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from Expert Zone:
Keeping fingers crossed in the run-up to Budget 2012
(The views expressed in this column are the author's own and do not represent those of Reuters)
It's interesting that in India, the run-up to the annual Budget means individuals, companies and industry associations keep their fingers crossed in the hope their annual budgets don't get affected by the announcements of the Finance Minister.
Even the market capitalisation fluctuates several percentage points in the matter of a day based on the pronouncements in the budget. It continues to be an event everyone looks forward to each year and 2012 may be no different.
This will be the eighth finance Budget in a row by the current government, and the past seven have struggled to provide any direction to the economy or to drive it upwards. It's an admitted fact today that economic growth in India is driven by the private sector, in spite of the government and the policy paralysis that it is so closely identified with now. The opportunity and the need for impetus in policy and government support relating to education, medical facilities, infrastructure, FDI among others is huge, if there is a political will to drive change and growth in these areas. Nonetheless, government policies define the cost of day-to-day life and hence the keen interest.
Beside the fundamental expectation that policy announcements need to be made to stimulate the growth and investment cycle, there will broadly be five areas in which policy measures will be expected.
-- Clarity is required on the actual implementation of the Direct Taxes Code (DTC) and the Goods and Services Tax (GST). Both these policy announcements govern day-to-day lives of the common man in the country
-- While the fiscal deficit continues to grow each year, it is not really reflected in growth in sectors where government spending and support is essential. Measures to contain fiscal deficit will be eagerly awaited
from Expert Zone:
Sensex: Key takeaways from 2011
(Nipun Mehta is an award-winning private banker with many years of experience across Asia. The views expressed in the column are his own and not those of Reuters)
About a year back in November, we were at the highest ever level of the Sensex with hopes of moving higher. A year hence, as we inch closer to the end of 2011, the Sensex has fallen more than 26 pct from its peak, and then recovered a bit.
In the interim, there have been bouts of volatility, long periods of dull range-bound movements, and a lot of events and learnings from the domestic and international markets.
The biggest learning in the last year has been for the present generation of investors who would not have seen such a long period of stock market underperformance and for whom the definition of long-term has changed. For those who started investing after 2003, the last three years have been an excruciating period yielding seriously negative returns. Most of these portfolios are still a few years away from returning to green. The key lesson is, short-term is out and long-term is in, with long-term to be defined as more than three years.
The other key learning during 2011 has been for the Indian corporate sector, where some hardly ever hedged their forex exposure. It was largely perceived by these companies that the rupee would remain stable and the Reserve Bank of India (RBI) would intervene whenever there were sudden bouts of currency inflows or outflows.
This prevented several mid-sized companies from taking a forex cover with the objective of saving costs. After losing significant sums during 2011 on account of foreign currency fluctuations, risk management for forex has all of a sudden become the buzzword for companies that have foreign currency exposure. The corporate sector is unlikely to take the currency fluctuations for granted any longer.
It is gradually becoming apparent that after a few years of excellent domestic economic growth, even when the global economy was struggling, the growth momentum for an 8 pct (or thereabouts) GDP growth for the country cannot be taken for granted any more. Estimates for closer to 7 pct GDP growth for 2011-12 have already been announced by rating agencies. The decision paralysis and governance deficit within the government is at an unanticipated new low and threatens to pull down GDP for 2011-12 to 6.5 pct levels. The greater threat, however, is for the Indian corporate sector -- starting to look overseas for expansion rather than investing in India, a far cry from the 'India shining' story that used to pull large investments from other countries into India.
from Expert Zone:
Too many questions, no convincing answers
(Nipun Mehta is an award-winning private banker with many years of experience across Asia. The views expressed in the column are his own and not those of Reuters)
If one were to evaluate global events of the last four years dispassionately, the subprime mess in the U.S. and the imminent debt default by Greece (and four other countries to a lesser extent) and the resultant crisis in the euro zone have virtually held the global economy to ransom.
This generation of bankers, analysts, bureaucrats, politicians or even economists, has not been witness to the kind of convolutions that governments and markets are passing through. All this has also led to credit rating agencies taking some surprising and some highly inexplicable decisions.
The outcome of this extraordinary, though not entirely unexpected, chain of events has been various out-of-the-box decisions and/or suggestions like introduction of a new tax on the rich called the ‘Buffet Tax’, an offer by Brazil to start funding the euro zone deficit (much like the tail wagging the dog), of breaking up of the EU, of easing Greece out of the EU, of issuing a new layer of ‘Euro Zone Bonds’, tranches of quantitative easing by the Federal Reserve, etc. The pendulum of risk aversion has swung so sharply that gold and more recently the dollar are the only asset classes that have performed in the last few quarters.
The uncertainty created by persistent delays in a clear decision within the euro zone has created a lot of volatility across markets and asset classes. The latest potential solution of investors taking a 50 pct cut in their investment in Greek bonds will shave off billions of dollars of assets from a few European Banks’ books and impair their balance sheets by raising a serious question mark on their overall asset quality.
Bank rating downgrades have already happened in Europe and unless governments capitalise some of them soon, an impending banking crisis is brewing in some European countries. Due to their huge exposure to Greek bonds, two of the largest French banks have already been forced to announce a 110 bln euro asset liquidation over the next few years to strengthen their balance sheets. Can you imagine the impact of such a measure on global businesses in various countries?
The kind of volatility across bond, forex, commodity and equity markets that we have seen globally over the last few months has been immense, and unknown to many, with far reaching implications. If a close to 9 pct rupee devaluation (vis-à-vis the dollar) over the last three months can create havoc amongst businesses, imagine the kind of impact on P&L a/cs, of bond price movements on profitability of some global banks, of importer or exporter revenues in case of adverse forex movement. The fact that company budgets have gone awry or government fiscal deficits estimates have increased will be apparent only after a lag. It’s best to be prepared.
from Expert Zone:
Life after the U.S. rating downgrade
(Nipun Mehta is a veteran private banker with many years of experience across Asia. The views expressed in the column are his own and not those of Reuters)
The unthinkable (for some) happened last week when the U.S. economy was downgraded from ‘AAA’ to ‘AA+’ with a negative outlook by Standard & Poor’s, one of the three large global rating agencies.
That led to an interesting situation where European economies like France and the UK are rated higher than the U.S., despite huge concerns about their financial condition. The event would undoubtedly have hurt the American ego, particularly since S&P announced that there could be more downgrades in the offing.
That this was an event that was imminent is accepted by many, but what is in store for the global economy and the Indian economy going forward?
There are several concerns that will keep haunting the central banks, the equity markets and governments around the world. These include:
- What if the UK and France are downgraded too?
- Will the other two rating agencies also downgrade U.S. in a few weeks’ time?
from Expert Zone:
The one-instrument orchestra
(Nipun Mehta is a veteran private banker with many years of experience across Asia. The views expressed in the column are his own and not those of Reuters)
The Reserve Bank of India on Tuesday quite unexpectedly raised interest rates by as much as 50 basis points. It was a move that shocked the street and took a lot of people by surprise. It was also a move showing aggressive intent at inflation management.
How is this announcement being viewed by the street? What are the implications of such a hike when interest rates were expected to have almost peaked?
It’s an accepted fact now that various efforts at inflation management have either been unjustifiably inadequate or completely missing. It’s also an accepted fact that much more than this being a demand-led inflation, this is a lack-of-adequate-supply led inflation or what is better known as inadequate supply chain management. Hence raising interest rates at this pace (11 times in the last 17 months) cannot achieve the kind of impact that improvement in supply through preventing hoarding or improving farm produce can.
To play good music one needs an orchestra with several musicians playing various instruments simultaneously. On the other hand what we have is the RBI alone trying to play its instrument and others (read the government) just watching in the hope that the lone musician will create the effect of an orchestra, and bring inflation under control. Merely raising interest rates will not bring down inflation fast enough.
With limited hope of inflation coming under control in the next quarter or two, one should expect more rate hikes in the coming months.
A couple of observations made by the RBI governor warrant a mention. His concern that meeting the fiscal deficit target could be a challenge, and the fact that economic growth had moderated but there is no economic slowdown. The latter observation is important as it is contrary to the observation made by several Bank heads as well as industry chiefs. If there isn’t an economic slowdown, this, and the subsequent interest rate hikes will ensure that. Importantly, the subsidy burden, the excise duty cuts, etc will ensure a higher fiscal deficit, and that can be inflationary too.
