Where do we go from here?

I know it's too early, nonetheless, cheer I want to.  RBI after a long haul, decided to tilt its focus towards growth as inflation seems to be behaving itself. Also with rupee continuing it's upward move, RBI can now breathe easy and release some liquidity (Rs 32k crore to be precise) back into the system (some of which it may have sucked while intervening to stop rupee's slide).  The move to cut CRR by 50 bps is a precursor to interest rate cuts; however RBI has adequately warned that interest rate cuts will be highly dependent on inflation remaining under control (core - 7% or under), fiscal consolidation and conducive investment environment.  

Growth (GDP) projection for current  financial year has been brought down from initial 8 to 7.6% and now to 7% while inflation forecast is kept unchanged at 7% for Mar '12. Also, RBI  deputy Governor has indicated that  rupee curbs are not likely to get rolled back in a hurry; it  fears that rupee recovery could be temporary.

Markets cheered RBI's move to ease liquidity; sensex crossed 17k mark and USD/INR tested sub 50 level. Market is looking at another CRR cut (albeit smaller) in March  if  advance tax flows tighten liquidity condition and another cut during its April policy.  We may see gradual rate cuts beginning April, however RBI will take cues from budgetary measures towards fiscal consolidation.  Let's hope for a pro-growth budget!

While we have a lot of fixing to do internally, a lot also depends on what happens in Euro region which is the epicenter of the current crisis. Will ECB prove to be lender of last resort and even if it chooses to be, can that become a solution that calms markets permanently?  Situation looks fragile and precarious.  IMF has lowered growth forecasts for most parts of the world.   

It's a complex and interconnected world and current crisis has affected capital flows into emerging market.  The impact of growth slowdown and increasing unwillingness to lend / risk aversion by banks is reflected in lower credit off take and hence growth in itself.  It's a vicious cycle.  It would take more than an organisation or a country to pull Euro region and hence our world out of trouble!  A lot depends on collective measures from countries in order that the contagion is contained.

"Where do we go from here?

I want the whole world to show

Where do we go"

Have risk, build MIS

Exchange risk is potential loss or gain due  to change in currency rates. In other words, it's is the effect of unanticipated currency movements on  cash flows, assets, liabilities and on the overall business of the firm.  Risk is risk because it is unanticipated.  Let's take an example from recent times - fall and rise of Indian Rupee.  Companies with Dollar liabilities were sitting pretty as rupee remained stable to strong for some time.  When the local currency started its downward spiral, there was panic and mayhem; and lo, rupee is recovering and we still wonder what has changed fundamentally . Nonetheless, rupee's move has left companies scampering for cover!

Markets are (and will continue to be) what they are.  They move and up and down, taking anyone caught in its way, along.  The question is, should firms actively manage their risk? Lack of understanding of  risk management tools, ability to measure exposure and risk, perceived high transaction costs for hedging and such kept corporates from undertaking hedging.  Then came a slew of banks "educating" customers in derivatives and the rest is history! Once bitten firms shied further away from markets and risk management.  However markets keep challenging the "do nothing" strategy of firms and (sooner or later) they are left with no choice but to prioritize market risk management.  

Indian companies (irrespective of size) are increasingly open to spend time and effort to manage market risk; this is certainly good news.  

In my experience of working with corporates, one common lacuna to effective risk management is lack of timely  exposure recognition.   The first step to manage market risk (or any risk) is to acknowledge (timely) that such exposure/s and risk/s exist/s.  Do I mean MIS (Management Information System)? Does it sound mundane and obvious?  Do they all have information system in place?  Of course they do! Does it reflect business like it is? We all know the answer.  A CEO tells me that their firm has an annual export  turnover of USD 200 million; I call for an exposure summary and it gives me totally different and understated picture.  Sounds familiar? How does one plan and take decisions, when basic data is incomplete / inadequate? 

What is a complete MIS, you ask?  Let's take an example of a report used by your treasury team to manage market risks.  Is it up-to-date? (has export sale concluded this morning flown in? has the delayed shipment detail been amended?),  Is it detailed? (Does it contain exchange rate at the time of exposure origination, payment terms, expected date of inflow, etc?), is it comprehensive (does it cover bulk orders and shipment schedule of your regular buyers?),   can it be queried for monthly nett (of exports/imports and PCFC) exposures? In short, with a click of a button, could you get a complete picture of your exposure - gross/nett, hedged / open, budget vs mark to market? See what I'm saying?

Want to manage your market risk, start with sound MIS! 

Kolaveri

Is rupee on Kolaveri or is it foreign investors?  Whatever be the case, rupee is in great shape compared to three weeks ago. Thus far in 2012, we have reasons to cheer which also explains quick recovery of rupee.  

Foreign investors have poured in close to $2.0 billion since the start of the year (most of it into debt markets) - sensex has been on a winning spree and benchmark bond yield is close to 5 months low.  At 8.20% it still is an attractive sovereign investment.  Yesterday Moody's upgraded India's short term foreign currency rating to "investment" from speculative, boosting FII's confidence in India further.  Also, NRI deposits have picked up and been quietly flowing in, after interest rate deregulation.

For the first time in six years, India's food price index went into negative leading to hopes that the headline inflation for December would be much lower than 9% (above which it has been hovering for more than a year now).  RBI is now poised to focus on growth from having focused on curtailing inflation for very long.  Don't cheer yet.  Interest rates are not going down in a hurry.  Repo / reverse repo cuts are not expected before Q2 2012 and  as of yesterday, RBI has dampened hopes of an immediate CRR cut; RBI policy review is slated for later this month.  While we all agree interest rate cut is the need of the hour, let's pray and hope inflation continues to move in the right direction (what with fears of seasonality factor looming large)! 

100% FDI in single brand retail is finally a reality.  FDI in domestic airline (26%) is also likely to be cleared. More reasons to cheer.  With all that and the easy money stance that the RBI is likely to adopt, 7 - 7.5% growth seems like a breeze.  

However (and there goes) big questions (and answers) remain - Union Budget, fiscal deficit  and undoing policy logjam to clear projects so that the investment cycle restarts.  It's disheartening that new investment proposal for 2011 was almost half of what it was in 2010.  There has to be some action and immediate - to address macro economic issues.

We can do with some Kolaveri ( read murderous rage to kill inaction) from the Government!

What is in store, 2012?

The year gone by was wild, crazy and full of surprises. Here's my prediction (read wish list) for 2012.

• Badly bruised Indian equity market looks poised to heel this year.   We are off to a good start,  but I am not suggesting that it would be a one way street; far from it.  However with RBI now ready to focus on growth, easy money policy will help corporate India and the sentiment will change for better.  Also investors are sitting on cash and some already bottom picking. 
• Expect rupee to end the year stronger. While the volatility is likely to continue and more downside in store, the improvement in overall sentiment (if ) should prop rupee.  Several measures (proposed and approved) including the latest to allow foreign individual and pension funds to invest directly in equity markets, encouraging trend of FDI, growth focus of RBI and hopefully a better year for policy decision(s) than the one gone by - should help our local currency gain part of its losses
• EU will stay in tact and slowly limp out of crisis, with as much drama as we have seen recently though.  Euro weakness looks inevitable but magnitude may not be alarming (or may be disappointing, depending on which side of the table one is)
• US would continue its modest growth  and Dollar would retain it's safe haven status for most of part of 2012.  Europe's travails will keep investors glued to USD; however Fed's continued easy monetary policy would underplay dollar strength
• US dollar being replaced by China? - not this year, not even this decade.  Japan and China (second and third largest economies) have entered into a pact to promote to trade / exchange their currencies without using dollar as the intervention currency.  Good starting point, but a long way to go!
• Gold will continue to do well; stay invested

Stay focused and nimble. Wishing you all a successful 2012!