Expert Zone

Straight from the Specialists

Invisible hand of market at work

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

India’s economic situation is at least grave, if not exactly in dire straits. Growth is at a decadal low, consumer inflation is persistently high, jobs have never been as scarce, the currency is volatile and the investment cycle is showing no signs of revival. Many of these problems are a result of bad policy and global economic conditions, but several are also the outcome of a natural economic cycle.

The Indian economy has developed several imbalances over the years as a result of bad policy and the usual cyclical fluctuations. The corporate sector went on an investment binge between 2005 and 2012 and is now saddled with significant amounts of excess capacity in several core sectors. The government itself went overboard with spending, first in 2009-2010 with the stimulus in response to the global financial crisis and then with its various populist programmes.

The result of these excesses is most obviously visible in the high current account deficit, retail inflation and property prices. After remaining in the 1 – 3 percent range for most of the last decade, the current account deficit rose to a high of over 6 percent of GDP in December. Consumer inflation too has remained above 9 percent ever since the stimulus began. And despite a weak jobs market and a slowing economy, property prices across the country kept rising till early 2012 and are still rising in some parts.

Rupee should not harden further

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The rupee has recovered over the past few weeks after falling to a record low of 68.85 per dollar in August. After a period of unease, the finance ministry and the Reserve Bank of India can now take it a little easy. But care needs to be taken that the rupee is not driven up further.

Speculation about the end of the U.S. Federal Reserve’s bond-buying programme in May affected global currencies and the rupee was not alone in this predicament. The announcement had created a scare about the tapering of quantitative easing. That would have dried up liquidity that the market had got used to. The Brazilian real, Indonesian rupiah, and the Indian rupee were the principal losers.

India Markets Weekahead: Investors should wait for a correction to buy

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Markets continued a strong rally to close the week around 3 percent higher. After the partial U.S. shutdown was confirmed and triggered speculation over the postponement of QE tapering, a weakening dollar and the rupee’s subsequent appreciation also helped lift the mood.

Though the current account deficit for the first quarter was a better-than-expected 4.9 percent, IIP data that came in after market hours on Friday showed India’s industrial production had slowed to a dismal 0.6 percent in August. This suggests that buoyancy in the stock markets was driven by liquidity and sentiment, while things are different on the ground.

SEBI tries to get it REIT again

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Ease of funding is a key recommendation for the growth and development of the Indian realty sector in the coming decade. New instruments of funding should be allowed into the sector, especially real estate investment trusts (REITs) — an investment mechanism that buys income-generating real estate assets and passes on the yield to investors.

In this current climate of dwindling investor sentiment and a plunging rupee, there is a need to implement funding options such as REITs for infusing much needed liquidity into the sector. The total REIT market size in the Asia-Pacific region is approximately $205 billion but India has been unable to take advantage of this funding opportunity, mainly because of the lack of an existing regulatory framework.

Terrano might just be the ace up Nissan’s sleeve

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

I could have said the Terrano — Nissan’s compact SUV — is a glorified and beautified Renault Duster, but Nissan isn’t silly to invest money and effort to market a product already in the market.

The Terrano gets the distinctive front grille treatment of a Nissan SUV. When you walk around to the rear, you will see that the tail lamps extend into the hatch — a departure from the now familiar look of the Duster — which helps conceal its mass and heaviness. The bumpers have also been changed to give the Terrano a bit more up-market appeal. Judging by its looks, the Terrano looks a lot more modern and aggressive while the Duster is rather plain.

Rajan panel proposals not a cure for disparity among states

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The report of a committee headed by Raghuram Rajan on backward states has drawn attention to development disparities among states in India. Not that these were not known or assessed before. The report offers an index for identification of states according to the degree of backwardness and their share of financial assistance from the central government.

The committee’s recommendations, even if efficiently implemented, are not likely to show results soon. The per capita income in Bihar, for example, is a fourth of the per capita income of Goa and half that of Gujarat. But it is encouraging that GDP growth in backward states has recently accelerated and, to some extent, reduced the income gap. It took place because state governments realized that growth counts politically, not because of any additional assistance from the central government.

India Markets Weekahead: Lack of positive triggers in the near term

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Indian markets are in a corrective phase after RBI Governor Raghuram Rajan’s monetary policy review on Sept. 20 put a damper on investor expectations. If Rajan had played to the galleries, we would have seen a stock market bubble. The move from pessimism to euphoria — a rally of nearly 20 percent in less than three weeks — without any perceptible change in ground realities, would have led to a bull trap. Though participation levels were not high, FIIs had turned buyers and it would have been a matter of time before dormant market participants jumped into the fray.

Barclays is the latest to cut India’s GDP forecast to 4.7 percent. Most of the others have cut their forecast to below 5 percent although the government is still hoping for an early recovery. The banking sector was under pressure after Fitch cut its rating for a number of public sector banks such as Punjab National Bank, Bank of Baroda and Indian Bank.

Was the repo rate hike necessary?

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The decision of the U.S. Federal Reserve to delay tapering its bond purchases cheered markets, and more so in India because they were convinced of a second bonanza from the RBI. But new Governor Raghuram Rajan gave the markets a jolt by turning hawkish and increasing the repo rate.

The gains of the previous day following the Fed meeting were nearly wiped out and the rupee, which was steadily crawling towards 60 to the dollar, also fell back. The only reason why the RBI increased the repo rate was the revival of inflation, which had dropped to less than 5 percent in April-June.

NSEL crisis puts spotlight on conflict of interest

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(Any opinions expressed here are those of the author and not necessarily of Reuters)

The ongoing National Spot Exchange Ltd (NSEL) payment crisis has highlighted the need for better regulation of commodities exchanges and increased transparency in corporate governance.

Indian markets at risk but elections could spell change

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

It’s been an eventful September so far for India. The Indian parliament cleared key economic legislation in its extended session. The Reserve Bank of India saw a new governor taking charge. FII flows reversed trend to turn positive in equity and debt markets. Volatility in the currency market subsided and the rupee staged a recovery from historic lows. Near-term bond yields shrank and the August trade deficit came in lower as exports climbed. The Syrian crisis seems to have abated. Does this mean that the worst is behind us and things will start improving?

As discussed in my previous column, some of these actions from the Indian government and the central bank seem like quick fixes to set right deteriorating macroeconomic numbers. India’s Q1 GDP is now at 4.4 percent, much lower than expected, and FY14 GDP growth is expected to be below 5 percent. The rise in interest rates on account of the central bank’s measures to lessen currency volatility will definitely affect GDP growth in the remaining three quarters. Monthly IIP and PMI numbers are not encouraging either. Both WPI and CPI inflation are not yet stable. Headline inflation soared to a six-month high in August. Input costs for the consumer staples basket are set to rise due to currency depreciation, which could have an impact on consumption volumes. On the oil subsidy front, rupee depreciation has again increased per unit under-recovery on diesel, kerosene and cooking gas. The urgent need for a substantial increase in diesel prices could eventually have a dampening impact on growth.

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