Wednesday, December 28, 2011

so far so good

2011 seemed to go on forever; finally its drawing to a close. US continued to be shaky, Europe is falling apart, emerging markets contracted contagion effects and (in addition) India suffers from policy paralysis.  Nature played havoc in the form of Tsunami in Japan, Hurricane Irene and floods in Thailand.

However all is not lost.  
  • Occupy wall street is gaining momentum in the US and Anna at home  
  • US continues to grow and ends the year on a positive note, bucking mid year forecast and fears of impeding double dip
  • US unemployment rate is dropping and consumer confidence is rising 
  • Markets feared a spate of municipal / Government default - but none, fortunately
  • European Union and Euro have survived (so far) and reportedly 26 of 27 members have agreed to tighten budget controls in an attempt to stem EU's debt crisis
  • India inflation is under control and CRR cut may be around the corner 

The table below shows key asset indicators' level - current and last year's closing.  Gold, US treasuries and Dow Jones have seen some safe haven flows, not surprisingly.  India clearly isn't "shining" anymore, at least as far as foreign investors go.  Major currency pairs look to be ending the year almost close to their years' opening level.

31 Dec 2010
DXY (Dollar index)
NY Gold
10 Y IND T
1 yr OIS (In)
5 yr OIS (In)

Good news is we survived 2011 (well, almost) and better news is 2012 promises to be another action packed year.

May 2012 (Mayan 2012?) mark the start of an exciting, joyous and new era!

Wednesday, December 21, 2011

Que Sera, Sera

Rupee touched an all time low of 54.30 last week and looked set to continue its downward spiral. Thanks to RBI's (extreme) measures, rupee has had a (temporary) recovery / halt.  In it's recent directive, RBI has dramatically reduced trading limits for banks and corporates and pushed us back to very restrictive currency trading era.  To highlight changes:

(1) USD / INR forwards booked by residents, once cancelled, can't be re booked
(2) Past performance limit is now reduced to 25% of last three years' average or last year's import/export (whichever is higher) and all forwards booked under this facility will be on a deliverable basis.  No exchange gain will be passed on if such contract is cancelled.
(3) All short tenor contracts (cash / tom / spot) by banks will strictly be on deliverable basis.
(4) FIIs will not be allowed to re-book cancelled contracts.  However rollover will be permitted.
(5) NOOPL (Net Overnight Open Position Limit) of all banks has been reduced across the board.  Banks have been directed to ensure that intra-day and daylight open positions are within the approved NOOPL.

As expected, there has been a significant reduction in trading volume.  For now, it looks like RBI has the house in order.
However, it is another story that shallow markets will prove to be less efficient and more volatile.  Some of   the most likely implications:

  • Companies with genuine hedging needs will be constrained.  Risk management, anyone?
  • Offshore markets likely to see more flows as onshore sees more restriction.  Is there an approach to control NDF's impact on onshore market and is there way to control NDF market in itself?
  • Curbs not only speculation also liquidity and would increase volatility in the medium to long term.  
In my mind, these measures could do more harm than help, in long run.  

In another move, RBI lifted the cap on interest rates paid by local banks on foreign currency deposits of NRIs.  There has been easing of ECB norms by allowing Micro Finance Institutions (MFIs) and NGOs to access foreign currency loans.  While these measures are aimed at attracting foreign currency flow, how significant and immediate the impact would be, is questionable.  RBI is also said to be toying with the idea of significantly pushing up the cap on all-in cost of overseas borrowing by corporates and also allow companies to borrow more through the ECB route.  

All this is ok but not enough.  Global issues, our own fiscal and economic mess, record debt coming up for repayment (almost double as 5-yr average) in 2012, fleeing foreign investments etc., will continue to weigh on rupee, and our central bank can only do so much.  

It's more to do with Government's behaving like a rabbit caught in the headlight and complete lack of sensible policy measures.  Action - long overdue please!

"Que sera, sera
Whatever will be, will be
The future's not ours, to see
Que sera, sera
what will be, will be...."

sad, but seems like our plight, at least for now.

Monday, December 19, 2011

Currency - news and views

Fed holds rates

In the FOMC meet held yesterday, Fed kept rates unchanged while keeping the door open for further easing if  European turmoil continued thereby increasing downside risks to to the US. Feel good factor is that the economy is expected to expand close to 3%  in it's current quarter; this compares with 2% growth in 3rd quarter and sub 1% growth in the first two quarters of this calendar year. Jobless rate is down, consumer spending looks up and factory activity is higher in the US. On the flip side, November retail sales had its lowest growth in the last five months, unemployment is still at a level that poses concern and housing market is still sluggish; explains why Federal Reserve is in no hurry to tighten rates yet. .  Dollar index moved past 80 reflecting greenback's safe haven status.    US treasury yield is still on the rise with 10 yr currently  at 2%.  

Euro woes

European Summit that ended last weekend agreed on an intergovernmental treaty but nitty gritties are expected to be worked on over the next three months. It is clear that while such summits may try to foster future financial discipline and better fiscal integration, it has no magic solution to save Euro from it's current mess.  Markets remained skeptical as there is no concrete steps to alleviate European government's debt crisis. Proposal to increase EFSF has not been favored by Germany's Merkel and market is jittery ahead of Bond auction today and tomorrow.  Euro is trading close to year's low and expected to continue its trade with a negative bias.

Rupee - how low?

Rupee is dragged by global factors but the pace is being determined by local issues.   Slower growth, disappointing IIP, balance of trade and current account deficit are crippling the economy and currency, but policy paralysis tops of the chart. RBI supplied dollars to cool demand but exporters remained on sideline as most analyst expect the rupee to weaken further. Given this, the supply side has been limited and it is obvious that RBI's intervention is only likely to be a token with its limited firepower.  With EU crisis worsening by the day, capital inflows into emerging markets is suffering a serious setback.  RBI is likely to hold rates in its policy meet on Friday and let's hope for strong policy measure from RBI to curb further fall in Rupee.  While hoping for respite, act based on reality.

(sent out by mail on Wednesday, Dec 14)

Wednesday, December 7, 2011

Self denial or destruction?

Yet again, proposal of FDI in retail has been shelved.  Well, that's the truth;  however to be politically correct (pun intended), our Finance minister today announced that the decision to allow FDI in retail is suspended (mind you, not rolled back) till consensus evolves.  Immediate concern of course, is to get parliament to function which has been in a state of inaction for half the winter session.  Talk of Democracy!

It is claimed that FDI in retail will kill kiranas and farmers. Which of these opposing politicians (in bigger cities) have their kitchens run on groceries from kirana?  What has been done so far, to protect farmers who realize less than 1/3rd of what final consumers pay? What have we done about crores of post harvest losses? My street corner kirana shop owner has a son, who is in engineering school.  Do we really believe that the father is waiting for his son to inherit his 8 x 10, infested by roaches and rats? Emerging to emerged, evolution, modernization and better life - too much to ask?  Don't the opposing individuals (and their families) enjoy the luxury of foreign cars - why didn't we fight endlessly to protect Ambassadors? 

Granted that the effort to protect the interests of kiranas is genuine.  What about consumers?  Aren't we the foundation of economy?  As tax payers, we deserve to be taken notice of! How irresponsible it is to encourage a nationwide bundh of traders?  What a colossal loss of productivity?  What happened to the perishable produce and the interest of kirana, while protesters were busy trying to prove a point? Did your neighborhood kirana actually want to keep his shop and business shut?  Can the health of the ( local and global) economy afford this at the current juncture?

Advantages of multi brand retail stores are several.  Employment opportunities to tens of thousands of young and educated Indians (farmers' kids included), infrastructure development, better, equal and transparent prices / terms to farmers, investment in technology, growth in tax revenue and better consumer experience are only few of them. It is disheartening that political parties twist every national issue to improve its electoral prospects? Isn't there a mid path?  China introduced FDI in a phased manner to select states.  Can't we take a cue from there? Refusing to discuss (read work) an issue such as this and disrupting functioning of parliament - God, we need some serious help!

Apologies for my innumerable questions and out-of-ordinary choice of subject for "market talk". Louder our voices get, sooner will be some action - I hope.

Currencies are likely to be muted as markets count down to EU summit.