India has some leeway to get reforms back on track with its long-term growth prospects firm, Tom Byrne, a senior vice president of rating agency Moody's Investors Service, said on Wednesday."There is no imminent funding crisis because of policy slippages," Byrne told reporters at the Asian Development Bank's annual meeting in Manila, explaining the rating agency's stable outlook for India.Standard & Poor's last week cut India's outlook to negative from stable, citing its large fiscal deficit and expectations of only modest progress on reforms given political constraints, battering stocks, bonds and the rupee. (Reuters)
Read More
The Reserve Bank of India is expected to cut interest rates for the first time in three years on Tuesday, but investors will be pleased only if there is an accompanying cut in banks' reserve requirements and a dialing-down of policymakers' hawkish tone.In a Reuters poll this week, 17 of 20 analysts forecast a 25 basis point cut in the policy repo rate next week, which would bring it to 8.25 percent. A minority expected a cut in the cash reserve ratio (CRR)."The disappointment would be huge (if there is no policy rate cut)," said Abheek Barua, chief economist at HDFC Bank in New Delhi.However, economists have scaled back expectations for rate cuts in India for the rest of the year following last month's release of the federal budget, which did little to allay worries about the government's ability to cut its current account and fiscal deficits.At its mid-quarter review a day before the budget, the Reserve Bank of India left rates on hold and surprised with hawkish comments, disappointing investors who had hoped it would finally begin cutting rates to boost sagging growth.Morgan Stanley this week rolled back its rate cut forecast and now expects the RBI to leave rates on hold on Tuesday, citing a wide current account deficit, a loan to deposit ratio at an all-time high of 78.1 percent and stubbornly high inflation.Instead, it expects the RBI to cut CRR once again to address a persistent shortfall in banking system liquidity, which would also help reduce borrowing costs. The RBI has cut CRR by a total of 125 bps since January, effectively pumping 800 billion rupees into the system.Still, bond yields remain high amid a flurry of borrowing by the deficit-strapped government and tight cash conditions. The benchmark 10-year bond hit a three-month peak of 8.63 percent in late March, easing to 8.55 percent on Wednesday.Morgan Stanley economist Chetan Ahya wrote that five years of expansionary fiscal policy has been accompanied by a decline in private investment as a percentage of GDP."We see aggregate demand pressures from the less productive government spending keeping upside risks to inflation alive," he wrote.Wholesale price index (WPI) inflation edged up for the first time in five months in February to 6.95 percent. March WPI data will be released on Monday and is forecast at 6.70 percent, according to a Reuters poll.Reviving GrowthWith New Delhi unable to rein in a fiscal deficit that ballooned to 5.9 per cent of GDP in the year that ended in March, from its target of 4.6 per cent, RBI Chairman Duvvuri Subbarao was left with the grim task of managing inflation And tightening monetary policy long after other countries had begun to ease rates in the face of slowing growth.Those high interest rates, combined with sullen corporate sentiment resulting from a lack of pro-growth reforms and a slowdown in project approvals, have battered growth and hit capital spending.India's economy grew just 6.1 per cent in the December quarter, its slowest in nearly three years.Fixed capital formation contracted by 4 per cent in the September quarter and 1.2 per cent in the December quarter, the first consecutive declines since the government began tracking it by quarter in 1996, Credit Suisse said in a report this week.Adding to evidence that the economy is losing momentum, industrial output grew a much-slower-than-expected 4.1 per cent year-on-year in February, figures released on Thursday showed, though the data series is notoriously volatile.Credit Suisse economist Robert Prior-Wandesforde said it is now up the RBI to stimulate growth, and expects a total of 175 basis points of rate cuts by March 2013, a position that makes him an outlier, with most economists expecting more modest cuts."RBI rate cuts are the only credible trigger for improved investment," Prior-Wandesforde said by phone from Singapore."They can't just carry on waiting for the government to do the right thing," he said.The RBI's priority, however, remains fighting inflation, where the outlook is hazy.While inflation is far off its double-digit peaks, India remains exposed to spikes in global commodity prices, especially oil, and shortfalls in domestic food production, none of which the RBI can control.New Delhi has been unwilling to fully pass along the rise in global crude prices to consumers, despite its long-stated intention to free up diesel prices. India will have to reckon with those pent-up inflationary pressures if oil prices continue to rise and the government can no longer bear the subsidy burden."Between the March policy and now, nothing much has changed apart from the only positives that oil prices are stable around $120 and metal prices have not risen," Manish Wadhawan, managing director and head of interest rates at HSBC India."If RBI delivers both rate and CRR cuts, it could have some positive impact and the 10-year bond can fall to 8.35 percent. But the momentum is unlikely to be sustained," due to heavy government borrowing, he said.(Reuters)
Read More
Facebook is organizing a party and is going to sell tickets to all of us. It is a party that we have been waiting to be invited to for a long time, but until now, it was restricted only to the company's founders, key employees and some fortunate investors who had been buying its restricted stocks. We still do not know how much of the company will be sold, nor what the price per share will be. We do not know how markets will behave in the next months, since a depressed market could jeopardize the success of the IPO. But we do know that Zuckerberg and his team are selling us tickets worth about $5bn. But, isn't the fact that we are invited a clear sign that the party is not as fun as we thought it was? Two details make us wonder. Firstly, we know that the objective of Facebook's IPO is not to raise funds to finance investments or repay debts. The firm is trying to create a liquid market for its employees, who are until now in possession of a very valuable asset which they cannot easily sell. Moreover, Facebook intends—after covering the tax liabilities arising from the conversion of stock options by Zuckerberg and colleagues—to keep most of the proceeds from the IPO in cash. That is, the worst possible use for money (putting it in a box). In the current economic environment where central banks print money only for it to freeze on bank balance sheets and where governments and international organizations are trying to make money move, here comes Facebook to sell us the possibility of storing our cash for good. Secondly, creating a public market for inside shares may seem like a reasonable pursuit. Yet, there is a catch. Facebook has two share classes, A and B. Only A shares will be sold, but B shares are entitled to ten votes while A shares are entitled to one. After the IPO there will be about 117 million class-A shares, and 1,759 million class-B shares. Therefore, Facebook is selling a maximum of 6.2 per cent of the cash flow rights, and 0.66 per cent of the voting rights! We are sold admission to the party, but we cannot choose our own drinks. Will the world be a better place after Facebook goes public? We surely hope so. However, the question should be: Whose world will be better? Well, certainly that of Zuckerberg and his associates, who will cash in their well-deserved millions of dollars. This is the reward for innovation, value creation, courage and hard work. And there are the non-executive shareholders (mostly hedge funds) who have bought restricted Facebook stock in the pre-IPO market. Unfortunately that stock was only available for a few "sophisticated" investors: under SEC rules, only sophisticated investors (read: already wealthy) can purchase restricted stock (so probably, you did not get much of that action). Finally, we have the investment banks. The IPO is underwritten by Morgan Stanley, JP Morgan and Goldman Sachs. If they follow the usual practice of charging 7 per cent of the IPO proceeds as a commission, they will share a $350 million prize for perhaps one year of work. Not bad. The underwriters have also reserved the possibility of an "over allotment option." This means that, if there are too many people willing to buy a ticket to the party, they will just print out more tickets (and get the 7 per cent commission of course). The typical over allotment option gives the underwriter the possibility to increase the number of shares by 15 per cent (that is, $52.5 million in additional compensation to the banks). Of course the party goes on only to the extent that we, the potential shareholders, are willing to participate. But should we participate in the IPO? Consider a lucky employee at Morgan Stanley trying to sell Facebook shares to her clients. How would she organize her selling strategy? She would probably start from her most prized customers, those whose acceptance would mean a high dollar amount for the IPO. If Plan A does not work, she will tap her next best customers, wealthy people who are potentially willing to put up a considerable amount of money. Finally, she will go down her list of clients starting from the third best and finishing up with … you and me. When normal investors get the call, should we be happy? Not really. Chances are that there were reasons why the super rich passed on this "spectacular" opportunity: maybe it was not so spectacular after all! Could this be why we were asked to join? Think for a second: if it were such a great party full of celebrities and superstars, why would they be inviting us? This is not to say that the Facebook party is all together bad. But if we get an invitation, chances are that it won't be as much fun as we thought it would be. As Groucho Marx said, "I don't care to belong to any club that will have me as a member." This party is not for us.(Professor Arturo Bris and Salvatore Cantale are professors of finance at IMD and teach on the Advanced Strategic Management and Building on Talent programs)
Read More
Shares in private power producers rose more than 2 per cent in a subdued market on Wednesday on media reports the government has issued a directive to state-backed Coal India to sign deals committing to meet 80 per cent of the coal requirement of the utilities.Average domestic coal prices are 1,600-1,700 rupees per tonne and are anywhere between 40-70 per cent below international spot prices as they are capped by the government which is keen to provide cheap electricity.Last checked, shares in Adani Power, Tata Power and JSW Energy were up between 2.3 and 3.2 per cent, while the main Mumbai index was down 0.6 per cent.(Reuters)
Read More
High inflation and ballooning fiscal deficit has been the concern for Chaitanya Pande, head of fixed income at ICICI Prudential Asset Management Company, who feels the government in the coming weeks before the Reserve Bank of India's (RBI's) monetary policy will bite the bullet and increase fuel prices. He sees RBI's decision will follow government decision and therefore RBI will cut rates (repo rates) by 25 basis points (bps) on 17 April 2012 and in total 75 bps by the end of the year. Talking to Businessworld, he feels the only way government can achieve its targets (fiscal deficit) would be to bring down the subsidies and pass the burden in form of hikes to the consumers, otherwise it becomes difficult for the government to manage its finances. The fixed income manager sees the 10-year government securities (G-Sec) yields to be volatile for the next 3-6 months because the supply is significantly larger than the market has seen. In the absence of policy measures, he expects 10 year G-Sec to rise to 8.75 per cent, while policy measures that will trigger fiscal consolidation have the potential to bring the G-Sec down to 8.00-8.25 per cent.Talking about investment in fixed income, he feels anytime is a good time to invest, but retail investors should come through mutual funds as the fixed income market unlike equity market is a big boys' market. Though short in supply, he currently prefers investing in 1-3 years corporate bonds. He also suggests that investors should park their money in 3-year fixed maturity plans (FMP) and regular saving plans. Meanwhile, his own investments is skewed towards debt which is around 60-65 per cent of his portfolio, followed by equity which is around 30-35 per cent and the rest 5 per cent in gold. However, he is waiting for a correction in gold to increase his exposure to the yellow metal to 10 per cent.Excerpts from the conversation:Despite rate cuts why is the market still struggling for liquidity? What is your assessment of the Indian economy? The tightness in liquidity in the short term is due to the fact that the expected government spending is yet to happen. The government surplus of around Rs 1,20,000 crore is currently with the RBI and is expected to be spent over the coming week. Additionally there are some maturities expected in the first half of the week. With the combination of expected government spending and maturities on the anvil, we expect the liquidity scenario over the next week to be easy and also possibly +/- 1 % within RBI's band over the next month.We therefore expect liquidity in the first quarter of FY13 to be relatively easier since there are a lot of maturities coming up and also RBI is expected to begin its rate cut cycle. The second quarter will show some strain since RBI is unlikely to do too many open market operations (OMOs) in the first 2 quarters of FY13.Do you expect RBI to cut rate cut in the forthcoming monetary policy on 17 April 2012 and why? If yes, then by how much? If no then when do you think RBI will start cutting rates?RBI has a stated objective in moderating growth and fiscal consolidation to initiate rate action. Also there is usually a 6-12 month time lag between RBI's rate cuts and its effects filtering to the economy. Hence even if he cuts rates now, it will start reflecting in the economy only in the second half of the year. We expect RBI to cut rates in April policy by around 25 bps, albeit only if the government is able to pass through the oil price hikes. In case the government is not able to pass through oil price hikes, the viability of fiscal consolidation gets called into question and cuts might get pushed out till further clarity is achieved.What is your take on the 10-year G-Sec yields and why?The 10-year government securities (G-Sec) yields will definitely be volatile for the next 3-6 months because the supply is significantly larger than the market has seen. There is to some extent supply fatigue in the market. At the same time there are some potential positives. If the government were to actually bite the bullet and pass on the oil price hikes, we expect the RBI to initiate a more sustained cutting cycle. Hence it is a combination of push and pull factors i.e. pull by the weight of the supply and push by fiscal/monetary policy action either by the government or RBI that will drive G Sec yields. In the absence of policy measures we expect 10-year G-Secs to trade in the range of 8.50 – 8.75 per cent. On the other hand, policy measures that will trigger fiscal consolidation have the potential to bring it down to around the 8.00 - 8.25 per cent.As a fund manager how are you managing the money in your portfolio and where are you investing in this market? In current market condition where will you advice investors to invest?All our investment decisions are aligned to the mandate of the fund. Hence in the short term funds we buy predominantly short-term papers. In the longer duration, funds we are adding duration, albeit cautiously, given the current uncertainty on policy actions and the viability of fiscal deficit target.Meanwhile, we have always held the view that there is no one-solution-fits-all for investors and deciding on funds to be invested in would depend on investment horizon and risk appetite of the investors. We therefore believe that short-term funds are best suited for moderate risk appetite investors in the mid maturity bucket. For investors with a lesser investment horizon, we recommend investments in Ultra Short Term Plan. Duration funds are likely to well as we go into the first quarter of next year, albeit expected volatility caused by oil prices and fiscal/monetary policy action or the lack thereof.We believe that at the moment, short-term strategies may not be best suited given that it is too binary and the outcome can go either ways. It is therefore ideal to look at the 1 – 3 year space.What is your take on the 1 year, 2 years, 3 years, 5 years and 10-years yields in corporate bonds? Will you be a buyer in corporate bonds and what would be the tenure?We believe that all the above stated tenures offer attractive yields/. However the 5 – 10 year because of supply and volatility in the underlying sovereign bonds will be likely to remain under pressure. The one to 3 year is therefore our preferred space in the current environment.Where are you personally investing your own money? And why?I strongly believe is asset allocation being the guiding principle for investments. I have allocation to asset classes like debt, equity, real-estate and gold as well. Within the fixed income space a significant part of my investments are in the short-term plan.How has the flows been to fixed income funds and if they have been positive into which funds have you seen maximum traction?We have seen significant flows into our FMP's as is the trend in the January to March period. Also market yields were attractive and therefore have got investors to invest significantly. We have also seen inflows into our short term and regular savings plans as investors looked for an open ended fund in the short to medium space.
Read More
Looking to expand product offerings beyond home markets, five of the world's leading emerging market indices, have started to cross-list derivative indices from Friday. Brazil's IBOVESPA futures; Russia's MICEX Index futures; Hong Kong's Hang Seng Index futures; and South Africa's FTSE/JSE Top40 futures got listed on the BSE on Friday.Part of the common linkage platform, the cross-listing however, could run into the same chicken-and-egg problem that has derailed similar efforts like liquidity.The idea to give investors in one country exposure to another hot market in their local currency carries appeal, on paper at least.However, investors won't buy into a financial product unless they are confident of liquidity, and that liquidity will not come unless investors buy in."Not many (investors) track other markets. Liquidity would remain a problem for these instruments on a perennial basis," said Ambareesh Baliga, chief operating officer of brokerage Way2Wealth.Indian investors have seen this particular problem first hand.An exchange traded fund (ETF) tracking the Hang Seng index, now called the Goldman Sachs Hang Seng Exchange Traded Scheme, was launched in early 2010 as a way for Indian investors to track a market that had surged 52 per cent the previous year.There has been one problem: The ETF had daily average volumes of Rs 300,000 this year as of Wednesday, according to Reuters calculations based on the daily data posted in the National Stock Exchange.That's just about the cost of a Nano car from Tata Motors in some cities in India, despite a 13.3 per cent gain in the Hang Seng in the same period, slightly higher than global indexes such as the S&P 500.ETFs listed in Hong Kong have run into similar problems. Late last year, Lyxor International Asset Management, a unit of Societe Generale, delisted a number of products tracking global indexes, citing trading volume as one of the factors.Solving the problem of liquidity would be key for the success of such investment vehicles, investors said, especially as exchanges plan to introduce products beyond index futures.Price-Bands For Cross-Linked IndexPrice bands for the benchmark equity index derivatives will be same as that applicable for the existing stock index futures contracts, BSE said. It added that the derivatives contracts on these foreign stock indices shall also be denominated, traded and settled in Indian Rupees.BSE further noted that exchange transaction charges for trades done by trading members on these futures contracts shall be waived off for a period of 6 months from commencement (till 30 September 2012).The cross-listing of benchmark equity index derivatives is likely to facilitate liquidity growth in the BRICS markets and will considerably strengthen their international position.The founding members of the BRICS Exchanges Alliance include BM&FBOVESPA from Brazil, Open Joint Stock Company MICEX-RTS from Russia, BSE Ltd from India, Hong Kong Exchanges and Clearing Ltd (HKEx) as the initial China representative, and JSE Ltd from South Africa.The alliance was formed on 12 October 2011, at a World Federation of Exchanges' conference in Johannesburg, South Africa.The listing of benchmark equity index derivatives marks the implementation of the first phase of the alliance.Under the second phase, the member exchanges plan to work together to develop new equity index related products representing the BRICS economies and cash market product offerings. The third phase may include product development and cooperation in additional asset classes and services.Interest in the BRICS economies is prompted by above- average growth predicted for these regions as well as the rising consumer power generated by growing middle class in each nation.(With Agencies)
Read More
Dealing with inflation in India is important to "recreate" high growth, Subir Gokarn, a deputy governor at the Reserve Bank of India, said on Friday.The country's economic growth slowed to 6.1 per cent in the three months to December, the weakest annual pace in almost three years.The wholesale price index, India's main gauge of inflation, rose a faster-than-expected 6.95 per cent from a year earlier in February, after a spike in vegetable prices fanned food inflation.(Reuters)
Read More
No bad news is good news for Waqar Naqvi, chief executive officer at Taurus Mutual Fund who feels the finance minister has done a fine balancing act by combining reality with attempted growth of 7.6 per cent. Though he isn't much impressed by the projected numbers, he feels at least it will put the Indian economy back on track. Speaking to Businessworld, Naqvi said the market may bounce back after a brief correction as its still a stock-pickers market and will be a buyer in this market and would deploy cash as valuation have become more attractive.Meanwhile, with Friday's budget increasing pressure on inflation he doesn't see the Reserve Bank of India (RBI) cutting rates in a hurry and therefore feels this could be an appropriate time for investors to build a good portfolio mix of equity and debt such that when RBI starts reducing the rates investors can expect a high double digit return from long term or dynamic income funds.Excerpts from the conversation:What has been your take on the budget? What impact will it have on the overall financial market including equity, debt, real estate and commodities?As was expected, given the fragile state of politics the government did not come up with bold measures like allowing foreign direct investment (FDI) or reducing subsidy, yet not increasing the subsidy or not incurring a higher public expenditure is a positive. While FY13 fiscal deficit is projected at 5.1 per cent looks realistic as of now. The Rs 15,888-crore kept aside for further capitalising public sector banks will give a boost to corporate lending. The finance minister has done a fine balancing act by combining reality with attempted growth. The 7.6 per cent GDP growth, though not earth shattering will still put back the momentum into growth if achieved. The Rajiv Gandhi Equity Scheme is a good way to inculcate the culture of retail equity investing which help the markets increase depth and help corporates. The equity markets otherwise may be impacted for a few days or weeks because of the budget and may react with a few hundred points downwards movement but should pick up in due course. Debt will not be impacted because of the budget nor do we see real estate getting impacted. The fundamentals of the global economy and the Indian economy will change slowly and we do not see real estate rising after the budget. While for commodities, different commodities may react differently given the announcement in the budget, but these will be short-term movements. The major drivers in the long-term for commodities will remain unchanged.Do you think the market can maintain this momentum even if liquidity drives and why? Will you be a buyer in this market and why?The fundamentals have not changed dramatically and will change slowly. The budget did not have any bad news which is good news. If the government can come up with convincing steps to reduce the fiscal deficit and increase growth in the GDP, the optimism will start taking shape to sustain the markets, else the markets will remain rangebound or dependent on liquidity. This is a stock pickers market and there are stocks available at attractive valuation. We have been buyer at all times and we continuously look for ideas in the market and will deploy cash as we feel valuation have become more attractive.Despite a rate cut of 75 bps, the market is still struggling for liquidity. What is your take on the RBI policy and your assessment of the Indian economy?India is suffering from a structural inflation which is visible in the fact that the manufacturing sector inflation is almost at 7 per cent. We do not see the RBI cutting rates in a hurry and rates may remain high for some months. If at all a 25 basis points (bps) reduction is brought in by RBI, it may be more to appease the sentiment rather than anything else. Given the fact that the global economy is still not out of the woods, the RBI is doing a good job. The banks do not seem to be keen on increasing lending to the corporate sector thereby showing a cautious approach. Overall the Indian economy remains on a sound footing. If the infrastructure can be improved thereby helping GDP grow faster and if we can get the fiscal deficit down it will bolster the Indian economy much more.What are your concerns for the Indian equity market?A high level of inflation with low growth rate is a big concern. Elevated level of crude also remains a concern. We would also like to watch the government's action to allay fears of down of policy. Equally important is the revival of capital formation in the economy and getting the capex cycle invigorated. We would also keep an eye on the Euro crisis at regular intervals and the impact it can have on the Indian markets.Do you think a time bomb is ticking in the global financial market with central banks across the globe pumping money in their respective economy? What is your view on the overall financial market? Do you think crisis in Europe as well as US behind us and why?We continue to see a synchronized effort from global regulators and monetary authorities to contain the fall out of the 2008 financial crisis. Global liquidity is positive for the emerging markets in the short term and we believe the regulator in India will be in a position to control the excess and unwarranted liquidity if that comes to Indian shores at a level which is considered toxic. US economy has shown sustained recovery since the past 3 to 4 months. Europe seems to be in a bigger mess and we need to be watchful about the developments there. The concerns on the ability of some of the countries in the Euro-zone to meet their bond redemptions may hover for most of the months in the year.In the current market condition where will you advise investors to invest? Currently where are you investing your own money? And why? (Can be real estate, commodities, gold or equity or debt)Equities as a class can never be ignored especially if you are in an emerging market or in a economy which is riled by high inflation since equities are known to give better returns as compared to other asset classes over long periods of time. Investors should divide their money currently between equity and debt (debt since interest rates are higher and as and when RBI starts reducing the rates investors can expect a high double digit return from long term or dynamic income funds). On the other hand, real estate given its illiquidity has to be a long-term investment. Apart from these three classes, investors should have a small allocation to gold which they should increase for the short term in case the geopolitical tensions in the Middle-East seem to rise or if they see a weakening of the US dollar.I am following the same strategy as I have suggested above all my equity investments are in mutual funds since it is a convenient, transparent and low cost vehicle.In your view what will be the next trigger for the Indian equity market? And why? And when do you see it coming such that we break the 18K levels?Concrete steps by the government to ensure GDP growth and reduction of fiscal deficit can drive the market upwards. If government goes for policy intervention to revive and kick start the stalled reforms and displays an intention and is willing to bring back the growth to what is projected or higher, the market will rally to break the 18,000 barrier other than this, the trigger can be the beginning of serious rate cuts by RBI. Apart from these the global liquidity coming to India in bigger waves may also drive the market beyond 18000, but this is the least predictable.
Read More
