance Scheme (LRS). Onions threatened to undo whatever governor Subbarao achieved in past couple of years. Yield curve topping ~9%, raising fears of imminent rise in lending rates jeopardizing prospects of any imminent economic recovery. Prospects of some distress selling by large brokers to fill the hole created by reincarnation of Harshad Mehta in NSEL. Thankfully, no one yet talked about a systemic crisis in equity market; though sharp spike in implied vola...

The recent utterances by the prime minister & finance minister and the steps taken by the RBI & government to handle the economic problems being faced by the country confirm at least three things:          I.    The government is unwillingly coming out of denial mode and accepting that the economy is in a serious mess.        II.    The policy makers are terribly short of ideas to get out of this mess.       III.    The country is losing badly in the game of perception, at a time when most troubled countries, including China, Italy and Spain, have successfully managed the perceptions. This provides further support to our fear that in this corrective phase we might regress all the way to 1967-1975 period rather than halting at 1991. Consider the following: (a)    The political leadership of the country is feeling as in...