SEBI & AMFI Turning A Nelson Eye...

 

 

Code of conduct looks like are resigned to lockers, if one goes by the latest trend in Mutual Fund advertising in India. There are  two glaring  examples where misleading advertisements are regularly placed in national and international publications to entice gullible investors.

 

A leading mutual funds is advertising that 100% of its Equity Mutual Fund has outperformed the benchmark for last 5 and 10 years. Once you read on, it mentions that AUM of Equity funds has beaten the benchmark. This is painting a misleading pictures. It is very simple. Suppose, there are five schemes, however AUM is not evenly distributed. For the simplicity sake, assume only one scheme has 99% of the equity AUM while rest four has 1%. As per the advertisement logic, there is an outperformance of 99% of the equity AUM, however, rest 4 funds have underperformed.  Investors have given funds to have outperformance in all funds. The correct score will be that only 1 out of 5 fund has outperformance.

 

Another leading mutual fund is much more blatantly furnishing older information to paint much better performance consistently in a leading international magazine as a pull out where as market value has gone down substantially in the period under question.  The Net Asset Value (NAV) is available on daily basis for the fund under consideration, then why fund house is misleading gullible investors.

 

Now a days, SEBI and AMFI is promoting investor education in a big way while the above mentioned examples clearly suggest what need to be  looked  to put a plug on sharp advertising practices.

 

 

South West Gujrat Travelogue : Inflation is all around

 

Last week, I was extensively travelling through South West Gujrat and the common thread running across the horizon was worries about ever increasing vicious circle of inflation. There were instances which shows clearly how much well entrenched this inflationary phenomenon is across the strata:

 

• As highlighted in earlier blogs that New Normal for pricing for India is multiple of INR 10.00 for whatever service/ goods used. Government has already pricing railway tickets in multiple of INR 5.00, which lends credence to this phenomenon and thereby on the hindsight proclaiming that we do not have coins/ currency notes below INR 5.00. This is playing havoc in the society. This New Normal practice is now well established and one can shudder to think its impact in the coming years.
• Vegetable prices which have reached all time high and firm and now rivaling with the fruit prices, looks like also standardized irrespective of the place of origin and sale. We have witnessed a weekly Sunday Farmer's market close to Reliance Oil Refinery (the world's largest) in Jamnagar. The prices were as good as any other metropolitan city of India barring few items which were cheaper. The buyers looks like working executive's of Reliance Oil Refinery as city is distant away. The puzzling question was how come fresh farm produces are selling at such a high price, which is produce locally?? I guess as farmer also consume other goods and services where they would be subjected to ever increasing spiral of prices for last so many years and thus it has made it clear to them how to price there produce in line with similar produce selling across the country.  One can check prices of Onion, Tomato and  Potato to find stark similarity in prices across the country. 
• A village having a cluster of no more than 100 homes near Sasan Gir, where a sweet shop was selling Indian sweet made of Milk. The price was INR 240.00/ kg. It was delicious yet intrigued to see such a high price. The vendor was aware of the price of same sweet in metropolitan city, where it would be selling at least double of what they are selling here. Top it all he knew logic of higher prices in metropolitan cities, Viz. high cost of rental, labor and raw material prices etc.

The point here is Rural / Semi Urban India is now catching up with Urban India in terms of prices and try to price goods and services at par with any other place. This is another source of Inflation. It is high time that our policymakers and economist should take note of the drivers of the persistent inflation to deliver sustainable growth at reasonable stable inflation.

 

 

India : A Nonfunctional Anarchy...

 

The only best thing in Indian economic and political environment is very low tolerance to deteriorating macro indicators like Inflation, external imbalances, fiscal deficit and so on for last two decades. However, off late these resolves are getting diluted to band -aid approach. Earlier government used to loose elections on the basis of high and volatile onion prices. Now, consumers are taking things in stride and unwilling to come out on street.

 

Gone are the days when spiraling food prices would attract government to act decisively against speculators and hoarders or to resort to import or open market sales. None of the such events are  visible now a days to control prices of the ever increasing food prices for last 5 years. Top it all, Government has even failed to acknowledge the severity of this issue and yet to launch any decisive program to improve sustainable increase in the productivity and supply chain.

 

The best thing happened in terms of to control inflation & inflationary expectations is that RBI has included CPI as an anchor point along with WPI to decide interest rates. This is a welcome sign so that savers will be getting, let us hope, real positive return going forward. So far we have been ignoring persistent high consumer inflation under the guise of lack of proper consumer price time series. Kudos to RBI, that they have recognized that it is high time to recognize general spiraling of prices and consequently raised policy rates twice.

 

India is also facing music on account of all time high Current Account Deficit (CAD). High CAD was persisting for very long period of time, however, we chose to ignore it. Come May 2013 and when US - Federal Reserve ( FED)  has made its intention to reduce quantitative easing, all hell broke loose in the Fragile Five countries, which were running high CAD, Viz.. India, Turkey, Indonesia, South Africa & Brazil. These countries experiences high interest rates, multi / all time low local currencies against USD and flight of foreign capital during last five months.  Again India could not envisage to reduce the high CAD to manageable levels within time. Ultimately we have to resort to old practice of reaching to our Non Resident Indians (NRI) to bail us out. The key point here is that are we ready to face reduction in quantitative easing as and when it starts? The answer is very difficult.  We have just bought breathing time to put in place to improve our exports, control unwanted imports and to make India as a preferred destination for foreign capital. Alas, there are hardly any attempts to act on any of them. Thus, there is a possibility that India would be facing music again in short to medium term. 

 

 The key point is that quality of decision making as well as response time has deteriorated in our society at all levels in last so many years. Thus we would be living hand to mouth, in case, we choose to tread the current path.

 

 

 

INR : Deceptive Calm before...

 

Well, RBI has managed to get around USD 5.6 billion under the foreign exchange deposit scheme aimed at Non Resident Indians (NRIs) so far. Once again our fellow citizens working abroad came to rescue India from the foreign exchange brink  a la  1998 and 2001. It is expected to swell further as concessional scheme is available till November 30, 2013 ,wherein RBI is providing insurance against foreign exchange fluctuation till maturity of the deposit. This is a win-win situation for every stakeholder be it depositor, bank or the RBI.  

 

However, the real rub lies in the fact that it merely provide breathing space before policymakers come out with reform to attract foreign exchange capital as well as control the unwanted imports. Alas, since the inception of current crisis, the entire energy is focused on the financing the bloated Current Account Deficit ( CAD).

 

Now one should realize that after getting the lifeline from NRIs, there are no more such lines exist or else we have to tap IMF or to activate bilateral swap agreement with Japan to get precious foreign exchange. Well, all such events would trigger unpleasant scenarios, showing lack of our resolve to bring down CAD to sustainable level and may risk losing our Investment Grade credit rating eventually.

 

Though our faith in the policymakers remains firm that they will devise ways to overcome current financial crisis, however, recent episodes have shaken our confidence a bit. Since the onset of global financial crisis in 2008, our economic resilience as well as tolerance has gone down. Gone are the days when government has always been vigilant to price rise Now a days, our response to current crisis is also piecemeal in nature, delayed and lacked coordination amongst  set of policymakers. Thus due to lack of permanent solution, the current situation will keep linger on though intensity may come down.

 

 

 

 

   

 

 

RBI : Burnished Inflation Credentials

 

 

 

Kudos to Reserve Bank of India (RBI. Once again acknowledging the rampant consumer near double digit inflation for last four years, RBI has decisively chose to increase the policy rate by 25 bps in-order to break the back of ever rising pricing spiral. There is hardly any respite for consumers during last so many years as Government was continue to provide lip service to this vicious phenomenon. Alas, the outcome is even more disastrous on several economic fronts. 

 

Though most of the inflation is driven by supply side issues like, inadequate production of various agriculture commodities, hardly any focus on productivity and continuous increase in Minimum Support Price (MSP). All these have created self sustaining loop of increase in prices. This has enforced the psychology of the citizens that price will be keep on increasing. On the other hand we are unable to bargain higher wages with the employers as due to the slow down in the economy, employers were unwilling to cave in. 

 

Higher inflation has also set the stage for INR to depreciate against major foreign currencies. The catalyst came in May 2013, when Ben Bernanke has hinted possible tapering of purchase of securities. Consequently, foreign investors chose to walk out from the Indian Fixed Income markets, which in turn taken a huge toll on INR. The USD/INR is currently trading at 62.28 while average for CY 13 is 57.22. The point which one should understand is that high inflation differential between India and its trading partners as well as consistent high Current Account Deficit (CAD)  are the  major factors to allow INR to go down once pressure increased due to higher demand for foreign currencies.

 

Now the question is that whether RBI moves can really control inflation. Well, these efforts should be complimented by Central and State Governments. Policy makers should immediately take measures like:

 

1. Create environment for improvement in the productivity, storage & transportation of the agriculture produce.

 

2. Mechanism to control prices of agriculture produce. Right now, big producers and  traders are emboldened with consistent price rise they have witnessed for last so many years. Thus an element of hoarding is always there as reflected in the price pattern of Onion a la squeeze in financial markets. It goes up suddenly  & sharply and then come down and settle at high rate then previous one. There are savvy traders who corner the commodity and then control the price and quantity of the produce. Government should note of this activity and curb it.  

 

3. Price rise in certain commodities has spill over impact on the other commodities as well. Traders now without hesitation increasing the prices of other products as well under one or other pretext.  

 

If government walk the walk with RBI, then consumer inflation will be controlled and India can embark on the journey of sustainable globally competitive nation.

 

 

 

 

 

 

Inflation : Secretly eroding your purchasing power..

 

 

 

Well, India has never been able to overcome the perils of global financial crisis since September 2008. Tough economy has recovered between 2009- 2012 but later on due to excessive reliance on global funding of local investments has led to foreign exchange crisis in the middle of 2013.

 

India was one of the beneficiary of global liquidity unleashed by US and Euro to help stabilize their countries in the wake of financial crisis. This global float was keeping the India buoyant till such time  US FED indicated to withdraw it gradually. Current Account Deficit countries like India, Indonesia, South Africa were badly hit as global investors chose to withdraw.  This devaluation of the INR is  now the latest driver of higher inflation, which is reflected in the higher prices of the trade able goods like petroleum products and so on.  

 

Already, India is into persistent high inflation for last four years. CPI continue to be high, which is currently at 9.6%. The reasons are very clear :

 

 

1. Government has designed scheme like MANREGA to provide employment in rural areas. Certainly, this has improved the purchasing power of the citizens while paying scant attention to increase productivity of the agriculture sector. In addition, Minimum Support Price (MSP) of the agriculture commodities are raised obviously to increase  production. However, this has backfired as intermediation was further increasing the prices dis- proportionately, which has adversely impacted the end consumers. This vicious spiral is still continuing and none of the policymakers are even trying to understand it.

 

2. Increase income of the rural citizens has fuelled the demand for food. Alas, where is the productivity. Year after year, items like milk, protein rich articles like meat, cereals are in good demand as improvised citizens are now able to afford them. Result.. prices are keeps on climbing under one or another pretext as retailers have realized that people have ability to pay. Top it all, there is hardly any improvement in quality. Again policymakers have failed to realize a well entrenched trend and so far not come out with any response to break it.

 

3. Last but not least we over-selves to blame for bearing such a spiral of inflation.We are not making any noise in any concentrated fashion to be heard at any forum. Political parties now a days are indifferent to the vicious circle of inflation . Gone are the days when fortune of the political parties are decided by the price of the onions. In fact, price of onion and potato, which are the staple ingredients of the Indian household, are raising at fast clip in last so many years. Yet, citizens are unable to come out with their anguish.  Lately, price are now moving in the multiple of INR 10.00. This is also a disturbing trend. Again we as a consumer refuse to carry coins so are the retailers. Once again who is the looser : Consumer...

 

Well, how we can break this vicious circle of persisting high inflation :

 

1. Union election is scheduled next year while some states are going for election later this year. Make it a point and judge your prospective leader, who can deliver lower inflation. Make them aware, how this is very important for the whole country.

 

2. Question Reserve Bank of India (RBI), whose sole mandate is to anchor inflation while delivering sustainable growth. Unfortunately this is not happening for last so many years.  RBI comes out with quarterly review of monetary policy where anybody can interact with Governor of RBI. Question them about the policy taken by them and how it is impacting the common man of India adversely for last so many years.

 

3. Last but not least start carrying coins in small denomination and pay as per Maximum Retail Price (MRP) printed on the article. This might bring some semblance in the marketplace otherwise be prepared to pay everything in multiple of INR 10.00. Trust, this day is not far away...Look around and you will see it coming through.

 

 

 

Game Changer : Tapering

 

 

All eyes across the world are now set on the US Federal Reserve (FED) Monetary policy, scheduled on Sep 18, 2013. It is expected that the recent good set of economic data points like employment and industrial growth will prompt FED  to lay the road map for possible gradual reduction in monthly purchase of the financial assets. FED has already hinted in May 2013 that, if, current growth momentum is maintained, then they may consider withdrawing exceptional liquidity provided since 2008 to help support the US economy after financial crisis. In fact, emerging countries are so paranoid about "Tapering" that, they were urging FED to considering its implication on them in the latest G20 conclave, should they decide to go for it.  However, in all likeliness, should they consider it, is any body's guess.

 

Globally financial markets have already started pricing in such event from May 2013. Yield have gone up for "Fragile Five" countries like India, Turkey, Indonesia, South Africa and Brazil. Most of these countries are running large Current Account Deficit (CAD), which has attracted the attention of investors, off late, and they choose to walk out. This has led to sharp fall in the nominal value of the currencies of these countries against USD side by side. This problem is further complicated as they have limited foreign exchange reserve to defend the local currencies. India has announced host of measures, which include attracting funds from Non Resident Indians (NRIs), easing rules to attract flows in both debt and equities etc.  These measures, at the best, will provide breathing space to policymakers to come out with structural reforms to improve quality of foreign exchange inflow in the coming years.

 

Going forward, movement in interest rate & foreign exchange value of the developed world will decide the course of various Indian asset class. why is it so.. Well, India was one of the major beneficiary of the global liquidity unleashed during 2008- 2012. Unfortunately, we are not ready, once stage is set for withdrawal. Our complacency that "All is Well" is taken the toll of growth in India. Though warning signs were there in terms of persisting high Inflation, increasing CAD & Trade Deficit, ever increasing growth of non productive imports ( Gold, consumer goods etc.), high corruption and anemic export growth. Yet our policymakers had wished away that  good times may continue due to external financing. This time the problem is "Made in India".

 

If FED decide to onset reduction in purchase program, then obviously interest rates will further inch up in developed world. This could adversely impact the emerging countries including India, which is already facing the heat in financial markets in terms of recent fall in the value of currency, higher interest rate and low interest in equities. 

 

Well, let us wait till then & look forward that policymakers should be ready to contain any adverse fall out.

 

 

 

Make the most of INR fall...Non Reisdent and Resident Indians...

 

 

 

Well, the reason to put money to work in India is not patriotic but entirely commercial. Recent depreciation of INR with respect to foreign currencies once again present unprecedented opportunity to invest in India. This could be in the form of deposit ( which is very attractive) or real estate.

 

India has gone through such kind of financial crisis in the past in 1991, 1998 and 2001 and that was the time when we have offered high interest rates to attract foreign exchange. This time is also no different from investors and savers point of view. Certainly, no body can forecast with certainty how long this crisis will continue and what would be the magnitude. However, history suggest that tolerance in our country to go to dogs is really very low. Whosoever be the policymakers, they always come together and devise the rescue plans. Everyday we are hearing that policymakers are working on all kinds of permutation and combinations to get precious foreign exchange. The moment they will unveil credible plan, markets will react positively and lo & behold things will come back to normalcy. However, these will be the short term measures to curb volatility in the markets. Moreover, if, policymakers comes out with structural reforms to improve manufacturing and boost productivity, this would be long term positive. This only will ultimately derive the value of INR in the long term.

 

The idea is not be fear-full about one way fall in the value of INR and have courage to invest. One approach one could follow is to invest in a gradual fashion a various price points. This is like a Systematic Investment Plan (SIP). It always works in your favor.  Right now, home developers are facing low sales and high demand for funds. Thus they are on the negotiation mode to make deals attractive. Take advantage of such scenario of twin unprecedented benefit like : low real estate price and attractive value of currency. This scenario may not persist for long  so go ahead and make your Years...

 

Long term resident investors should also be investing in Tax Free bonds available at attractive rates. This is also possible due to current high interest rates. Once stability arrives in the market, these rates will no longer be available. One should look for listed bonds available in the exchanges to lock-in attractive yield.

 

This is the time to feast on long term fixed income products. Lock in attractive rates and reap the benefits over the years.

 

 

Hupmty Dumpty Had A Great Fall..

 

Indian Rupee (INR) has again touched life time low at 62.00 against USD. The reasons are very obvious. Though RBI and government were taking measures to help support the INR but most of them were ill timed and lack necessary powers to convince the market that these are the potential solutions. This time is really different then in the past when we have faced similar foreign exchange crisis. Currently huge short term liability to the tune to USD 170 billion are going to mature in the current financial year. Accepted the fact that most of these will be rolled over as what we have witnessed in the past. However, these numbers are staggering and market is testing the resolve of the authorities and keep asking for show me the inflow of foreign currency.  

 

 Authorities are expected to understand the real cause of problem behind the latest persisting foreign exchange crisis. Let me outline them:

 

1. Global Factors : Indian markets were one of the beneficiary of the global quantitative easing since 2008, which has buoyed the equity and fixed income markets. Now, US growth is returning and thus it is expected that Federal Reserve would be scaling down purchases of securities gradually, which in tern reduce global funds available at ultra cheap rate.

 

2. Indian man made disaster : Policy paralysis and recent corruption has turned India into importer of certain products where we were either exporter like iron ore or net importer like coal.  This has increased demand for foreign currency suddenly. Further consumption of imported consumer goods like electronic items, food products, fancy SUV cars etc. further added to the demand for foreign exchange. Obviously, authorities have turned nelson eye to these events & failed to recognize these shifts in the market. Thus, here we are facing the music and currency is falling.

 

Once federal reserve have made public its intention of withdrawing excess liquidity in near  future, globally bond market & consequently local currencies fall down substantially as leveraged investors choose to move back to safe heaven and reduce risk. India which was recipient of global liquidity could not be left unscathed.

 

What is the solution... well, the real game changer would be shock and awe therapy. Authorities should come now with a realistic plan get at least USD 10 billion in the country within no time. This will only calm the market. In addition, government should not hesitate to take tough economic decisions like deregulating at least diesel & fertilizer price. Time has come to reduce subsidies and thereby reducing its consumption. Further, we should resolve that we have policies in place to improve our global competiveness so that exports can be encouraged. Markets are watching you...Please deliver before it is too late...

 

 

 

 

 

 

An open letter to all policital parties...Let us put Country First above all..

Dear Sir,

We are facing unprecedented economic and financial crisis. The need of the hour is to tackle it head on.  Moreover let us acknowledge and understand that we as a nation were overlooking macro imbalance build up since global financial crisis ( 2007) and unable to overcome that so far. Question of taking decisive measures  will not arrive as we have never acknowledge the gravity of the deteriorating economic fundamentals over last so many years.

 

We have been following band aid approach to fill the leaking tap. Now time has come to rise above all to take measures which would restore our economy to the path of sustainable growth to generate employment and contain ever rising consumer prices.

 

Government should go all out and seek support for crucial pending reform. Opposition parties in the interest of nation, should not oppose any bill just for sake of opposition. Let us work constructively to put India again on the path of sustainable growth.

 

Union Government should also undertake bod measures like complete deregulation of all petroleum products which will eventually bring down subsidy and consequently fiscal deficit. Those days are over when there would be nationwide protest for any rise in price of petroleum products. Now a days,  vegetable price, which are touching all time high, failed to attract any protest, then who is bothered about high petroleum prices.  Today, we are paying market prices for every product, then, why government is shying to make it market determined. In fact, high prices will automatically adjust the demand as well as users will be cautious.

 

Union Government should also cutting wasteful expenditure, which never reaches to the intended recipients.  No doubt, Adhar is a nice start, however, till such time it become reality, let us rationalize the need of the subsidy and expenditure as well.

 

It is high time we should put together our thoughts and energy so that we can overcome the current economic and financial crisis once for and all.

 

 

 

 

 

More on Inflation.. vicious circle is firmly established..

Well, daily in every walk of life, we are witnessing ever increasing spiral of inflation. You go to barber shop, grocery store or hire a cab, it is certain that very next time you will be incurring some thing more for the same quantity and service. What are the reasons behind such persisting phenomenon for last 5 years.

 

First and foremost, governments at both Central and State level have failed to recognize or rather overlooked the persisting high consumer inflation. They have done nothing to improve the supply which is being used by average Indians on daily basis. This has emboldened the whole-sellers and retailers to increase the price under any pretext like increase in petrol price ( though delivery vans use only diesel which is increased occasionally) or destruction of crop due to excess rains which should be always exaggerated. Absence of any government action on this front has left both producer and consumer poorer day by day. In fact, quality is now a days pretty suspicious despite paying higher and higher prices, which is further undermining the interest of the consumers.

 

Second consumer has chose to become mute spectator. They refused to raise there voice against price rise and quality of the product and services. Gone are the days when rise in the price of onions would have brought down the government. We have lost the sensitivity to the persistent high inflation. If we ourselves are unwilling to understand the long term implication of indirect tax on our income then we have no one to blame which is reducing our purchasing power day by day.

 

Let us understand, how we can overcome such situation which has been persisting for long period of time:

 

1. Raise your voice and concerns at all appropriate level. Be it your cab who is refusing to pay you change or a grocer who ask you to buy unwanted stuff for the balance amount.

 

2. Election is around so let us exercise our right cautiously and try and elect who can pay attention to this spiraling price rise.

 

3. Now a days people hardly carry coins. In such environment, every thing is getting to rounded off to nearest multiple of Rs.10.00, which is also a kind of stealth inflation while reducing your purchasing power. Credit/ debit card can help in such situations so that one can pay correctly.

 

Remember, money saved is money earned...

 

 

 

 

Collateral Damage : Indian Bond Yield...

 

 

Indian bond yield has went up across the yield curve by 50 bps during this week in response to de-facto tightening by RBI to shore up the value of INR against foreign currencies.  RBI has capped the funds available at Repo Rate to INR 750 billion while additional funds will be available at 300 bps above Repo Rate. This will help curtail the speculation of going long on foreign currency against INR as holding foreign currency become expensive. In addition, hopefully, higher interest rates will lure back the foreign debt investors, which have been selling from late May 2013.  

 

The key question now, a la 1998 & 2001, will RBI / Government will follow up with the measures like issuance of offshore bonds to augment its foreign currency reserves. The key difference between this time and the similar events in the past is that currently, we are facing real high demand for foreign currency for variety of reasons like maturing short term foreign loans in the current financial year, falling exports & stagnant import etc. Persistent higher international prices and large imports of gold has created additional demand for foreign currency to import.

 

Equities remain resilient though earning would be under pressure, going forward, for the sectors which are already suffering from high debt overhang and slowing economy. Sectors like PSU banks, Infrastructure, Metal, Telecom, Hotel etc. which are already under various economic pressure will now be facing higher interest burden as well if the current measure persist for long. Further, lots of companies have taken debt denominated in the foreign currencies which is as high as 70% of the outstanding debt, will also feel heat of additional burden on account of strengthening in foreign currency. This will be mitigated to the extent of hedging done for debt in foreign currency.  

 

As always thoughtful selection of asset allocation and careful investment will yield handsome return in the long term. One should make use of these inflection points judiciously to  build long term nest egg. It is like we have faced these kind of situations in last decade and a half thrice and lo & behold.. we are still growing and doing something right..

 

Do not hesitate to continue to invest through Systematic Investment Plan ( SIP), if you already have or start new plan to take advantage of the situation as things are now available much cheaper now. In fact it is advisable to invest one time lump sum to take advantage of lower valuation currently available in the market.  In terms of equity mutual funds route, always stick to the diversified mutual fund scheme or low cost  Index equity fund.

 

 

 

 

 

 

 

 

 

 

Indian Rupee.. the game changer..

 

Well, our economic fortunes are tied with the value of the Indian Rupee (INR) against the currencies of the major developed market viz. USD/ Euro/ Pound etc. We got  immensely benefitted with the onset of Y2K projects of software companies at the turn of the millennium, which had opened altogether new avenue of earning the foreign exchange. We continue to enjoy this benefit till the global financial crisis erupted in 2007. Alas, though US, the epicenter of the crisis is now stabilizing, yet we are sinking into another one.

 

All these years since 2007, we are now facing problems which we were ignoring during hey days. Actually we could not anticipate that our export are dependent on external demand while imports are mostly inelastic to local demand. Further, due to persistent higher inflation and uncertainty associated with financial and real economy, citizens decided to move into physical assets like Gold and Real Estate.  This has boosted import of Gold manifold over the years which has required foreign exchange. In fact, our foreign exchange reserve did not grow in last six years. Anecdotally, demand for Gold was further fuelled due to investment of unaccounted funds. In addition, attractiveness of the gold was magnified as it was appreciating year after year since global financial barring last one year. What more one can want from gold: easy to store with steady appreciation.

 

All this has precipitated into demand for USD not commensurate with enough supply. Market was waiting for a catalyst to let INR reach to its fundamental level. This moment has arrived when  US Federal Reserve gave a whiff of withdrawal of quantitative easing as US economy is strengthening. Leveraged investors across the world started deleveraging bonds and thus outflows from emerging markets has started. This has created demand for foreign currency in the system which was already short of supply and prompted INR to touch life time low in line with other emerging market currencies.

 

The worrisome part is depreciation of INR witnessed when growth in the economy is at low point. This will put further pressure in terms of higher fiscal and trade deficit as well as higher inflation. This if we combine with policy paralysis prevailing in recent years, cast a doubt over any imminent recover in the economy.

 

 

 

Indian Economy.. are we going the way to Hindu rate of growth..

Looks like we are getting into vicious circle of ailing economic growth, persistent high consumer inflation and increasing joblessness. Since the onset of global financial crisis in 2007-08, we are unable to stand on our feet. Though we recover once global economy stabilized at lower level, but during the last two years, due to policy paralysis, we are unable to convert adversity into opportunity.

 

First, government has failed miserably in augmenting supply to rein in consumer price inflation. India badly needs reform in agriculture, farm produce and distribution etc. This will benefit both farmers and consumers. It is high time that we should witness another green revolution to make ourselves self sufficient. This is all the more important now in the light of recently announced Food Security Bill to provide food to 80% of the population at abysmally lower prices. This will involve procurement and storing of various farm produce. This may further boost price rise. We already have very poor record of storage of grains. Can we do something to improve that at the outset..

 

In addition, due to the lack to reform, malpractices, fear in bureaucracy and uncertainty in India, domestic investors chose to invest outside the country. For example Tata chose to buy Corus and JLR. Aditya Birla has bought over Novelis. These are few illustrative example which indicates the mindset of promoters.  

 

In the middle of the 1990-2000, we were growing at the rate of 5%. Already, we are cloaking almost similar growth. There are reasons to believe, that we may witness same growth rate for considerable future as there are hardly any measures taken . In fact the worrisome fact is that neither government nor corporate world is recognizing this fact. In the absence of action plan, only way we can grow above Hindu rate of growth is to export our way on the back of recovery of global. However, this is not a panacea of our all problems.

 

Government and RBI has to act decisively and swiftly to manage the current foreign exchange crisis on the back of large current account deficit. Otherwise, it will inflict permanent scar on the Indian economy..

 

Time is ticking fast.. Let us have resolve and conviction to reclaim our glory...

Persistent Inflation : The New Normal...When we will be able to break the vicious circle..

Inflation is so well entrenched in India at consumer level that whenever you go out and purchase any goods and services, it is invariably up. Retailers are looking to raise prices under any pretext. In all big towns in India, retailers are selling groceries, fruits & vegetables at a margin of 2-3 times of the wholesale rate in the guise of increase in Petrol / Diesel price, flooding and thus low arrival of products and so on. Surprisingly Government is silent for years and this is lending a helping hand to retailers to take prices to mindless levels. Moreover, there are doubts that  any body would like to devote time and energy to go to the Consumer Court to file a complaint against unorganized business where transactions are entirely cash based without any receipt. 

 

Now the next question arise how Government can restore price behavior in the unorganized cash based transaction economy. In older days, Government used to conduct raids against hoarding, quality checks or open market sale of certain items like grains, sugar etc. to control prices. Now a days, these things are looks like no longer practiced and government is, in any case, sleeping. 

 

What is the need of the hour is that Government should check and conduct price audits to understand prices at wholesale and retail level and then act accordingly to maintain price level.  In fact the current differential between Wholesale Price Inflation (WPI ) and Consumer Price Inflation (CPI) reflect this differential starkly at 5%. Thus it is amply clear that Government knows about it but maintains a stoic silence and hardly any initiative to bridge this gap. The current phenomenon of persistent high level of CPI for years can not be mitigated by RBI as this is so well settled in the psychology of retailers that they do not hesitate to increase the prices at every available opportunity.

 

How we can bring this cash based daily transactions into banking system ??  The answer is simple and ultra low cost. Adopt mobile banking. Mobile penetration is excellent in our country and it is increasing day by day. Why not Indian banks take initiative to  make it convenient to do daily transactions through mobile phone and thus we could be having a trail and consequently we can bring consumer court to regulate this petty transactions.

 

The need of the hour is to attack this incessant price rise habit by all corner : Government to monitor  the supply & prices of goods and services & consumer court to sharpen there teeth. Above all authorities to make it clear in no uncertain terms that they are lurking behind to  maintain price stability.

 

Investors : Tap the opportunity...

 

INR has been continue to depreciating against USD and other major currencies. Equity markets was also volatile and scores of stocks touched year low or all time low.  This is what creates investment opportunity to struck gold in the haystack.

 

It is time when most of the investors are fearful about uncertainty associated with growth in the economy, indecisive government and impending elections. However, if you notice we have overcome these and other uncertainties over so many years and here we are as top 5 global economy of the world. No doubt, head winds are there, but we shall surmount them in long term.

 

Another thought which investors would appreciate that equity investment held for more than one year is exempted from capital gain tax while less than that attract higher tax rate. Thus from tax perspective also, it makes sense to invest for long term.

 

Well, now it makes eminent sense to start investing systematically to take advantage as valuation is now getting attractive. There are two ways to capture this event:

 

1. Simple and straight forward method is to invest in index equity mutual funds. This is cheapest and best way to own top business of the country. In addition, you can eliminate the bias of fund manager if you choose to invest in actively managed equity fund. Pl exercise caution while investing in Sector / Theme based equity mutual fund as they are flavor of season and you should be alert when to enter and exit.

 

2. Direct invest in Equities : Here one has to study companies in terms of business model, competitiveness of the business, corporate governance etc. and top of that Valuation. One can develop these skills by mastering reading annual report of the company and other available resources in public. Thus companies available cheaper would be candidate for investment.

 

Happy Investing ...

 

Indian Rupee : Humpty Dumpty had a great fall....and opportunity for investors to profit by..

Market will remain irrational longer than what you think. This is what always happen across the world and markets. Indian Rupee was remarkably calm despite persistent high inflation differential with major trading partners as well as record high Current Account Deficit (CAD) for fairly large period.  

INR was waiting for catalyst to onset the correction of the value of the INR against major currencies like USD. It was Ben Bernanke, chairman of US Central Bank in it's testimony, who has hinted possible withdrawal of massive liquidity in the light of strength gained by US economy. This has prompted investors to withdraw funds from emerging markets. India has also witnessed withdrawal by Fixed Income investors and this has put pressure on INR to depreciate.

One of the major driver for higher CAD is import of gold. RBI and Government of India (GOI) have taken measures to reduce demand for gold by introducing several measures which will take a while to have a meaningful impact.  This along with strength in the US economy is presenting a strong case for the investment in index funds of the USA, as highlighted in the last week blog.

There would be two ways to benefit. The possible annual depreciation of INR against USD by 5% due to inflation differential in two countries. This along with expected increase in stock prices of USA as economy is piaking up. These two components will spice up your performance. This should be the part of asset allocation and recommend to have a weight of 10-15% of your portfolio.

Alternative investment to Gold to generate Real Return...

 

We Indians are obsessed with gold with so much so that this has been creating additional demand of USD and thus putting additional pressure on Current Account Deficit (CAD).  The reasons are not far to see... Persistent high retail inflation for last 3-4 years, dismal performance of equities and not every one would be lucky in investment in cumbersome real estate. Investors just jump on the gold wagon to intuitively capitalise on trend of strengthening of USD against INR as well as global bull run in gold prices. Moreover it is easy to invest and hold gold on top of nobody is asking you to declare Permanent Account Number (PAN). All this has made Gold as a block buster product during these years as a preferred choice of investment.

 

However, gold as a hedge of uncertainty is now loosing its appeal. USA is now stabilising as reflected in latest data like employment generation & various points related to housing. Additionally, Euro zone will also be stabilising on the back of commitments of ECB " Whatever it takes". Japan has also embarked on the ambitious program to bring back the growth after more than lost decade. All this is going to bring down uncertainty associated with global growth. Thus Gold is going to loose its appeal of safe heaven investment.

 

Now, we have an investment theme of  persistent high retail inflation in India and consequently expected strengthening of USD against INR. This couple with reflation of the USA present an excellent opportunity to invest in the index funds of the US equities  to capture these twin themes. 

 

There are several mutual funds which are offering these products. One should take caution to invest only in Index products linked to Dow Jones or S&P 500. This is an ideal way to take exposure to US equities while eliminating fund manager's bias in an actively managed funds. In addition, index funds are least expensive in comparison to other actively managed funds.

 

Last but not least, it is paramount to keep an eye on the development in financial markets to track inflection point and performance of the fund. This will ensure to take home decent return.

 

Tracking of performance can be done by reading business dailies on regular basis as well as making oneself literate about factors and trends which moves the market..

 

 

Debt Fund: Are they creating wealth in long term...

This is what has catalyzed thoughts after seeing a leading Mutual Fund advertisement that is advocating investment in Debt Funds to generate long term wealth.  Yes.. last one year and five years returns are in double digit as interest rates are coming down. Make no mistake, though banking deposit and lending rates are still high by any yardstick, however, interest rates are coming down on Government Bonds and Corporate Bonds due to sluggish economy & as RBI reducing policy rates. This makes a case for investment in debt funds. But, is there any further room for additional fall in policy rate so to maintain double digit return through debt funds.

It is expected that we would be witnessing sluggish economy and consequently waning pricing power of the producers in the current financial year. This will help maintaining lower inflationary expectations. This will aid interest rates to remain low for the at least next one year before economy rebounds and put a floor on further fall in rates.

This makes a case to stay invested in debt funds at least for the foreseeable future. However, it is pointed  out that debt fund can not generate long term next egg. What is that means, it will not be able to generate inflation adjusted real return in the long term the way equities can do. There would be a point when inflation would be stable in India in the range of 5%-6%  and in such scenario they might be able to deliver just above inflation, falling short of expected long term real return.

Happy investing and lets us build long term nest egg..

Next publication would be on June 8, 2013 due to summer break...

  

Savers dilemma: How to generate real return...

 

 

Savers are in consistent dilemma about how to generate real return for there long term savings. Financial planners are suggesting only way to generate real return through investment in equities. It is expected that you should invest early in equities & as you progress in the life, you should keep reducing the proportion in equities while raising fixed income to lock in return.  Is this the panacea of real return....

It is easier said and sold to the gullible investor than to achieve the desirable goal. To give an example, for last 5 year, Indian equities have give only 5% return. It is often cited that in the long term equities will always give real return. However, there are instances like in China, where returns are hardly to talk about despite superlative economic growth. 

 

The answer lies somewhere in between. One has to start investing only in diversified equity funds while not succumbing to the lure of sectoral / theme based funds as they will do well only when that theme is in vogue.

 

Another important thing a common investor is missing is to follow up after investing hard earned money. What a person can do is to at least read couple of economic dailies to keep oneself abreast with latest happenings and trends in the economic and global environment. This will assist you to decide when to encash your gains to lock the same in fixed income. Here again one should be practising Systematic Withdrawal Plan ( SWP).  It is a tool to keep withdrawing gains to invest in the fixed income assets to meet your financial goals. In fact financial planners mostly fails to emphasise on SWP as they are commission oriented to maintain your investment or try to switch to other equally risky investment. Therefore it is in your interest to understand when market is expensive in terms of valuation and it is time to encash gains.

 

Meanwhile as suggested in the last week that airlines will be doing creative crazy things to boost there coffers came alive. One of the airline has decided to price even middle seat as well. This means are they selling tickets to fly standing in the plane as one may not be willing to pay additional fee for seat..

 

 

 

 

Inflation... It is all around...

Inflation is the phenomenon which is eroding Indian purchasing power for last four years. India is unable to get over from the impact of global financial crisis. This has led to worsening of leading indicators like Fiscal and Current Account Deficit, Interest Rates etc which is reflecting in  sub par growth, low employment  and mostly into persistently high inflation. This psychology is so well entrenched in the society that when ever you go out to purchase any goods or services, it is invariably high and that too with questionable quality.

 

Now, let me put focus on how government itself is further strengthening the vicious circle of inflation. Railway ministry has recently decided to round off the increased rail fare to next multiple of Rs. 5/. This is nothing but day light robbery. On the other hand, notes of lower denomination up to Rs. 5/ are no longer printed and this is also creating hassle to carry loose coins. This is also effectively moved now everything in the multiple of Rs. 10/. for whatever goods or service you would like to buy. Thus we are artificially creating and strengthening  the tentacles of inflation across the society and country. The day is not far away when your taxi and cab will also charging in the multiple of Rs. 10/ in line with railways. 

 

In addition, there are doubts that airfare will become come down with segregation of the services. Airlines would find ways to sustain current fares while coming out with dubious charges like web transaction service charge  to boost there coffers. On the similar line, websites like Bookmy show.com levy service charge while booking tickets. It is highly objectionable as a consumer of the service I am entitled to buy ticket at what it is available to box office. In fact till some time back  none of the website was charging any service charge. This should be vehemently opposed at every forum. All this further adds up to your inflation.

 

This persistent inflationary pressure has created dilemma for savers. Bank deposit rates are low in the light of consumer inflation. This is what reflected in the lower deposit collection of the banks over the years as savers are wise enough to diversify away to other asset class where they can expect real returns.

 

It is high time that we as citizens of India stand up and start raising our voice to the government to control the inflation. It can happen if they control wasteful expenditure, increase productivity and most of all reduce bottleneck to augment resources. 

 
 More in next column...