Expert Zone
Straight from the Specialists
India Market Weekahead – PM’s call for “animal spirit” gets the bull raging
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The last trading day of June brought back memories of a raging bull market with a single-day gain of over 2.5 pct while the month ended with a 6 pct gain. On taking over the finance portfolio, Manmohan Singh along with his ‘dream team’ seems determined to revive both domestic as well as institutional sentiment. It started off by mending announcements made by his predecessor, especially the general anti-avoidance rules (GAAR) which kept foreign investors away in the last few months.
The call for revival of the “animal spirit” in the economy coupled with positive sound bites from the Euro summit helped the rupee bounce back sharply to 55.60 from record lows of 57+. It seemed that he has been able to stall the vicious cycle temporarily but whether he turns it around will depend on the flow of policy action over the next few weeks.
The new draft guidelines on GAAR cheered the markets. It has suggested that the tax evasion rules would not apply retrospectively and clarified that only income accruing after April 1, 2013 will be subject to the provisions of the GAAR and will be triggered only above a certain income threshold. Softness on the Vodafone tax issue has also lifted corporate sentiment. This helped revive the FII sentiment with fresh upgrades from foreign brokerage houses such as Deutsche Bank, Morgan Stanley, BNP Paribas and JP Morgan.
Internationally, euro zone debt worries eased after European leaders unexpectedly announced measures designed to alleviate the worst of the current debt crisis gripping the euro zone. The measures will help stabilise immediate sentiment surrounding the euro zone and lessen the sense of panic. We still hold the view that the inevitable has been deferred by a few months. However, oil prices bounced back sharply by 7 pct and this could negate the currency appreciation we saw on Friday.
We step into the new derivative contract with a sense of optimism and hopes of further measures by the government to revive the investor sentiment. Apart from this, among other cues, the manufacturing Managers’ Index (PMI) for June will be released on Monday. The HSBC manufacturing Purchasing Managers’ Index (PMI), compiled by Markit, slipped marginally to 54.8 in May from 54.9 in April. The services purchasing managers’ index for June is also expected to be out next week.
Auto and cement stocks will be in focus as companies from these two sectors start unveiling monthly sales volume data. We believe the auto dealers are holding a huge inventory which has forced auto majors to cut production. The monthly numbers are bound to disappoint. The cement sector bounced back in spite of the CCI penalty. There is an expectation of further consolidation in this sector but the valuations are still expensive.
Life insurance business remains almost stagnant
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The life insurance industry in India is still struggling on the growth front while the general insurance industry seems to be doing well. The life insurance industry grew by a marginal 1.4 pct while the general insurance industry grew by 18.3 pct. This is based on data released by Insurance Regulatory and Development Authority (IRDA) for the first two months of the financial year.
While April & May 2012 may not really decide which way the year will close, the numbers throw up some interesting facts on the way the industry will go. I will focus on the life insurance space here because this is the one that has been sluggish last year too, due to a variety of reasons.
– Interestingly, while LIC was more or less flat with a growth of -0.6 pct, private players as a whole grew by 7.8 pct. Just for the record, there are 23 private players and LIC still retained a share of almost 75 pct of the market.
– In absolute numbers, the biggest growth was shown by HDFC Life followed by Metlife and Aviva.
– All but one of the companies has shown a drop in business in the individual single premium segment. Hence, this seems to be a conscious move by the industry to move away from this product. This could be because of the last budget that had provided tax benefits only for those plans which offer 10 times cover of the premium paid. And most of the single premium plans did not meet that criterion.
– While a large majority of private players have seen a dip in the sale of standard regular premium plans, LIC has seen a remarkable 50 pct increase in sales here. These plans are great to have on the books of the insurance companies as they bring in renewal premiums every year, something which single premium plans do not do. Of course, these are harder to sell too.
RBI vs the govt: who will blink first?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
At its mid-quarter monetary policy review on June 18, the Reserve Bank of India (RBI) kept its rates unchanged despite expectations of a cut. To further augment liquidity and encourage banks to increase credit flow to the export sector, the RBI has increased the limit of export credit refinance from 15 percent of outstanding export credit of banks to 50 percent, which will potentially release additional liquidity of over 300 billion rupees, equivalent to about 50 basis points reduction in the CRR.
This is an excellent move as lower rates together with a weak rupee should benefit exporters. The overall policy announcement disappointed the markets with stocks down sharply and 10 year g-sec yields up more than 10 bps post policy.
The Reserve Bank had front-loaded the policy rate reduction in April with a cut of 50 basis points. This decision was based on the premise that the process of fiscal consolidation critical for inflation management would get under way, along with other supply-side initiatives. The assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small. Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures.
Despite the rate cut in April and clear positioning by the RBI, the government has failed to bring about much needed reforms and address supply bottlenecks. In fact, the impending diesel price hike has been postponed once again due to political pressures.
Even as the manufacturing Purchasing Managers’ Index (PMI) for May suggested that industrial activity remains in an expansionary mode, there is no question that the pace of expansion has slowed significantly. In this context, it is relevant to assess as to what extent high interest rates are affecting economic growth. Estimates suggest that real effective bank lending interest rates, though positive, remain comparatively lower than the levels seen during the high growth phase of 2003-08. This suggests that factors other than interest rates are contributing more significantly to the growth slowdown.
In the wake of increasing allegations that hawkish monetary policy dented growth, the RBI has sought to clarify matters. Indeed, more than interest rates, it’s the policy uncertainty and lack of action by the government that has led to growth slowdown.
Foreign borrowing or foreign investment?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The market’s response to the currency measures announced on Monday was a dip in the Sensex. Much was expected after the announcement made over the weekend by the finance minister. What has been actually initiated cannot make much difference either to the rupee or to growth.
The measures permit companies to go in for more external commercial borrowings and FIIs to hold more government securities. C. Rangarajan, chairman of the prime minister’s economic advisory council, expects $15-20 billion additionally to come into the foreign currency kitty.
Our current account has been in deficit for a very long time though it has been less than 3 percent of GDP until last year. But in 2012, the deficit has crossed 4 percent, making dollars scarce and pushing the rupee down. To reverse the trend, more dollars have to come in or the RBI has to draw down reserves. The latter can affect investor confidence and, in extreme cases, spawn a financial crisis. Hence, the search for dollars.
The funding of this deficit offers a choice between external debt and external investment. NRI deposits have provided some support though not very significant. The option is between external commercial borrowing and foreign investment, the latter either via stock market by FIIs or direct investment by foreign companies.
Debt has to be repaid and to do that countries are most often required to borrow more in future. Investment, on the contrary, comes to roost but demands a congenial climate. The choice is not entirely our own.
Our external borrowings are comparatively less than those of most other countries though not of China. At the end of 2011, our external debt was $335 billion, about 21 percent of the GDP. But the short-term component of debt at about 23 percent, if paid out, would wipe off 26 percent of our foreign exchange reserves. Our total debt is high because it exceeds our total reserves.
India Market Weekahead: Time to buy after a period of caution
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Markets opened with a healthy dose of optimism last week. Two big events were expected to boost sentiment. On the global front, Greece election results eased fears of immediate global financial turmoil. Back home, expectations were high of an interest rate cut by the Reserve Bank of India (RBI) to boost the falling economy.
The RBI rate cut has been viewed as a panacea by the markets for quite some time. Belying high expectations, the central bank kept both repo rate as well as CRR unchanged on mounting inflation worries leaving India Inc and the markets sorely disappointed.
The RBI expressed its intent of prioritising the management of liquidity and of continuing to use open market operations (OMOs) as and when necessary to contain liquidity pressures. The central bank has stated that any further rate cut in the short term would be on the basis of growth-inflation dynamics and the government’s fiscal consolidation initiatives. The onus for action now lies squarely on the government.
Another event that has placed the government’s inaction under the spotlight was the downgrade of India’s credit outlook by rating agency Fitch from stable to negative. This comes close on the heels of Standard & Poor’s warning of India losing its investment grade. The agency supported the downgrade on the basis of lack of credible government action on policy and reforms as well as the growing menace of corruption stalling the growth prospects of the country.
Hurt by dollar demand, both speculative as well as well from oil companies, the Indian rupee witnessed a sharp slide this week. At 57+, the rupee plunged to record lows, its worst weekly fall in nine months. A weak rupee offsets the benefit of lower global crude oil prices which in turn would aggravate inflation. It remains to be seen what impact the currency would pose for India Inc numbers as a falling rupee would lead to an increase in the cost of imported inputs in spite of falling commodity prices, huge forex losses as well as impacting the cost of borrowing for the corporate sector in turn weighing on profits.
The cement sector was in for a big jolt as the Competition Commission of India (CCI) penalised 11 companies a combined penalty of 63 billion rupees for cartelisation. Stocks reacted mildly as this sword has been dangling for a long time and was getting discounted. Secondly, this matter will be contested and could drag on.
Too much of Optimism is sometimes wishful thinking. The markets prognosis of ‘ Nothing can go bad than this’ is a vague analysis. Although, insiders may now prop up markets and sale themselves out thereafter.
Congress is likely to play a fin-min who is more popular than Real. Many So called Socialistic Game plans and deliberate injections thorough rising MSP for farm products may keep inflation unabated. While, Oil remains at trough Indian Equities are likely to TOP Out Sooner.
Can we provide more cover at lower costs?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
When it comes to financial products, does the general rule “low cost = low quality” hold true? By quality, I mean the quality of experience and service levels that should be expected from a standardised product.
One industry which consistently beats this rule is the electronic hardware industry which keeps packing in more punch into phones, laptops and cameras at more or less the same price or even at lower prices. For a limited period of time, the niche gadget charges a premium but very soon the same power gadget is available at a much reduced cost. Is it even fair to draw this parallel between a hardware industry and a service industry?
Does it require regulatory intervention to put an end to pre-payment charges on loans — and even then selectively? Does it require regulatory intervention to slash entry and exit loads on mutual funds? Does it require regulatory intervention to cut down the excessive charges on unit-linked insurance plans? Since time immemorial, interest rates on credit cards have been ridiculously high — once you get into the revolving credit trap with a card it’s almost impossible to get out.
High costs being charged by all players in a financial space has an even more negative impact — the moment a disruptor charges something low, it runs the risk of being termed ridiculous and hence maybe of a low quality. There were days when online term insurance plans were being viewed very suspiciously by a lot of sceptics — some still do. But they were such a strong proposition that one life insurance company after the other has been forced to launch them.
Once the charges in unit-linked insurance plans were limited, the focus of insurance companies shifted to traditional insurance plans. The fact is that the traditional plans are a lot more opaque and the charges too are very high. So will some innovator take the lead and launch traditional life insurance plans which are a lot more attractive to the customer? I certainly am betting on it. With 23 life insurers fighting for 30 pct of the share and LIC having the balance 70 pct, there will be some player who will take the plunge and force the market to follow.
The customer needs more insurance, but at a much lower cost.
RBI makes the right policy call
(Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company. The views expressed in this column are his own and do not represent those of either Principal Pnb or Reuters)
The Reserve Bank of India’s (RBI) monetary policy states that “..it is relevant to assess as to what extent high interest rates are affecting economic growth. Estimates suggest that real effective bank lending interest rates, though positive, remain comparatively lower than the levels seen during the growth phase of 2003-08. This suggests that factors other than interest rates are contributing more significantly to the growth slowdown.”
One could not have placed this argument with any more clarity.
This can possibly be illustrated better by using representative numbers. Assuming the prime bank lending rate at 14.75 percent per annum, and we reduce the impact of WPI at 7.6 percent, the ‘real’ lending rate will be 7.15 percent per annum which on a post-tax basis will be 5.58 percent per annum, considering it’s a business paying tax at 22 percent and can expense its interest costs.
On the other hand, the retail deposit rate applicable to domestic household savers at 8.5 percent per annum will correlate to the Consumer Price Index of 10.4 per annum, giving a ‘real’ deposit rate of negative 1.9 percent. Assuming an average 20 percent tax rate, a domestic saver will get a negative real rate of 3.6 percent per annum.
How can we expect to attract household savings back into financial assets and how can we justify a further reduction in lending rates?
The RBI in its words had ‘front loaded’ the reduction by the 50 basis points cut in April and in doing so, had very clearly hit the ball back into the government’s court by not mincing words in expressing the need for fiscal consolidation in driving down inflation.
Well & truly said Sir. Not only had RBI stated indisputable reasons for holding interest rates, it emphatically also sent a message that decisions are taken independently and not swayed by the ‘loud’chorus of an anticipated rate cut which included inter alia the FM and others.
RBI needs to take bold steps
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Expectations of a rate cut were legitimate. But the RBI preferred to pause, not quite convinced that inflation is under control. That has been its singular target though it is dressed up to look more appealing as growth-inflation dynamics.
What is a matter of anguish is not that the RBI preferred a pause but its presumption that the relation between interest rate and investment was weak.
“Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small,” the RBI elaborates. “Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures.”
It is certainly true that the investment climate has been vitiated by corruption revelations which have delayed decision-making by the government, the euro crisis which created uncertainty and depressed foreign investment, as also the policy holiday that the government was forced to take to appease its allies in the coalition. But these do not belittle the impact of high rates that forced companies to shelve projects which had lost viability.
Interest rates are critical. In 2008, the world economy would have collapsed following the financial crisis in the U.S. The Federal Reserve, as also other central banks, took immediate steps to cut interest rates and infuse liquidity to prevent certain disaster. Had this not been done, the U.S. economy would have gone into a depression which would have been deeper than 1929.
The RBI too had followed the same strategy although inflation in 2008-09 was more than what it is today. In a matter of months, the repo rate was slashed from 9 to 4.75 per cent which boosted GDP growth from 6.8 to 8.1 percent and brought inflation down to 3.1 percent.
Where are the Alphonsos?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
I had my first Alphonso mango of the season a few weeks ago in London. Oddly enough, although so many things are so easy to get hold of in London, Alphonsos aren’t. You either have to go to very expensive food halls — places like Fortnum & Mason or Selfridges or Harrods — or pick them up at one of the more selective South Asian food shops that are scattered around.
Even stranger, in London, a place which is in love with food, relatively few people have heard of Alphonsos. We bought a couple of boxes of Alphonsos when people came to lunch a couple of weeks ago and we offered them round and most of our guests, even those who were fairly well-travelled, had never heard of them, let alone eaten them. Naturally, everybody who tastes them is ecstatic and everybody wants to know where you can get them.
So, in London, where anyone who wants to can get practically anything from anywhere, why is the Alphonso mango such a comparative rarity — practically unknown?
Contrary to popular belief and myth, the British are in love with food. TV is full of programmes about French food, Italian food, Indian food, Chinese food and even British food. Celebrity chefs are treated like pop stars and the food columns that appear all over the press get bigger and bigger and bigger. And yet, you rarely see the amazing Alphonso mentioned. There doesn’t seem to be any marketing, there doesn’t seem to be any promotion, there doesn’t seem to be any understanding that this is an extraordinary opportunity for an Indian product which shouldn’t be missed.
Why isn’t there an Alphonso Mango Promotion Council sitting in Europe and the United States, promoting these delicious fruits and selling them at a price from which Indian mango growers can get a decent living?
And Alphonsos aren’t the only thing that India is sitting on, that it takes for granted and that the rest of the world doesn’t know about and would pay a good price to get hold of — if only they were told about it. A bit more consistent food and drink promotion programme worldwide would do Indian imagery a world of good. The winegrowers in New Zealand and Chile have done wonders worldwide. It’s about time India starting waking up to its food and drink heritage and did the same thing.
Time to think beyond monetary policy rates?
(Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company. The views expressed in this column are his own and do not represent those of either Principal Pnb or Reuters)
Irrespective of the RBI monetary policy review and its outcome, the fact that policy rates have assumed such obsessive focus needs closer scrutiny.
The boom from 2003 to 2008 was not peculiar to India, which like other emerging countries benefited from the liquidity surplus in developed economies and capex into capacity building was at its best. The Indian economy was already overheated when it collapsed from the sudden credit shock following the Lehman event.
The massive government spending, which incidentally had commenced even before the 2009 crisis, ensured a rapid recovery peaking the economic cycle on the back of consumption.
A shortfall in supply capacities eventually led to the decline with food, particularly protein, inflation racing off.
The monetary policy rate hikes had no significant impact on food prices. This time the government, unlike in 2009, has little fiscal capacity to boost spending and a reduction in interest rates is more likely to prove a mere symbolic gesture.
The consistently negative real interest rates have only pushed Indian savers into gold, our asset class of cultural preference; pushing the trade deficit to historical highs. The global economic situation fuelled by rupee weakness due to the twin deficits, resulted in its devaluation. India being a net importer by virtue of oil pays for devaluations through inflation.
RBI just crashed all hopes. However the rates will come down over the nex few months given the sluggish growth and lower credit offtake.
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