Expert Zone

Straight from the Specialists

Not a smooth ride for the markets

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

There was subdued excitement over the Sensex hitting a record high in a special trading session on Diwali. It had taken the market quite some time to cross its previous peak in 2008. This was also the case for most other markets, although they had recovered a little earlier.

The Indian market was slow to catch up because, apart from the international conditions, there were domestic problems that affected the health of the economy.

The fundamentals of the Indian economy were weakened, undermined by a number of imbalances. Inflation has been beyond the Reserve Bank of India’s (RBI) tolerance limits for more than three years now. A bloated current account deficit took the exchange rate to around 69 to the dollar. The budget deficit and tax proposals vitiated the business climate for FIIs and FDI. Governance left much to be desired and investment was held up. As a result, GDP growth nearly halved to 4.8 percent.

The market had received several knocks off and on. Essentially, the Sensex dropped too fast in earlier years and climbed back too slowly to its earlier peak.

Need to rebalance RBI’s interest structure

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

In its mid-quarterly monetary policy review last month, the Reserve Bank of India (RBI) made some hasty changes in the interest structure. The repo rate was raised possibly because of the rise in inflation and the marginal standing facility (MSF) rate was cut after the rupee recovered against the dollar. The interest structure is still lopsided with short rates exceeding long rates. This anomaly needs to be corrected.

It is believed that the economy is susceptible to a rundown when short rates exceed long rates. A further slowdown, in any case, needs to be prevented and is quite feasible since the compelling conditions that necessitated an interest hike have been contained. There is now enough room for the RBI to restore balance.

Raghuram Rajan and the rupee

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

With Raghuram Rajan taking over as the governor of the Reserve Bank of India (RBI), it’ll make for a change in the central bank’s policy perception.

His predecessor Duvvuri Subbarao used conventional methods and got no results. It is likely Rajan will opt for innovative means and his initial steps are already showing results. It’s evident that the complex problems of today demand out-of-the-box solutions.

Focus should be inflation, not just stemming rupee’s fall

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

Indian stocks have been battered over the past few sessions. The market condition is not unexpected, thanks to over-action by policymakers and over-reaction by stock investors.

The apparent anxiety on the part of the government was that even if the fall of the rupee was inevitable, left entirely to the market, speculative activity would push the economy into a crisis. Presumably, the rupee at 60 to the dollar was the benchmark for intervention.

A bumper crop may energize Indian industry

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

Industrial growth in India in 2012 was less than a percent and data from April and May this year doesn’t show a lot of promise. The reluctance of industry to grow has been the reason for GDP growth dropping to a disappointing 5 percent, raising doubts about whether the India story has come to an end. That may be an extreme view considering that even the best performers, such as China, are having problems.

But there is a glimmer of hope. Monsoon rains have been above average this year and a bumper crop is expected. Agriculture contributes to around 20 percent of India’s GDP and even an 8 percent increase in agricultural production will at best improve GDP growth by a percent. But agriculture does have an impact on industry and both together can make a perceptible difference.

Sooner the better for RBI to unwind grip on liquidity

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

The Reserve Bank of India (RBI) wasn’t expected to do anything new at its policy review on Tuesday and it did exactly that. But the markets still reacted adversely. The stock market moved in consort with the rupee with the Sensex falling 245 points.

It is generally true that markets overreact, more so in India, partly because market sentiment is affected far too quickly. What evoked these sentiments was the undue concern expressed by RBI Governor Duvvuri Subbarao about external uncertainties, more so about quantitative easing by the U.S. Federal Reserve and food inflation in India.

Why the rupee is linked to jobs in the U.S.

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

It appears odd that an increase in job offers in the United States should pull the rupee down in India. After all, any improvement in the U.S. economy should benefit the rest of the world. It means an increase in imports by the U.S. and exports by other countries. But there is more to it than that.

Will the rupee fall further?

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

On May 31, the rupee fell to an 11-month low of 56.51 to the dollar. It wasn’t the only currency to suffer a loss. Most currencies depreciated during the month; some more than the others.

The appreciation of the dollar reflects an improvement in the performance of the U.S. economy and partly the related possibility of the phasing out of quantitative easing (QE) by the U.S. Federal Reserve. The latter would make the dollar even scarcer.

The threat of a junk rating

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

Credit ratings by agencies are never very objective and their long-term outlook is also seldom accurate. Sovereign ratings, in particular those which are not solicited, are generally unreliable and often biased. But rating agencies do draw attention to critical issues that should not be ignored.

Standard & Poor’s announced on Friday that it had maintained India’s rating at BBB- with a long-term negative outlook. This assessment is based on three major considerations. The budget deficit, government debt and the current account deficit (CAD) are too high.

Why is RBI chief Subbarao so cynical?

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

In its policy review on May 3, the Reserve Bank of India (RBI) did bring down the repo rate by 25 basis points but it also presented a gloomy outlook on growth and inflation which left the stock markets cold. The Sensex, which had surged in anticipation, fell 160 points. What makes the RBI so negative when even rating agencies are inclined to accept the emergence of green shoots?

RBI Governor Duvvuri Subbarao has himself spelled out the risks. “Upside risks are still significant in view of sectoral demand supply imbalances, the ongoing correction in administered prices and pressures stemming from increases in minimum support prices,” he said. Is Subbarao’s risk assessment genuine or has it been exaggerated to put the government under pressure?

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