Forex trading desks seem to have smelt a change of fortune for the rupee. At the start of trades on Thursday, the rupee dipped to 56.40 levels. The Reserve Bank of India (RBI) stepped in and sold dollars. Rumours were that the central bank would supply dollars to four big state-run banks to meet the demands of oil companies — a move which would ease pressure on the rupee. It saw the rupee gain to 55.70, but it proved shortlived. Within minutes, word got out that no such plan was on the cards. And the rupee again fell to 56.20. Dealers believe that with the month-end demand for dollars from oil companies satiated, the rupee would be range-bound at 56.20-40 levels. Thursday's fall was also triggered by poor fourth quarter GDP numbers. With both month-end dollar demand and bad numbers out of the way, the sense is sometime in mid-June the RBI will announce a slew of measures on the forex front in its policy review.Strictly BusinessIceland's banking defaults had hurled it into a recession that continued till mid-2010. Now, its economy is estimated to grow 3 per cent in 2012. In contrast, the collective euro zone economy is said to contract 0.3 per cent.(This story was published in Businessworld Issue Dated 11-06-2012)
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Two years ago, Vilas Yelmar took out a 200,000 rupee bank loan to develop a small grape orchard in a dusty hamlet southeast of Mumbai. The bank has repeatedly asked for the loan to be repaid, but Yelmar, whose annual income has risen to 2 million rupees, has spent the money on a new sport utility vehicle and a lavish family wedding.He is one of an increasing number of 'wilful' defaulters in Asia's third-largest economy, where banks are under government pressure to lend to farmers. Two-thirds of the population depend on agriculture for their livelihood and, to boost productivity - annual agricultural growth is just 3 per cent - India has this year raised the farm lending target for banks by a fifth to more than $100 billion."My brother was the village head so it had to be a big wedding. That's where the money went," said Yelmar, speaking the local Marathi language, and proudly showing off his new SUV which he uses to ferry barrels of diesel and fertilisers."Paying off the bank loan is not really my priority," said the 39-year-old, who lives in a simple, yet spacious, house next to his 4-acre orchard near the main irrigation channel.Banks and government officials do not have data on just how many subprime farmers are abusing the cheap loan system, but they are giving banks a multi-billion-dollar headache.MORAL HAZARDState Bank of India, which accounts for about a quarter of India's total loans, including the one to Yelmar, said about $1.4 billion, or 9 per cent of its farm loans, turned bad in the year to end-March. Bankers bemoan the rise in 'wilful' defaults among those taking agricultural loans - and using them to marry off their daughters, build extensions for their farmhouses, or become lenders themselves.Defaults also tend to increase when elections loom as farmers hope the government, desperate for their votes, will bail them out. The government bailed out farmers in 2008 with a $12.5 billion loan waiver, but a struggling economy and swollen fiscal deficit make another rescue unlikely."Agriculture loans are more retractable, depending on what type of whispers go around. If the whispers are about elections and debt waivers then interest payments drop," said SBI Chairman Pratip Chaudhuri, noting the rise in defaults is a big concern for the bank.Under the government's targets, banks have to go out of their way to lend to poor and marginal farmers who may not be able to repay the loans. If banks fail to meet the targets, the RBI locks up the shortfall for five years in a fund that returns just 4-5 per cent a year.Bad farm loans contributed nearly 44 per cent of new non-performing loans (NPLs) in fiscal year 2011, and have jumped 150 per cent in the past two years. In the year to March 2011, sour agriculture loans almost doubled to 3.5 per cent of total loans by s tate-run banks, which account for about 70 per cent of India's total loans and deposits."The pace at which agri-NPLs have increased has been worrisome," said Suresh Ganapathy, an analyst with Macquarie Research. "The willingness to repay has been affected by debt waivers ... and that has created a moral hazard."Yelmar, who said he doesn't want his children to have to resort to farming, got a heavy interest rate discount of 3 per cent on his SBI loan, thanks to government handouts, compared to the 14-15 per cent interest corporate borrowers are asked to pay. Some lenders even offer zero interest on farm loans.But, for the banks, getting any money back can be an issue."The cost of servicing an agriculture loan is very high. During every harvest, you need an army of people to go out there and collect dues from each farmer," said Michael Andrade, senior vice-president for agri-lending at HDFC Bank. "This increases your costs, and hurts profitability, bottom lines."BRANDED DEFAULTERSFor years, unpredictable rainfall decided the pace of farm loan defaults in India, where nearly half the arable land is rain-fed. A drought triggers an increase in defaults."You can't do anything if there's a drought. It erases the entire year's returns," says Babasaheb Mahadev Parekar, 29, a sugarcane farmer from Korti village, 10 km (6 miles) from Supali. Parekar's extended family of 16 children lives in a small house by a narrow canal that is used to water crops.Parekar is struggling to repay a 275,000 rupee loan that he and his brothers took out from SBI in mid-2009. With interest, the loan has swelled to 416,000 rupees. The Parekars wanted to use the money for land levelling, but the worst drought in nearly four decades wiped out their crops. The following year, a bumper cane yield could have helped them repay the loan, but Parekar's father had a heart attack, which ate into savings, and last year the family spent the rest on a wedding, leaving SBI waiting in vain to get its loan back."We desperately need more loans, but banks are not willing to give as we have defaulted," said Parekar who fell back on farming when he failed to find a job after graduating.Once branded as defaulters, other banks won't lend them money, so Parekar plans to borrow from money lenders to pay off the SBI loan and then apply for new farm loans.The head of farm loans at SBI's Pandharpur branch, which lent to both Parekar and Yelmar, said: "When it comes to repayment, farmers give the least importance to the bank. We need to constantly chase them.""It's not like they say they won't pay up. They keep postponing. They keep saying: we don't have money, when we do, we'll pay. So, all banks can do is wait," he added.NEED FOR REFORMThe pressure on banks to help farmers has been ratcheted up by an increase in suicides in recent years, as cash-strapped farmers turned to money lenders charging interest as high as 12 per cent a month. Bank lending to small farmers more than doubled over five years, but farm output growth averaged just 3 per cent over that period.To also protect farmers from unscrupulous money lenders, banks were told they could not attach farmland as collateral for loans, making them unsecured and a bigger risk. In most countries, farmland is used as collateral for such loans, though in the United States, the Farm Credit System and private lenders are increasingly accepting farm cashflow and assets such as $200,000 combine harvesters to set against loans.There is also no government incentive for banks to lend towards irrigation or newer techniques to boost productivity and prevent drought. Bankers complain that a large chunk of farm loans goes only to buy seeds or fertilizers, rather than on mechanisation. India is the world's second-biggest producer of rice, cotton, wheat and sugar, but its productivity is way below the world average.India's banks now want policy reforms and regulatory intervention to make the business of farm lending more viable."This is a policy issue," SBI's Chaudhuri said. "If there's an incentive for term loans, capital formation in agriculture would increase."Others say more needs to be done to boost infrastructure which, in turn, should help farmers become more productive."Flogging the banks alone is not going to work," said another senior SBI executive. "Government agencies have to become active - they need to provide roads, Internet and the infrastructure. How else do we reach the interiors?"In the meantime, with increased pressure on their assets and rising corporate defaults, banks are having to show some muscle to get their money back - setting up recovery camps and "boosting collections through persistence," said N. Seshadri, executive director at Bank of India.SBI has started naming and shaming wilful defaulters by putting their pictures in newspapers to get them to pay up.(Reuters)
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PVK Mohan may be underweight in financial sector stocks, but the last few days has seen him adding frontline banking stocks to his portfolio. In the same breath, he has trimmed his position in automobile stocks despite being overweight on the sector. The reason: valuation. "We are picking up stocks with strong balance sheet and secondly stocks which leaves some upside for us. Though sectors like IT, pharma and consumer are doing well, the stocks don't come cheap," says Mohan, Head, Equities at Principal Mutual Fund.Speaking to Businessworld, Mohan feels the Indian market is lacklustre because it lacks conviction and that is the reason why there is no participation. Though global crisis has been a cause of concern, he feels it is rather the policy paralysis in India that has restricted the upward movement in the market. Mohan is of the opinion that though all headline news in negative, Indian market will remain rangebound within a narrow band over the short-term and doesn't see it break the recent lows in the near-term as most of the negatives have got discounted in the price. However, a clear trend will emerge only in end June and starting July after the presidential election in India and a clear picture emerging on the monsoons.Meanwhile, in this unfriendly environment, he feels investors with one year view should stick to frontline companies as the risk-reward is favourable towards large-cap than mid-cap stocks.Excerpts from the conversation:Do you think it is a great time for investors to invest in equities? And why?It is a challenging time given the Euro-Zone crisis, slowdown in China and back home a slowing economy, sticky inflation and lack of policy push. However, valuations are not demanding and offer a good entry point for long term investors notwithstanding the near term volatility.With rupee at its all-time low, what is your view on the currency and its impact on the equity market, economy and inflation? What are your concerns for the Indian equity market?The rupee has been impacted by India's large deficits – fiscal and current account. It was expected to weaken but the sharp depreciation in such a short time has been a negative surprise. A weak rupee adds to inflationary pressure, especially on oil, as we import the bigger part of our requirements. The concerns for the Indian equity market are a slowing economy, sticky inflation and lack of policy push.What is dragging the market and what is your overall view on the equity market for the next three to six months?A challenging outlook for the global economy due to Euro crisis, slowdown in China, a slowing Indian economy with a large deficit and a political environment which has made policy making challenging. I see the market remaining rangebound in the near-term with the Sensex not breaking its recent lows as well as it's not going to see much upside until the global situation improves.Do you think the RBI should be interfering in the currency market? Do you see any rate cut happening in the near-term and by what per cent and why?We would expect the RBI to intervene in case of sharp volatility or significant movements in short periods of time. Given the stickiness of inflation and lack of steps to contain the large deficit, we believe there would be no rate cut in the near term. What is your view on the overall financial market? Do you think the crisis in Europe as well as the US is behind us and why?The overall financial markets are under a stressful phase due to the challenging global environment. The Euro-Zone crisis is far from over and we need to monitor the situation in the period ahead for further developments.What is your view on gold and crude oil?Given the challenging global environment, we would expect commodities to be under pressure. However, gold prices are also influenced by currency movements which are difficult to predict.In current market where will you advice investors to invest? (Any short-term strategy). Don't you think it's better to be sector and market-cap agnostic in this market or stick to the large-cap stocks. What's your view? In the current environment, we would recommend investors to take a long-term view of the market. A large-cap fund is suitable for investors, whereas looking for portfolio stability and steady returns, whereas investors looking for slightly higher returns and with a longer investment horizon — say beyond three years — could consider a mid-cap fund.At Principal Mutual Fund what has been your current strategy in investing in equities? How much of an inflow are you receiving in a day? Of which how much are you investing in equities? If you are investing in the equity market which are the sectors that you are purchasing stocks and which ones you are avoiding? We remain focused on identifying companies with good growth prospects over the next 2-3 years, available at attractive valuations. In the current environment, we are slightly more bottom-up in our approach given the macro challenges. Sectors that we are overweight include pharmaceuticals, auto & auto ancillaries and media. Sectors that we are underweight include metals, cement and energy.Where are you investing your money in this market?I continue to be invested in the market, largely through equity mutual funds.
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Convicted hedge fund founder Raj Rajaratnam wanted former Goldman Sachs director Rajat Gupta to ask Indian industrialist Mukesh Ambani if his company Reliance Industries was planning to "aggressively" get into the solar business, information federal prosecutors want to include as evidence in Gupta's ongoing insider trading trial.In court documents submitted on Monday, prosecutors said they want to offer as evidence an April 3, 2008, email from former McKinsey executive Anil Kumar to Gupta to demonstrate the "close" relationship between Gupta and Rajaratnam, particularly the "mutual trust" between them.In the April 2008 email, labelled "urgent", Kumar told Gupta that Rajaratnam wanted him to ask whether "Reliance Industries Limited would be getting into the solar business aggressively because, if so, there would be implications for supplier companies."According to the email, Kumar said, "When with Mukesh on portfolio question... 2 things to explore: A) Raj wants to know if they will get into the solar biz aggressively and when [there are implications for supplier companies etc]."The email was sent to Gupta around the time he was scheduled to meet Ambani.Ambani has not been accused of any wrongdoing in the case.Kumar has pleaded guilty to insider trading and is cooperating with prosecutors. He is scheduled to take the witness stand in Gupta's trial, which began on May 21."The proffered testimony of Kumar is relevant to demonstrate the nature of the relationship between Gupta and Rajaratnam, particularly the mutual trust between them and that their relationship was so close that Rajaratnam was willing to confide in Gupta, the former worldwide head of McKinsey, about his illicit activities with Kumar in violation of McKinsey policies and US tax laws," the prosecutors said.US District Judge Jed Rakoff, presiding over the case, has not yet decided whether to allow the email into evidence.The government alleges that Kumar received money from 2004 through 2006 in exchange for providing Rajaratnam with material, non-public information.Kumar received approximately $125,000 every 3 months in 2004 and 2005, as well as a bonus of one million dollars in late 2006 after providing Rajaratnam with material, nonpublic information.During a July 29, 2008 call between Gupta and Rajaratnam, the Sri Lankan founder of the Galleon hedge fund told Gupta that he was "giving him [referring to Kumar] a million dollars a year for doing literally nothing."In the July 29 call, Rajaratnam also cites the name of Ambani's younger brother industrialist Anil Ambani as he discusses with Gupta how a telecom fund can be set up.(PTI)
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Rupee was at day's low of 56.20 from 55.67/68 last close as traders continue to play on euro weakness, stock losses. Dealer with private bank says rupee may move toward life low of 56.40 in session, but unlikely to breach.The RBI has not been spotted in recent sessions, with traders saying the fall in rupee over past two sessions has been orderly, with exporter selling also seen. BSE Sensex was down 0.7 per cent.The rupee approached its record low against the dollar on Wednesday as oil importers ramped up demand for the greenback ahead of the end of the month, while global risk assets were hit by rising worries about Spain.Though global cues are providing a trigger, traders said the rupee was also being weighed down by deep concerns about India's fiscal and economic challenges, and doubts about slowing policy reforms.Traders were on alert about RBI intervention should the rupee test its record low of 56.40 to the dollar hit on Thursday.That fall was the culmination of seven consecutive daily all-time lows against the dollar, though the local currency had recovered since then to as high as 55.01 on Monday."USD/INR made a definite move-up once the last technical retracement level of 56.05 was breached. However, today's upmove is in line with the euro's fall and I don't expect the RBI to come in at these levels," said a senior trader with a private bank.At 10:27 a.m., the partially convertible rupee was at 56.09/11 per dollar, weaker than its 55.67/68 close on Tuesday.Traders cited strong dollar demand from oil importers looking to meet their commitments at the end of the month.Global risk aversion also weighed as the euro hit a two-year low on Wednesday, hurt by worries about Spain's soaring borrowing costs and expectations that more spending may be needed to support its ailing banks.India's move to allow foreign retail investors to buy up to $1 billion in local corporate bonds on Tuesday was seen as too mild to significantly bolster capital inflows and support the shaky rupee."The INR is unlikely to benefit from news that policy makers almost doubled the number of countries eligible for the QFI program and allowed foreign investors to open INR accounts onshore, as the steps will take time to be implemented," said Dariusz Kowalczyk, senior economist at Credit Agricole.He was referring to the qualified foreign investor programme under which the government will allow retail investors from overseas to buy corporate bonds.The RBI had been intervening frequently this month, in both forwards and spot markets, and adopted measures such as forcing exporters to convert half of their foreign currency holdings into rupees.However, the actions have failed to have much of an impact.(Reuters)
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Faced with realpolitik, on Thursday the UPA government took the face-saving decision of deferring the proposal to raise the limit on foreign direct investment in insurance firms, possibly until after the 2014 elections. The indefinite deferment of the proposal, which had been pending for years, dashed the hopes of foreign insurers to spread their wings in a promising emerging market.When the government's Chief Economic Adviser Kaushik Basu had acknowledged in a statement in Washington last month that economic reforms have slowed down and may remain that way till 2014, the year of general elections, it had sparked off a major political row in India (Courageous Adviser). Basu ultimately had to issue a clarification.Hemmed in by maverick allies and the fallout from a slew of corruption scandals, the Congress party-led central government has failed to carry out any meaningful structural reforms since it was re-elected in 2009. Thursday's move underlined the difficulty Prime Minister Manmohan Singh's beleaguered government faces driving reforms that are sorely needed to shore up weakening economic growth.Domestic and foreign insurers, which have invested billions of dollars in India over the last decade, have been lobbying the government for years to raise the FDI limit to 49 per cent from 26 per cent.Finance Minister Pranab Mukherjee on Friday said in a federal structure with multi-party democracy reforms are possible only with broad consensus after dialogues and discussions."While some stakeholders might be desirous of fast-paced reform process, reforms are possible only with broad-based agreement after dialogue and discussion," he said in the Lower House of the Parliament, the Lok Sabha."With a federal structure and vibrant multi-party democratic polity, reforms in India have been made possible through a process of dialogue and consensus with different stakeholders," he said.Perhaps, the government ought to take a leaf out of the Chinese experience (Sequencing Reforms ). For the first twenty years, China concentrated only on the export, agricultural and infrastructure. The reforms in retail, banking and other problematic areas were not touched. At the same time, huge expenditure by the Government on the social sector lifted some 500 million people from poverty. Only afterwards, it aimed at opening banking, insurance and retail sectors. It took twenty five years of sustained growth of 10 per cent to make such transition from one type of reforms to another. Blocked ReformsSeveral reform steps have been blocked by partners in Singh's coalition government, most notably the Trinamool Congress, which is now standing in the way of the insurance bill as well as a plan to allow foreign airlines to take stakes of up to 49 per cent in domestic carriers."There is no question of supporting the government on 49 per cent FDI limit in insurance sector," a Lok Sabha MP belonging to Trinamool said, declining to be named.As well as proposing a rise in the limit on FDI, the insurance amendment bill aims to strengthen regulation of the sector and allow foreign re-insurers to enter the Indian market."Our stand is clear: unless the FDI cap is kept at 26 per cent for the insurance sector, the government should not expect our support for the bill," former finance minister and opposition leader Yashwant Sinha told Reuters.A Congress party MP conceded that the proposal to increase the FDI limit for foreign insurers may now be shelved until after the elections due in two years.Finance Minister Pranab Mukherjee had promised to push through three critical finance-sector reforms, including the insurance bill and one on pensions, during the current or next session of parliament. Unless he can win over allies and opposition parties, however, they will remain on hold.A parliamentary standing committee headed by Sinha has asked the government to cap FDI in the pension sector at 26 per cent, confounding the government's plans to raise the limit in tandem with an opening up of the insurance sector.Insurance reform is widely seen as crucial because, according to Insurance Regulatory and Development Authority (IRDA) estimates, the sector needs a capital infusion of over $12 billion over the next five years.India has 24 life insurance companies and an equal number of general insurance companies that include subsidiaries of HDFC, Metlife and Aviva.A survey by Ernst & Young had come out with the fact that consumers prefer the brand of the service provider, customer service and convenience over price while buying general insurance productsA number of legislative measures or amendments are being taken up in this session of Parliament as part of financial sector reforms, he said.The Union Cabinet had approved on Thursday a Bill to regulate the micro finance industry and bring micro lenders under the purview of the Reserve Bank.This has paved way for introduction of Micro Financial Sector Development and Regulation Bill in Parliament.(With Agencies)
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In an interview with BW's Mahesh Nayak, IFC's South Asia's Ayaan Adam talks about why fund raising still continues to be difficult in India (and emerging markets), upcoming trends in the PE industry and where and why IFC is likely to invest money Why are private equity players in India finding it difficult to raise money? Aren't limited partners (LPs) confident in investing in Indian markets?Appetite for emerging markets private equity in general has been muted —although in 2011 it has shown a positive trend — with $26 billion raised, it is still lower than the peak of $40 billion in 2008.Fund raising for Indian PE in 2011 hasn't recovered to the $8 billion levels of 2008 either. "A lot of liquidity constrained LPs had reduced allocations to emerging markets PE. Within that allocation they have also favoured some of the larger markets and this is, in some part, also driven by the level of exits.IFC has run counter to this trend and as an LP has been happy to develop a deep PE investing program in India and South Asia focused on GPs who are small and/or new and focused on expansion capital largely in the SME sector. We have announced commitments to 7 strong funds in the past nine months and are looking to further develop our presence in the region in the coming year. Apart from the SME focus we have also made commitments to funds investing in the low income states and funds that address climate change issues.What trend do you see in the coming year for the overall private equity industry in India?Indian PE has evolved from a venture capital (VC) oriented market to a quasi-public model and latterly a more operationally focused environment. This shifts away from pure multiple expansion to a focus on earnings improvement is what we expect to see more of. India has a wealth of trained professionals who are functional experts. PE funds that combine this pool with the entrepreneurial energy of the Indian promoters are better able to foster earning growth and therefore control exit outcomes - irrespective of market volatility.Though IFC acts both as an LP as well as a general partner (GP), what has been the expectation of IFC as a LP? What are your expectations from GP when you invest in India dedicated funds?We look for three things. Firstly, does the fund have a team and investment strategy that is compelling and able to deliver strong returns? Our PE funds portfolio at the global level has a 10 year track record in excess of 20 percent at the net level.Secondly, we look for development impact of these PE funds in terms of increased access to finance, jobs created, impact on low income states, impact on climate change, promotion of South-South linkages.Thirdly, we try and ask what value does IFC bring as an LP? If having IFC as an anchor investor helps a GP mobilise more capital, improve governance standards and adopt Environmental and Social standards, then we feel there is a role for us to play in fostering such GPs in countries where we operate. Our investments are usually in first and second time funds and at the smaller end of the market.Why are we seeing desperate exit(s) in India?Indian PE — like a lot of emerging markets PE — is a young asset class. From a low base at the turn of the century, the size of the market (funds raised) grew very rapidly on the back of some very strong exits. The expectations based on that initial set of exits remains but the pool of capital is much bigger and the public market conditions are different. This pool of capital is, of course, not uniform and we see the ecosystem developing in a positive way with a greater number of full and partial exits from the small funds to the larger funds.Which are the markets that IFC would bet its money? And why?IFC is very active in lower income countries and in frontier markets. We see our role as a counter cyclical capital provider and our track record shows that we have generated top quartile returns globally precisely because of those attributes.
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The current account deficit is widening and a weak global investment climate coupled with policy paralysis in New Delhi, sticky inflation and slowing growth have increased the aversion of foreign investors to India, pushing the capital account into the red.Last week's move by rating agency Standard & Poor's to cut the country's credit rating outlook to "negative" has complicated matters further for the RBI, which has few options other than intervention and tinkering with rules on export credit to encourage inflows, RBI officials say."The main problem now is lack of confidence among investors and this is getting reinforced every time by either data or events like S&P cutting rating outlook," said a senior RBI official who is not authorised to speak on record to the media."When risk aversion is high, the success rate of intervention is low and that is why we are seeing rupee at such low levels despite intervention," he added.The rupee fell as much as 0.5 per cent immediately after S&P's move but has recovered much of that loss.Still, it is down nearly 6 per cent since February, recording most of the drop in March and April as foreign investment dried up. It had touched a record low of 54.30 to the dollar in December.India's balance of payments slipped into the red for the first time in three years in the December quarter as dollar inflows shrunk and imports soared.It could worsen given India's need to import 80 per cent of its oil, high crude prices, and unhappy foreign investors.Foreign investments into Indian stocks have swung into negative with an $545 million outflow in April from a robust $7.1 billion net inflow in February. Foreign direct investments fell to $2.2 billion in February from $5.7 billion in May 2011."Symbolic Significance"These are some of the concerns that UBS took into account when it said it expects the rupee to test 56 per dollar this year."If we are right that the exchange rate takes its cues more from the capital account side till better fundamentals emerge then regulatory risk must rise in importance," UBS wrote in the note."In this respect (the) negative outlook on India sovereign credit by S&P may not have much immediate impact, but has great symbolic significance."That leaves RBI in a bind. Selling dollars to defend the rupee without policy reforms provides only temporary respite and further reduces its reserves.India's foreign reserves fell to around $295 billion on April 20 from about $321 billion on September 2, after the RBI sold dollars to prop up the currency.The RBI is officially agnostic about the level of the currency but steps in to smooth volatility and took several administrative and market moves to defend it in late 2011.The RBI has sold $20.14 billion in the spot market from September to February besides intervening in the forwards.The country's foreign exchange cushion is dwindling. S&P figures India has reserves to cover about six months of current account payments, down from eight months in 2008 and 2009."We work only reactively when it comes to the currency. The proactive measures are to be taken by the government. Surely it will be a problem for us to control the currency if they (government) don't do so," said a second RBI official.However, if S&P's move forces New Delhi to get its act together, then funds could return quickly, given India's robust long-term growth prospects.New Delhi, embroiled in several corruption scandals, has put off foreign investors with recent plans to retroactively tax indirect investments and target tax havens. The Congress party-led government's bargaining power to push through key reforms like raising fuel prices and allowing foreign supermarket chains was further weakened after recent state election defeats."Economic activity is going on - we do not have lock-outs in factories. But government is not facilitating as it is too busy fire-fighting corruption, scams," said the third RBI official.(Reuters)
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Despite receiving a sustained flow of money into his insurance equity schemes, Lakshmikanth Reddy, executive vice president, investment, at ICICI Prudential Life Insurance, is cautious in his approach to equities and prefers to sit on the fence and wait for the opportune time to invest in the stock market. "Though it's a look to buy market, today the number of investable opportunities are few," says Reddy and will prefer to buy once the price corrects.Speaking to Businessworld, Reddy says it's a drag market and agrees that there isn't much appetite for equity following high valuation and unfavourable macro economic indicator. He, however, isn't much worried about what happens in the Europe and US as he feels the Indian market will eventually be driven by what happens to our growth, specifically corporate profit growth. Reddy is of the opinion that Indian market will move sideways within a narrow band over the short-term, as there are no significant catalysts to move it sharply in either direction.Though he agrees that given the environment, investors should avoid equities, but at the same time, says it will not be prudent to ignore this important asset class because of uncertainty in the short-term. He feels it is extremely difficult for retail investors to predict market movements and they should opt for systematic investments in equities over a long term, particularly given that equities have become attractive after performing poorly for almost five years now.Excerpts from the conversation:How do you view the impact of the S&P downgrade on the Indian economy and equity markets?What the rating agency has done is bring forth all prevailing issues into their opinion to make it current – as such there has not been anything new or unknown that the market has discovered. Equity markets have underperformed for the last two years, notwithstanding the growth in economy, essentially for the reasons highlighted by the rating agency. However, it might have an impact on policy makers and if indeed some positive actions come forth on fiscal consolidation etc that will be a good outcome.Despite a rate cut why is the market not reacting positively? What are your concerns for the Indian equity market?Yes, the market has not really reacted positively to the much expected reversal of rate cycle. The accompanying central bank's commentary indicated that the likelihood and extent of further cuts could be much more moderate than what the market would have liked. The concerns plaguing the market are a slowdown in economic growth, particularly weak capital spending by the private sector, and therefore anaemic corporate earnings growth and the need for lower interest rates. In addition, negative surprises on the policy front in several areas have also dampened investor risk appetite.What is dragging the market and what is your overall view on the equity market for the next three to six months?The market is struggling with near-term issue of slow economic growth with high interest rates on one hand, and the longer-term prospect of reverting back to higher growth on the other. We are of the opinion that the market is likely to move sideways within a narrow band over the short-term, as there are no significant catalysts to move it sharply in either direction. Inflation falling on a consistent basis, with a possible fall in oil price could be a catalyst to move the market higher. On the other hand, negative surprise to forecast 7 per cent growth rate in FY13 with inflation persisting at high levels can take the market lower.What is your view on the overall financial market? Do you think the crisis in Europe as well as US is behind us and why?Europe and US would influence our market through the impact of capital flows rather than in any fundamental manner significantly. The critical question is whether there is any systemic risk to the global financial markets which can adversely impact capital flows. It appears that given the recent interventions by policymakers, the likelihood of such a systemic event is very low. Our markets will eventually be driven by what happens to our growth, specifically corporate profit growth.In the current market conditions where will you advice investors to invest? (Any short-term strategy)While high interest rates and sideways movement of equity markets will naturally tempt investors to avoid equities, it will not be prudent to ignore this important asset class because of uncertainty in the short-term. Since it is extremely difficult for retail investors to predict market movements it will be arduous for them to forecast when equities will start performing. We recommend systematic investments in equities over a long term, particularly given that equities have become attractive after performing poorly for almost five years now.Were you surprised with RBI cutting 50 bps in the last monetary policy? And why? Despite rate cuts why is the market still struggling for liquidity?The RBI move was a surprising one, the reaction was not as absolutely positive as it may have been due to the accompanying hawkish commentary of the central bank stating that inflation is still a major concern and the extent of further rate cuts could be small. The liquidity deficit is on account of several factors including possible liquidity drain on account of the central bank's intervention in the currency markets and a weak deposit growth in the banking system relative to credit demand.What is your assessment of the Indian economy?We are optimistic about long-term prospects of the economy. The economy has had a phenomenal decade of 2000s where significant changes happened across several sectors which created numerous opportunities for investors. The growth rate had picked up from 4-5 per cent to 8-9 per cent, prior to the recent cooling off. We expect the future to be good with high single digit growth rate on an average. However, given natural vagaries of an economic cycle, the markets will see years of bullish trends accompanied by years of bearish markets and investors should learn to take it in their stride.At ICICI Prudential Life Insurance what has been your current strategy of investing in equities?We are a net inflow company and the quantum of flow varies. As a policy we always maintain a well diversified portfolio with exposure to major segments of the economy. We are currently somewhat cautiously positioned on some capital goods sectors where there is over-capacity, some commodity stocks which are exposed to the global capital expenditure cycle and certain highly valued domestic discretionary consumption stocks. We are largely sector or market cap agnostic – our investment decision is a combination of fundamentals and valuations. However because of the size of our portfolio, we invest in small cap companies more by exception.
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India's Infrastructure Development and Finance Co is in the early stages of raising $1 billion-$1.5 billion for a new fund to invest in infrastructure in the country, two sources with direct knowledge of the matter told Reuters.The funds will be raised for IDFC Project Equity, in which Citigroup and India Infrastructure Finance Co., a state-owned infrastructure finance firm, are key investors, the sources said.The company already has a project equity fund, which manages about $930 million in roads, ports, airports and power projects.The new fund, which is set to be launched in the second half of this year, will also invest in such projects, said the sources."We have invested nearly 80 per cent of our first fund and exited a couple of investments. Now, we are looking to launch the second fund," said one of the sources.An IDFC spokeswoman declined to comment.The previous fund drew investors from India, the United States, Canada, Europe, Japan and the Middle East, and the new fund will target investors in the same places, one of the sources said.The existing IDFC Project Equity fund is part of the $5 billion India Infrastructure Financing Initiative announced in early 2007 by IDFC, Citigroup, Blackstone Group and India Infrastructure Finance Company (IIFCL). The initiative was to have a $2 billion equity component and $3 billion debt portion.However, Blackstone later pulled out of the venture.Several private equity groups, including the 3i Group PLC and a fund jointly managed by India's State Bank of India and Australia's Macquarie Group, are on the road to raise India infrastructure funds worth a combined $4.5 billion, sources have said.Others raising India infrastructure funds include the private equity arms of no.2 Indian lender ICICI Bank and Kotak Mahindra Bank.Private equity investments in Indian infrastructure fell 60 percent to $183 million in 10 transactions during January-March quarter compared with $459 million in 16 transactions a year ago, according to industry tracker VCCircle.com, as policy concerns and slowing growth dampened sentiment.Poor infrastructure acts as a bottleneck to India's economic growth, which slowed to 6.1 per cent in the December last quarter, the weakest annual pace in almost three years.India wants the private sector to invest hundreds of billions of dollars in infrastructure over the next five years.But bureaucratic red tape, a lack of domestic long-term debt and battles between farmers and industry over land have hit construction and funding targets, hurting industrial growth.(Reuters)
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