august 2013 monthly e-book from - investors are...

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August 2013

Monthly E-Book from

Editor:

Arjun Parthasarthy


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Table of Contents

Weekly Equity Analysis 4

Week Beginning 5th August 2013 5-8




Weekly Podcast Transcript 21

Week Beginning 2nd August 2013 22-23



Week Beginning 23rd August 2013 28-29


Economic Analysis 32

Choking Economic Growth will not” 33-36 India is a Fashion Statement – You are “in” if you are Short India 37-38

RBI Policies 39

The New RBI Governor – Expect a Conservative but Surprise Approach to Policies 40-42

RBI Starting to Reverse its Tight Liquidity Stance Will Induce Sharp Rally in Markets 43-44

Rupee at Rs 68 – RBI has to Reverse Liquidity Measures to alleviate Market Panic 45-46


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Article General 58

Fixed Income Article General

IIB price fall due to rise in cost of holding the bond 48-49

Currency Article General

INR at all time lows –Calm Not Storm Is Needed From Policy Makers 50-52

Panic Leads to More Panic 53-54

INR at Rs 63.13 – Fear can make you Money 55-57

INR is a Man Made Disaster and Hopefully Something Good Can Come Out of It 58-61

Why I am not going to talk about the INR any longer 62-63

INR at 68 – INR will touch Rs 70 to the USD if RBI Hikes Rates 64-65

Personal Finance Article General

Loosely Regulated Markets – Few Profit at the Cost of Many 66-68

Old is not Gold is the message from Washington Post 69-70

Classroom 71-73

Market movement analysis September 2013 74-78

Subscription Details 79-80


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Weekly Equity Market Analysis

The weekly equity market analysis brings you the outlook for broad equity indices and currencies. You will know all that has happened in the past week in equity, derivative and currency markets and will also get to know the factors affecting markets going forward.


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WEEK BEGINNING 5THAUGUST 2013

Pain for Markets post RBI Monetary Policy

The RBI in its quarterly monetary policy review on the 30th of July left key rates unchanged and lowered economic growth forecast for fiscal 2013-14 to 5.5% from earlier estimates of 5.7%. The Sensex and the Nifty declined 2.96% and 3.53% respectively on a week on week basis on the back of macro-economic concerns. The INR declined by 3.47% to Rs.61.09 per USD on a week on week basis despite measures taken by the RBI to control excessive speculation in the currency market, with a stance to roll back the implemented measures once the INR stabilizes in the near future.

The US Purchasing Managers Manufacturing Index (PMI) rose to 53.7 in the month of July 2013 compared to 51.9 in the month of June 2013. US Non-Farm Payrolls increased by 1,62,000 in July 2013 and the unemployment rate came in at 7.4%, a marginal improvement over 7.6% seen in the month of June 2013. The US GDP growth rate was estimated at 1.7% in the second quarter over 1.1% in the first quarter of 2013 while the consumer confidence index came in at 80.3 in July 2013, slightly lower than 82.1 seen in June 2013. The Federal Reserve has pledged to continue with bond purchases until it sees sustained improvement in the unemployment rate and labour market data for the US economy.

The European stock market indices rose week on week as the European Central Bank said interest rates will remain low for an extended period of time citing growth concerns for the region. The German DAX rose 1.96% to 8407 and the FTSE rose 1.42% to 6648 on a week on week basis. Major currencies remained flat against the USD last week.


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The equity derivatives market saw fall in open interest in Nifty Index futures by 19.14% while implied volatility of Nifty index call and put options increased week on week. The premium of nifty index futures to spot decreased to 22 points in the last week. FIIs were net buyers to the tune of Rs.50 crores in the equity and debt market in the last week.

Industry and Stock Specific trends

The sectoral indices declined significantly last week with only the S&P BSE IT index closing positive with 3.78% gain on a week on week basis. The IT index rose due to the expectation that rupee depreciation would give increased profits for the companies in the coming quarters. S&P BSE Bankex, Auto, PSU and Oil and Gas indices declined 4.42%, 2.87%, 9.44% and 5.66% respectively in the last week on macroeconomic concerns due to measures taken by the RBI in its quarterly monetary policy.

The output of eight core sector industries grew 0.1% in June 2013 on a year on year basis as against 2.3% growth recorded in the month of May 2013. The core sector industries have a 38% weightage in the index of industrial production that makes it a good lead indicator of industrial production.

The HSBC Manufacturing Purchasing Managers Index (PMI) was reported at 50.1 in July 2013 against 50.3 in June 2013 indicating stagnation in the production activity in the economy.

The telecom majors Bharti Airtel and Idea Cellular reported positive growth in margins and profits on a quarterly basis due to increase in the average revenue per user (arpu) on the back of increased tariffs.

Wockhardt Ltd. fell 26.5% in the last week to Rs.422 on concerns over quality issues in manufacturing of drugs at its plant in Waluj in Maharashtra.


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The Foreign Investment Promotion Board (FIPB) cleared the Rs.2058 crores Jet Airways – Etihad deal. The stock closed at Rs.327 down 17.4% on a week on week.

Financial Technologies Ltd. fell 73.31% in the last week to Rs.151 from Rs.565 due to fear that suspension of trading at National Spot Exchange Ltd. (NSEL) would default payment to brokers by the institution. NSEL is an unlisted entity with group companies Financial Technologies Ltd. and Multi Commodity Exchange that are listed on the stock exchanges. The companies are expected to face a severe cash crunch amidst suspension in trading for the NSEL.

Table 1. Weekly Market Movement


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Table 2. Weekly Gainers & Losers


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WEEK BEGINNING 12TH AUGUST 2013

Markets extend losses on INR fall to record lows

The Sensex and the Nifty declined 1.96% and 1.97% respectively on a week on week basis as positive data from the US and deteriorating domestic macroeconomic conditions made the outlook gloomy for the Indian Rupee (INR) in the near future. The INR depreciated to a record low of Rs.61.81 against the USD last week but closed 0.38% higher at Rs.60.86 on a week on week basis on the back of RBI intervention. RBI is tightening liquidity in the system by planning to auction government of India Cash Management Bills (CMBs) to stem INR depreciation. CMB is a short term debt market instrument issued by the central government to meet its short term fund mismatch.

The US markets declined marginally with Dow Jones Industrial Average down 1.46% and NASDAQ down 0.81% on week on week on concerns of likely withdrawal of stimulus by the Federal Reserve.

The US economic data showed Jobless Claims at 3,33,000 in the last week compared to the revised estimates of 3,28,000 in the last week of July. The Jobless Claims data is positive for the economy and the Federal Reserve is expected to taper its stimulus if the overall economic data continues to be positive going ahead.

Chinese markets ended positive with a gain of 1.13% over the previous week on the back of higher than estimated growth in factory production at 9.7% for the month of July over the previous year along with pick up in exports and imports. The positive data is expected to avoid deeper economic slowdown for the Chinese economy.

The Japanese Yen appreciated 2.74% to Yen 96.21 against the USD while the other major currencies were flat to positive on a week on week basis.


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The equity derivatives market saw rise in open interest in Nifty Index futures by 2.49% while implied volatility of Nifty index call and put options decreased week on week. The premium of nifty index futures to spot remained at 22 points in the last week. FIIs were net sellers to the tune of Rs.3973 crores in the equity and debt market in the last week.


The sectoral indices declined marginally last week with only the S&P BSE PSU index closing positive with 1.1% gain on a week on week basis. S&P BSE Bankex, Auto, IT and Oil and Gas indices declined 1.9%, 1.15%, 0.62% and 0.2% respectively in the last week.

Financial Technologies stock was down 67.09% to Rs.178 on a week on week on liquidity concerns of the National Spot Exchange Limited (NSEL) for the settlement of payments to brokers. The stock recovered from its 52 week low of Rs.105 as NSEL disclosed stock positions as on 31st July 2013 and followed directives from the Forward Markets Commission for the settlement of dues.

Bharat Heavy Electricals Ltd. stock was down 25.72% to Rs.117 in the last week due to a decline of 49% in the net profit on lower sales in Q1FY14 from the power and industry segments amidst weak macroeconomic environment.

Jet Airways stock reached a 52 week low of Rs.301 due to loss of Rs.355 crores in Q1FY14 due to rupee depreciation, increased fuel cost, flat passenger traffic and a weak season.


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Markets close to Year Lows on RBI Capital Controls

The Sensex and the Nifty declined on a week on week basis by 1.02% and 1.04% respectively on account of the INR depreciating to record lows of Rs.62.03 to the USD last week. Stricter measures taken by the RBI to curb speculation and better than expected US economic data in the last week depreciated the INR to record lows. RBI announced more measures citing concerns for the INR depreciation and decreased the individual limit for investment abroad from $ 2,00,000 per year to $ 75,000 per year and lowered investment under automatic route from 400% of net worth to 100% of net worth. Federal Reserve is likely to commence withdrawing stimulus starting September.

The US markets declined marginally with Dow Jones Industrial Average down 2.24% and NASDAQ down 1.56% on week on week on concerns of likely withdrawal of stimulus by the Federal Reserve. The US economic data showed Jobless Claims at 3,20,000 in the last to last week compared to the revised estimates of 3,35,000 in the first week of August 2013. The numbers are positive as jobless claims have decreased 15,000 on a week on week basis. The Consumer Sentiment Index was reported at 80 for the month of August 2013 that was lower than the previous reported figure of 85.1.

The custom duty on gold imports was raised to 10% from the earlier 8% in order to minimize imports to curtail the Current Account Deficit (CAD) that would help to reduce INR depreciation. Gold rallied 4.79% on a week on week basis to reach 1377 USD/Oz on back of the likely withdrawal of stimulus by the Federal Reserve. Crude oil prices rose by 2% to reach $ 110.40 per barrel amidst political tensions in Egypt.


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The equity derivatives market saw rise in open interest in Nifty Index futures by 11.25% while implied volatility of Nifty index call and put options increased week on week. FIIs were net sellers to the tune of Rs.18.4 crores in the equity and debt market in the last week.


The Index of Industrial Production (IIP) declined 2.2% in June 2013 on a year on year basis over June 2012 and the Consumer Price Index (CPI) declined to 9.64% in July 2013 from 9.87% in June 2013. The Wholesale Price Index (WPI) rose to 5.79% in July 2013 from 4.8% in June 2013. The May IIP numbers were revised to a decline of 2.8% over a decline of 1.6% reported earlier. The exports reported an 11.6% rise in July 2013 over June 2013 and the imports fell by 6.2% in July 2013 on a month on month basis to yield a trade deficit of USD 12.3 billion in the month of July 2013. The decline in industrial growth was due to a broad-based slowdown in investment and consumption activities.

The sectoral indices declined last week with only the S&P BSE Auto index closing positive with 3.95% gain on a week on week basis. S&P BSE Bankex, PSU, IT and Oil and Gas indices declined 3.6%, 0.88%, 0.32% and 2.19% respectively in the last week. S&P BSE Bankex and Oil and Gas indices declined significantly as the INR depreciation is taking a toll on the interest rate sensitive sector and the import oriented sector respectively.

Private sector banks have started increasing interest rates to attract deposits due to tight liquidity conditions as a result of several measures announced by the RBI in the last week to stem INR depreciation.

Tata Motors stock rose 12.45% to Rs.313 on a week on week basis as Jaguar Land Rover Sales rose 21% in the month of July over the previous month.


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Sensex and Nifty Rise despite RBI Liquidity Tightening Measures

The Sensex and the Nifty declined on a week on week basis by 0.42% and 0.65% respectively on account of the INR depreciating to record lows of Rs.65.56 to the USD last week. RBI intervention supported the INR to recover from record lows to close 2.66% up at Rs.63.35 per USD last week. According to the data released by the RBI the Foreign Exchange Reserves dipped by USD 13 billion since May 2013 to USD 278.8 billion on 16th August 2013 as the central bank sold USD 2.7 billion in spot and USD 900 million in forwards in June. Other emerging market currencies also depreciated significantly with the Brazilian Real, Indonesian Rupiyah, Thai Baht and the Malaysian Ringgit losing value on a week on week basis.

The US markets showed mixed trends with Dow Jones Industrial Average down 0.47% and NASDAQ up 1.53% on week on week on concerns of likely withdrawal of stimulus by the Federal Reserve after release of the Federal Open Market Committee (FOMC) minutes data. The signal from the FOMC minutes data showed a mixed trend for the benchmark indices. The US economic data showed Jobless Claims at 3,36,000 in the last to last week compared to the revised estimates of 3,23,000 in the second week of August 2013.

China’s HSBC manufacturing Purchasing Managers Index (PMI) for the month of August 2013 increased to 50.1 from 48.2 in the month of July. PMI for manufacturing sector in Euro Zone increased to 51.3 in August 2013 from 50.3 in July 2013. Germany reported a 0.7% growth in real GDP in Q2 2013 on a sequential quarter on quarter basis. The Euro appreciated 0.38% to 1.337 Euro per USD. Japanese Yen depreciated 1.22% to Yen 98.72 per USD on a week on week basis.


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Crude oil prices firmed up by 0.48% on a week on week basis to USD 110.93 per barrel due to political tensions in Egypt. Gold prices rose 1.45% to 1397 USD/Oz on the back of the likely withdrawal of stimulus by the Federal Reserve in the immediate future. Withdrawal of stimulus would have concerns for sustained recovery of the US economy.

The equity derivatives market saw rise in open interest in Nifty Index futures by 32.16% while implied volatility of Nifty index call and put options decreased week on week. FIIs were net sellers to the tune of Rs.4323 crores in the equity and debt market in the last week. Domestic Institutional Investors were net buyers to the tune of Rs.3359 crores in the equity and debt market in the last week.

Industry and Stock Specific Trends

The sectoral indices showed a mixed trend as S&P BSE IT, PSU and Oil and Gas rose 1.35%, 1.12% and 0.36% respectively and S&P BSE Auto and Bankex declined 0.08% and 3.49% respectively on a week on week basis.

RBI relaxed rules for the Hold to Maturity (HTM) of the Banks and allowed them to retain bond holdings at 24.5% of their Net Demand and Time Liability (NDTL). HDFC Bank stock rose 2.71% to Rs.607 last week as banking stocks recovered from year lows with private sector banks at the forefront.

Metal stocks rallied last week with Hindalco Industries, Tata Steel and Sesa Goa increasing by 13.29%, 17.04% and 12.47% respectively.

Financial Technologies declined 20.8% last week to Rs.134 on concerns of National Spot Exchange Ltd. (NSEL) liquidity worries as two directors resigned from the board.

Reliance Industries reported a new gas discovery in the Cauvery Basin off the east coast of India.


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BHEL stock rose 10% to Rs.116 last week as it recovered from year lows.



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Weekly Podcast Transcript

The Friday podcast is a value adds feature for the followers of Investors are Idiots.com. The brief podcast will select one topic for analysis and will be released every Friday.


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WEEK BEGINNING 2ND AUGUST 2013

This week’s Friday Podcast topic is on

“What Is The Right Level For The INR”

RBI is waiting for the Indian Rupee (INR) to stabilize before it takes steps to help the economy grow from decade low growth rates of 5% seen in fiscal 2012-13. The INR is trading at levels of Rs 61 to the USD and is threatening to go below all time lows of Rs 61.21 seen in the beginning of July 2013. RBI had taken steps to curb INR volatility at levels of around Rs 60 by tightening liquidity and ensuring money market rates are in double digit levels. However the INR after a brief period of stability has again turned weak implying that market forces are strong on selling the INR.

The markets are worried on what the RBI will do if the INR goes below all time lows. Will RBI take further monetary tightening measures? If the central bank does take monetary tightening measures, India’s GDP growth is likely to fall below 5% levels for this fiscal year even as the RBI revised growth estimates from 5.7% to 5.5%.

Is the level of the INR at above Rs 60 to the USD unpalatable to policy makers? What is the significance of this level? Every level above Rs 60 will be record lows for the INR but the same was true when the INR touched Rs 60 as it broke all records when it started trending down from Rs 57 levels. Why did the RBI not initiate measures to prevent the INR from touching Rs 60?

RBI wants stability in the INR? At what levels? Rs 60, Rs 55 or even Rs 65 (if it goes to that). RBI has always maintained that it does not have a target for the INR. Dr. Raghuram Rajan, the government’s chief economic advisor too has gone on record saying that the government does not target any specific level for the INR. If


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the central bank and the government do not have any specific level in mind for the INR, then why is the focus on the INR so sharp at levels of Rs 60 and above?

The question is “Is there a Right Level for the INR?” Or for that matter “Is there a wrong level for the INR?” What should be the right level for the INR? Is the REER (Real Effective Exchange Rate) the right measure for the INR? The REER is the measure of the INR against a trade weighted basket of other currencies (6 and 36) and adjusted for inflation.

The INR has been on a long term decline against the USD, falling from levels of Rs 20 to current levels of Rs 60 over the last twenty years. The economy in the meanwhile has had its ups and downs with growth rising to levels of 9.5% from 4% levels before falling to levels of 5% in 2012-13. The INR does not seem to have had an effect of pulling down long term growth prospects of the country even as it has shown a sustained fall against the USD. On a REER basis, the currency has depreciated with index levels below 100 indicating that the weakness is broad based.

The government and the RBI cannot really prevent a trend decline in the INR but can only hold it for periods of time. The INR will go where it wants to go and policy makers have to get on with business rather than trying to the stem the INR fall. Needless to say right policies will prevent decline and will bring about strength to the INR and vice versa.

Thank you for listening in. Have a good weekend.


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“Develop an understanding of Fixed Income Markets”.

Fixed Income plays a large part in your personal finance. A look at your individual balance sheet will reveal that most of your assets and liabilities are in fixed income products. Home loans, vehicle loans, personal loans and other such loans form the liability side of your balance sheet. On the asset side, investments in fixed deposits, public provident fund, insurance policies, post office savings and savings account would form a large part of your total assets.

The difference between fixed income liabilities and fixed income assets in your balance sheet is that the liabilities are floating while assets are fixed. Hence rise in interest rates will increase cost of servicing loans but interest on fixed rate investments will not increase by the same rate. On the other hand falling interest rates can bring down servicing cost of loans while interest rates will stay sticky on fixed income investments. In effect one part of your balance sheet is sensitive to interest rates while the other part is not very sensitive to interest rates.

The fact that home loans and other loans make up for a large part of your liabilities, especially if you are progressing in your career, is important for you to understand how and why interest rates rise and fall. A working knowledge of fixed income is extremely important for you to manage your finances in your day to day life. Understanding the movements of interest rates will help you in managing your liabilities. You will know when to take loans, when to convert loans to fixed from floating, when to prepay loans and what maturity loans to take.


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On the asset side of your balance sheet an understanding of fixed income markets will help you in positioning your investments. You will learn to use fixed income schemes of mutual funds to your advantage. You will be able to position your investments when interest rates are falling and when interest rates are going up. Your judgement of risk return profile of various fixed income instruments will help you to make the right fixed income investments.

Fixed income markets have largely influenced the events in the domestic and global financial markets in the last six years. Mortgage crisis in the US, sovereign debt crisis in Eurozone and economic problems in India have fixed income as the root of the problems. Volatile global and domestic markets in turn have made your liabilities expensive as interest rates have gone up in India and have reduced real returns on your investments due to high inflation in the economy.

INRBONDS.com is India’s only dedicated fixed income website and gives you all the information necessary for you to develop your understanding of fixed income markets. We run online training programs on fixed income. It is the right time to start increasing knowledge levels on fixed income. Log in to INRBONDS.com to increase your understanding of fixed income markets.



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“No Independence Day for Bond Markets”.

The last week’s podcast was on “Do not Position Portfolios Based on Central Bank Policies”. RBI has just provided an example of how central bank policies can hurt your investments in the short term but for the long term fundamentals will come into play.

RBI’s move to tighten liquidity in the system has led to bond/bond fund investors losing all the gains seen over the last one year. Many investors would have lost money if their entry point in bonds/bond funds were in the last four months, when the ten year bond yield fell from levels of 8% to levels of 7.10%. The ten year benchmark bond, the 7.16% 2023 bond is trading at levels of 8.10% post the RBI move on the 16th of July.

Bond/bond fund investors will obviously be nervous on their investments at present. It is difficult to predict where the ten year bond yield will go in this uncertain market environment. The normal tendency in such market conditions will be to take money out of the market and keep it in cash.

The RBI may have acted for the short term to prevent the INR from falling. However that does not mean that bond/bond fund investors have to act for the short term. In fact RBI has given a good entry point for fresh investments in bonds/bonds funds as yields have gone up by 100bps from lows seen in May 2013.

The long term view on interest rates has not changed despite RBI moves to curb liquidity in the system. The Indian economy is slowing down considerably and


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growth for 2013-14 could be even below the decade low growth rate of 5% seen in 2012-13. Consumer spending has come off with consumer durables seeing over 10% fall in growth in May while credit growth is at multi year lows of 13.7% indicating weak investment demand.

Inflation is seen trending higher for a couple of months as food prices and hike in administered fuel prices take up inflation. However weak domestic demand coupled with weak outlook for commodity prices globally on the back of economic growth slowdown will keep inflation tempered.

The Indian Rupee will stay volatile given domestic and global uncertainties and the markets will learn to live with this volatility. The correlation between INR and inflation is not perfect and in fact WPI (Wholesale Price Inflation) has fallen from over 9% levels to below 5% levels even as the INR has depreciated by over 25% against the USD over the last couple of years.

The government on its part is looking to encourage FDI and FII flows into the country and is also making plans to raise USD funds through a sovereign bond issue or through a quasi-guaranteed bond issue. USD bond issuance will lead to domestic government borrowing being restricted.

The long term outlook for bond yields is positive while the short term outlook is uncertain. Hence bond/bond fund investors with a longer term view should take advantage of this short term uncertainty brought about by the RBI. Gains will be much higher going forward with risk levels lower than what it was before the RBI action on liquidity.



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WEEK BEGINNING 23RD AUGUST 2013


“Sensex Is 40% Cheaper Than What It Was Five Years Back”

The broad picture is as follows. The USD/INR pair is trading at levels of Rs 65 as of 22nd August 2013 against levels of Rs 44 seen in August 2008. The Sensex is trading at levels of 18000 against levels of 14500 seen in August 2008. An FII who invested in the Sensex in 2008 would have seen his investment depreciate by 16%.

The Sensex, while having gained 24% in absolute terms has lost in valuations. The Sensex was trading at a PE ratio of 20x (one year forward earnings) in 2008 and is now trading at a PE ratio of around 15.5x (one year forward earnings). In the meanwhile Sensex earnings have risen by 37% in absolute terms over the last five years.

FIIs coming in to invest in the Sensex today are investing in a market that has seen the currency depreciate by 47% and valuations ease by 22% in PE terms since August 2008. One could argue that the INR and the Sensex were overvalued in 2008 but the fact is that the Sensex today is trading at much lower levels in terms of currency as well as valuations.

The Sensex is definitely feeling the pangs of falling economic growth, weakening deficits, see sawing inflation and poor governance. However despite all the issues the country is facing the Sensex is still showing earnings growth at a pace that is definitely far lower than what it was in the peaks of valuations but growth all the same. Sensex earnings is expected to growth at single digit levels in fy 2014 against levels of 25% seen in fy 2008.


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The future outlook for the market is more important than what happened in the past. The future may seem hazy at present given weak INR, economic slowdown, elections in 2014 and uncertain global economic environment. The INR and Sensex valuations are factoring in the uncertain future at current prices.

The most pessimistic of scenarios also provide cheap entry points to the market. The Sensex is definitely cheap now for an FII and as sentiments turn there will be positive flows into the market. The Sensex should rise on the back of positive FII flows and domestic investors should buy into the index at current levels.



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“Weekend Online Fixed Income and Currency Market Training Programs”

The Indian Rupee (INR) is making headlines everyday by depreciating to record lows against the US Dollar. The fallout of the INR fall is higher interest rates as RBI takes steps to stem the currency depreciation. Higher interest rates in turn are impacting equities with bank stocks dragging the Sensex and Nifty down.

Investors in long term and short term bond funds have seen one year returns being wiped out and even turn negative on the back of bond yields rising sharply due to the INR fall. Corporates have seen borrowing costs rise due to sharp rise in short term interest rates. The government too is facing the prospects of paying higher interest on its borrowings.

The inter linkage between currency, fixed income and equity markets have never been stronger. It is important for everyone and anyone interested in financial markets either professionally or otherwise to understand how fixed income and currency markets work.

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The Weekend Online Training Program on Fixed Income and Currency Markets is a highly practical oriented program that is aimed at bringing the markets to the


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participants. The program will benefit those keen on improving their knowledge on fixed income and currency markets.

The Weekend Online Training Program on Fixed Income and Currency Markets is an eight week online program where participants are given study material and tests over the weekend. Participants will have to login to access the study material and take the tests. A live online training session will be conducted on Sunday of the 4th and 8th week. Participants will receive regular inputs on markets over the period of eight weeks that will help them follow fixed income and currency markets with better understanding. Participants will be given certificate at the end of the program.

Join the Weekend Online Training Program on Fixed Income and Currency Markets to clearly analyse for yourself how the inter linkages between various markets work. Once you are able to analyse the inter linkages you will be able to form your own opinion on future market movements.

The Weekend Online Fixed Income and Currency Markets Training Program commences every fortnight with the latest program commencing on the 31st of August 2013.

Call toll free 1800-102-1611 or email [email protected] or visit inrbonds.com/weekend-training-program for details on course structure and for enrolment to the program.



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Economic Analysis


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Published on: 13th August 2013

Economic Analysis August 2013

“Choking Economic Growth will not”

India’s GDP growth forecasts are being revised downwards across think tanks. Private economists are projecting growth at below decade low growth rate of 5% seen in fiscal 2012-13 while RBI and government have lowered projections by around 200bps to 300bps to 5.5% and 6% levels respectively. The outlook for growth is weak as RBI is tightening monetary conditions to fend off INR speculation while the government is fiscally constrained to spend. Global economic outlook is not very positive despite green shoots emerging in the Eurozone and US economy showing slow and steady growth. Weak global economy impacts domestic trade prospects leading to a negative impact on growth.

The Indian Rupee (INR) is deeply impacted by the falling growth prospects of the economy. India is seen as one of the high growth economies in the world and a growth slowdown can impact capital flows negatively. Weak capital flows lead to worries of financing a high CAD (Current Account Deficit) leading to more pressure on the INR. Policy makers actions to stem currency weakness leads to more growth pangs for the economy leading to fresh worries on capital flows that in turn leads to INR fall. A vicious cycle that has no end in sight.

The INR that touched all time lows of Rs 61.81 to the USD in the first week of August 2013 is compelling the RBI to tighten system liquidity to stave off currency speculation. RBI’s liquidity tightening policies has driven up yields across yield curves and has inverted the yield curves. Inverted yield curves have short maturity bond yields higher than long maturity bond yields and the reason for the inversion is due to the cost of liquidity becoming tight in the system.


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The rise in yields at the short end of the curve is impacting the cost of funds for the banking system. Banks have been forced to park 4% of their NDTL (Net Demand and Time Liabilities) with the RBI at zero interest rates on a daily basis. Banks access to the RBI repo window for funds is restricted to 0.5% of their NDTL and banks are forced to borrow from the RBI at MSF (Marginal Standing Facility) rate of 10.25%. Banks are raising lending rates to pass on the higher cost of funds to borrowers.

Borrowing costs for corporates are high due to the stress levels in bank loans. SBI’s gross and net NPA (Non Performing Assets) stood at 5.56% and 2.83% respectively in first quarter of fiscal 2013-14 compared to 4.99% and 2.22% respectively seen in the same period last year. Economic growth at decade low levels of 5% is placing pressure on debt servicing by indebted corporates.

The economy is slowing down sharply. IIP (Index of Industrial Production) growth was negative 1.1% for the first quarter of fiscal 2013-14. Vehicle sales are falling with sales down year on year for the first four months of the fiscal. Tax collection at 10% levels for the April-July 2013 period is well below the budgeted growth of 17.5% for the full year. Bank credit has grown by just around 1% in the April-July period.

The government is under pressure to contain fiscal deficit as it is seen as one of the primary factors for a weak INR. Fiscal deficit is budgeted at 4.8% of GDP for this fiscal against levels of 4.9% of GDP seen in the last fiscal. The weak economy is slowing down revenue growth and the government has to curb expenditure to keep its fiscal deficit in check.

The government and the RBI are trying hard to bring down the Current Account Deficit (CAD) that was at record highs of 4.8% of GDP in fiscal 2012-13. The government has raised duties on non essential imports such as gold and silver


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while RBI has made financing of non essential imports costlier. The weak CAD is seen as the primary cause for the INR weakness.

Exports have grown by less than 1% in the first four months of fiscal 2013-14 despite a weak INR that is down by over 11% in the same period. Weak global economy is leading to anemic export growth. Imports are up by just 2.6% indicating weak domestic demand.

Global Economy

The US economy added 162,000 jobs in July 2013 against expectation of 185,000 job additions and against June 2013 additions of 188,000 jobs that were revised downwards from 195,000 job additions. Unemployment rate came off at 7.4% in July against June levels of 7.6%. US equity indices are trading at close to record highs on the back of rising home prices that rose by most in seven years in May, vehicle sales that touched five year highs in July and consumer confidence that is running at five year highs as of July. US economy is growing slowly and steadily.

China’s exports rose by 5.1% year on year in July against a 3.1% fall in June while imports rose 10.9% against a 0.7% fall. The country’s inflation was steady at 2.7% in July. Inflation was at 2.7% in June. China’s official figures showed improvement in the manufacturing index in July though private reports showed a decline. China’s economy faces many headwinds going forward and growth will be muted for the second largest economy in the world.

Eurozone economy is showing signs of stability. Manufacturing grew for the first time in two years in July. Eurozone economy is expected to show growth of 0.2% in the second quarter of calendar year 2013 against flat to negative growth seen in all the quarters since late 2011. The record low interest rates maintained by the ECB is helping the Eurozone come out of a recession. However the Eurozone


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economy has a long way to go given record unemployment, fiscal austerity in indebted countries and weak global economy.

Table 1. India Economic Date July 2013


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India is a Fashion Statement – You are “in” if you are Short India

Hedge Fund managers who typically frequent the same bars in upmarket areas of London, Hong Kong and Singapore greet each other with pleasantries that reflect their positions. One such pleasantry is “Short India” with beaming smiles that indicate a strong performance of their funds. Any fund manager not “Short India” is to be either excommunicated or sympathized with as that fund would be a severe underperformer.

Not so long ago, the same fund managers were greeting each other with “Long India” pleasantries that indicated strong performance of their funds.

Hedge funds have no loyalties and should not have any loyalties. Fund managers are paid for betting on the right trends and the more the leverage placed on a correct trend the more fees the fund manager gets paid. Obviously, fund managers betting on wrong trends lose assets.

The right trend now globally is “Short India”.

India has provided great returns to bears across assets. Sensex and Nifty are down 10%, Rupee is down over 18% while bond prices are down 10% from levels seen in April – May 2013. On a longer term basis, Sensex and Nifty and bond yields have almost stayed flat while the Rupee is down over 45% against the USD.


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India can do nothing right now. Apart from economic issues of fiscal and current account deficits, economic slowdown, corporate and political scams there are the deep politically motivated policies such as the Food Bill that was passed in the Lok Sabah on the 26th of August. The food bill is negative in terms of optics, with higher subsidy bill and higher inflation caused by the government paying more to stock up on grains and other food articles. However given administrative inefficiency there is absolutely no certainty on whether even 25% of the ambitious project will see light in many years to come.

On the social front, headline cases such as rape in Mumbai is food for fodder for India bears. Hedge fund managers get a glowing feeling that only a trader knows when he or she is in the money, when negative headlines come out on a day to day basis. True, issues of rape has no relevance to a position run by a hedge fund, but it all adds up to profits on short India trades.

Apart from the money managers, it is fashionable to criticize India across all media platforms. Criticisms on the web draws many comments and Face Book likes while prime time TV draws more viewers when there is debate about what all there is wrong with the country. Everybody wants a piece of India now, but nobody wants to own it.

Short India is making money now. The question is when will the tide turn and short covering starts to take place. Given the issues surrounding the country, the only reason to cover shorts will be the levels of asset prices or fatigue in the “Short India” story. The country is definitely oversold at this point of time as everyone and anyone is “Short India”.


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RBI Policies


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The New RBI Governor – Expect a Conservative but Surprise Approach to Policies

Dr. Raghuram Rajan, a former IMF economist, visiting professor to the World Bank and US Federal Reserve Board and one of the few economists who predicted the 2008 credit crisis will head the Reserve Bank of India. He takes over from Dr. D. Subbarao on the 4th of September.

What can one expect from the new RBI governor. He takes over the reins of the central bank at a time when the economy is going downhill, the Indian Rupee (INR) is on a free fall, equity and bond markets are nervous and the government at the centre wants quick fixes before the 2014 general elections.

Dr.D. Subbarao came into office in the middle of the 2008 financial market crisis. He is one governor who in his term cut rates drastically and raised rates at the same pace. The repo rate under his term fell to levels of 4.75% from 9% and rose to levels of 8.5% from 4.75%. All in a period of five years. Needless to say the economy, markets and the currency has been on a roller coaster ride over the last five years due to various reasons both domestic and global.

Rajan comes to the RBI governor post with a lot of expectations thrust on him by both the government and the markets. The government will want him to wave a magic wand to bring down deficits, strengthen INR and help the economy grow. The markets will want from him a calm, well thought out approach to handling


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both the economy and the government. A tough task by any means, as will be vouched by both Dr. Y.V. Reddy and Dr. Subbarao, the former RBI governors.

The immediate focus of the RBI is to curb INR volatility and Rajan has been involved in this process since the time he came into the post of the Chief Economic Advisor to the Indian government in August 2012. The government and the RBI has not succeeded in curbing the volatility in the INR that touched all time lows of Rs 61.80 to the USD on the 6th of August, which is also the day of Rajan’s appointment to the RBI governor post. Rajan will be hard pressed to stem the INR fall unless luck in the form of global markets behaving well comes in his way.

Rajan’s past record shows that he can equate economics to markets and this is extremely important for a central bank governor. Whether one likes it or not markets determine the fate of economies as seen by the way indebted Eurozone economies are suffering due to austerity. India too is seeing the effect of the markets view on the INR as growth is suffering due to policies that are aimed to reducing INR volatility.

Rajan will focus on a longer term approach to the economy and market stability. He did predict the 2008 bubble burst, but he first predicted it in 2005. Similarly if he can focus on long term goals of the central bank that is price stability, growth and curbing systemic imbalances in the markets, he can bring about a change in the country’s prospects.

The government may not have the patience for long term goals of RBI. Rajan should stand off short term political pressures for longer term goals.


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Rajan’s policies will be conservative, as he will not want to create market bubbles. His policies will also surprise to create a shock effect that shakes out excesses in the market. Markets can expect direction from the RBI going forward but that will not be cast in stone.

Here’s wishing him all the best in troubled time.


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RBI Starting to Reverse its Tight Liquidity Stance Will Induce Sharp Rally in Markets

RBI’s moves to ease bond market pain will see sharp fall in bond yields as the market scrambles to cover its short positions. Ten year government bond yields can fall by 50bps to levels of 8.40% in the next couple of days. Markets will however be wary of the levels at which RBI accepts bids in the OMO auction. Markets will also worry about cut offs in the government bond auctions. Hence bond yields will stay volatile and will take time to stabilize.

Banking sector stocks will benefit from RBI moves to curtail losses on bond portfolios and the bank Nifty that had fallen by 22% since the 15th of July is likely to see a sharp jump in the next few days.

The RBI, unnerved by the volatility of its actions on the INR that touched all time lows against the USD as well as on bond yields that rose to five year highs, has started to relax its tight liquidity stance. The bond market had a violent trading day on the 20th of August 2013 with the benchmark ten year bond yield touching highs of 9.40% in early morning trades before falling all the way back to 8.90%, a fall of 50bps from highs. Bond markets seem to have got a whiff of some easing measures in the offing but those who did not know about the easing measures would have got burnt badly.

The RBI’s announcement of easing liquidity measures came after market hours. The Central Bank has announced an OMO (Open Market Operation) purchase auction of Rs 8000 crores of long dated government bonds on the 23rd of August


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2013. The central bank will also scale down the issuance of Cash Management Bills (CMB) to alleviate the tight liquidity conditions that have led to money market security yields crossing 12% levels.

RBI has also addressed the problems of banks losing money on their government bond holdings due to the sharp rise in bond yields. Ten year benchmark government bond yield has gone up from levels of 7.10% to 8.90% levels over the last three months. Banks have to hold government bonds as part of the reserve requirement.

The SLR (Statutory Liquidity Ratio) of banks is 23% of NDTL (Net Demand and Time Liabilities) and banks have to compulsorily hold government bonds for this purpose. Bonds held for SLR need not be marked to market (MTM) and is placed in a category called HTM (Held to Maturity). The HTM portfolio of banks stood at 24.5% of NDTL and banks were required to lower their HTM portfolio to 23% of NDTL, which is also the SLR rate. RBI has now told banks that they need not bring down the HTM portfolio to 23% and they can continue to hold bonds in the HTM portfolio to avoid mark to market losses on their bond holdings.

RBI has also allowed banks to transfer securities that were held for sale (AFS or Available for Sale Portfolio) to the HTM portfolio at yields that were prevailing on the 15th of July. The yield on the ten year benchmark bond, the 7.16% 2023 bond was 135 bps lower on the 15th of July at levels of 7.55% against levels of 8.90% as 20th August. Banks have been allowed to stagger the losses on the bond portfolio over the next three quarters.


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Rupee at Rs 68 – RBI has to Reverse Liquidity Measures to alleviate Market Panic

Markets are panicking. The Food Security Bill and the Syria issue have taken the Indian Rupee (INR) to all time lows of Rs 68.75 to the US Dollar. The INR is down over 10% over the last ten days. Ten year benchmark bond yields have gone up by 70bps while the Sensex and Nifty are down 10% from levels seen over the last ten days.

RBI has no reason to continue with its tight liquidity policy that it introduced on the 15th of July 2013 when the INR was trading at levels of around Rs 60. RBI’s moves to take up overnight money market rates to 10.25% have resulted in yields at the short end of yield curves going up by 300bps. Long bond yields including ten year benchmark government bond yields have risen by 150bps.

The bond market is swamped with supply at a time when liquidity is tight and the INR is on a free fall. RBI must realise that it has absolutely no control over the INR and all its liquidity tightening efforts have only created more panic in the markets.

Bond market this week has seen supply of Rs 22,000 crores of Cash Management Bills, Rs 1000 crores of IIB (Inflation Indexed Bonds) and Rs 8800 crores of State Development Loans (SDL). The market will have to absorb Rs 17,000 crores of government bond supply in the auction scheduled for Friday the 30th of August. RBI buying bonds in the OMO (Open Market Operation) purchase auction for Rs 8000 crores scheduled for the 30th of August will hardly help ease tension in the market.


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Bond market has no appetite to absorb supply of bonds and money market securities. The IIB auction held on the 27th of August saw over 50% of the auction devolving on the Primary Dealers at a price of Rs 83.30 implying a real yield of 3.47%. The IIB closed at Rs 81.49 post auction. The IIB was first issued at real yields of 1.44% for Rs 100 face value in the first week of June 2013.

Ten year benchmark bond yields, the 7.16% 2023 bond is trading at levels of 9%. The bond yield touched five year highs of 9.45% on the 20th of August before RBI announced OMO purchase action to bring down the yields. The bond yield touched lows of 8.20% on the 22nd of August 2008 before climbing back to levels of 9% on the back of the panic over Food Security Bill and the Syria issue.

The need of the hour for markets is not INR damage control measures. The RBI and the Government must have by now realized that the INR is not in their hands in the short term. Instead policy makers should work towards easing the panic situation in the market that is seeing prices fall drastically across equities and bonds.

RBI should withdraw the limit of 0.5% of NDTL placed on banks on access to Repo funds under LAF (Liquidity Adjustment Facility). RBI should bring back MSF (Marginal Standing Facility) rate to 100bps over repo from 300bps over repo. The system requires liquidity at present and the comfort of liquidity can lessen the panic that is prevailing in the market at present.

RBI reversal of its tight liquidity stance will not fully stem the nervousness in markets but it can at least stop it from causing more damage to market sentiments that are hurt by issues beyond its control.


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Article General


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Fixed Income Article General

Published on: 24th July 2013

IIB price fall due to rise in cost of holding the bond

India’s foray into IIB (Inflation Indexed Bonds) has been disastrous. IIB were supposed to provide a hedge against inflation for investors but in fact it has wiped out capital for the early buyers of the bond.

The latest IIB auction for Rs 1000 crores held on the 27th of August 2013 saw the cut off price on the IIB at Rs 83.30 at yield of 3.47%. The IIB went on to trade at a price of Rs 81.49 at a yield of 3.716%. The first IIB auction for fiscal 2013-14, held in June 2013 saw the cut off yield at 1.44% for a Rs 100 face value bond.

The IIB has lost 18.50% in value since issuance in June. The primary reason for the market shunning IIB is the sharp rise in cost of holding the bond. The RBI moves towards tightening of liquidity in the system pushed up funding costs to levels of 10.25% from levels of 7.25%. A bank holding the IIB was earning a negative carry of 8.81% (10.25% – 1.44% ). The bank requires the price of IIB to rise by 8.81% to negate the negative carry cost.

The price at Rs 81.50 levels for the IIB may look cheap but the yield on the IIB at 3.7% is still too low for banks to hold the bond in times of high funding costs. However if funding costs are expected to come off, the market may punt on the IIB given its low absolute value.


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Funding costs can come off only if the INR stabilizes and that does not seem likely in the near future. IIB holders will continue to bleed until then.


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Currency Article General


INR at all-time lows –Calm Not Storm Is Needed from Policy Makers

The Indian Rupee (INR) fell to all-time lows of Rs 61.80 against the US Dollar today and there is fear in all markets on the back of the weakening currency. The Sensex and Nifty are down over 2.5% while the ten year benchmark government bond yield is up 6bps on worries of actions by the government and the RBI to curb INR fall.


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The fresh weakness in the INR is giving rise to speculation of repo rate and CRR (Cash Reserve Ratio) hike by the RBI. The government might impose restrictions on non-essential imports and may make noises on more reforms. However the RBI and the government are helpless and any moves that they may take in the short term will only further deepen the gloom over the economy.

RBI knows that it cannot use its depleted reserves (at USD 280 billion as of July 2013 is down by USD 15 billion since April 2013) to protect the currency. At best by selling USD it can prevent a sustained directional fall. The government does not have any weapons on hand to fight the INR fall. A sovereign/quasi sovereign bond issue may help but the size has to be large enough to make markets sit up and think before shorting the INR.

It is high time that the policy makers realise that the currency fall cannot be prevented. The more they protect the INR the more the opportunity that the market is getting to short the currency. Hence the more the actions policy makers take to prevent INR fall the more the nervousness amongst markets. Equities will fall and bond yields will rise on panic reaction by policy makers.

The markets need soothing at this point of time. It is best that RBI stays away from monetary tightening and the government stops talking about actions to prevent currency depreciation. The economic data since the beginning of this month has given markets enough worry on the economy. Service sector PMI (Purchasing Managers Index) for July 2013 fell to its lowest levels since July 2009 indication falling activity in the economy. Large infrastructure companies such as L&T and BHEL have shown weak first quarter results for this financial year. Defaults amongst indebted companies are rising. There is an issue on regulations over exchanges with settlement being deferred by NSEL (National Spot Exchange).


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Growth expectations for the economy are coming off sharply with estimates for fiscal 2013-14 at below decade low levels of 5% seen in fiscal 2012-13. The INR is reflecting the gloom falling over the economy and any measures that could deepen the glow will reflect on the INR.

The RBI now has a new Governor. Dr. Raghuram Rajan is replacing the outgoing Dr. D. Subbarao. Markets will hope that the former World Bank economist takes steps to calm markets rather than add gloom to the economy.

The INR is seeing fresh weakness since it touched all-time lows of Rs 61.21 in the first week of July 2013. The currency gained strength from all-time lows on the back of RBI actions to curb speculation. The government on its part took measures to attract capital flows by allowing FDI in multi brand retail and giving the Airline sector a boost by passing the Jet –Etihad deal.

RBI measures of tightening liquidity and pushing up overnight rates by 300bps only helped take up government bond yields by 70bps. The yield curve inverted with 91 day Treasury bill yields trading at over 11% levels. Government’s move on attracting capital flows can only bear fruit down the line when investors see stability in the economy as well as the currency.


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Panic Leads to More Panic

India is panicking on the Rupee (INR) and that is feeding panic into the currency markets that in turn is taking the INR to all-time lows. The INR crossed all-time lows of Rs 61.80 to the US Dollar post India’s actions on capital controls. The INR weakness is feeding to equities and bonds with the Sensex and Nifty down by 2.5% each while the ten year benchmark bond yield is up 10bps to trade at over one year highs.

The RBI on the eve of India’s 67th Independence Day reduced the investment limit for Overseas Direct Investments (ODI) from 400% of net worth to 100% of net worth through the automatic route. The central bank also reduced the limit under Liberalised Remittance Scheme from USD 200,000 to USD 75,000. The central bank is effectively curtailing Indians from investing abroad.

The move on capital controls by the RBI is by far the most damaging for the INR. Foreign investors will now worry about some form of capital controls on their investments. The fact that the Indian government is falling head over heels to bring in foreign investors will not prevent worries on capital controls in the minds of the investors.

RBI should have realised that the move on capital control on Indian’s investing abroad would never work to stem the INR fall. The world is replete with countries that have failed to prevent currency depreciation through capital controls. Malaysia in the late 1990’s and Argentina in the 2000’s are examples of capital controls that never worked. Iceland imposed capital controls post its crisis in 2008 and has still not been able to roll back any of the measures.


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Why did the RBI panic on the INR? Ok, it is trading at all time lows against the USD but in terms of many factors such as Foreign Exchange Reserves at seven months imports and external debt to GDP ratio at around 21%, India is no where near any kind of balance of payment crisis. Countries that have resorted to capital controls in the past had external debt to GDP ratios of over 100%.

It is difficult to understand the RBI’s panic reaction on INR fall especially after it imposed curbs on gold imports, tightened liquidity conditions and imposed limits on speculative positions on the INR in the market. It is true that the central bank has in no way curbed foreign investors from bringing in and taking out money freely from the country but even a hint of suspicion that this could happen is enough to take down the INR.

RBI and the government will now have to send out clear messages to foreign investors that there will be no controls on their investments in India. However the damage has been done and markets will trade weak until some calm emerges. The calm can emerge only when foreign investors do not fear capital controls.

The Indian investor is hit badly. The weak INR is hurting equity and bond markets. RBI has prevented the Indian investor from investing abroad. The Indian investor will now go into a shell by placing money in fixed deposits and with banks hoarding on liquidity, there will be no flow of money to the industry. India’s economic growth will be hit badly leading to more pressure on the INR to fall.


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INR at Rs 63.13 – Fear can make you Money The Indian Rupee (INR) fall is exclusively due to domestic factors. RBI actions of tightening liquidity has taken up bond yields sharply higher with yields at the short end of the government bond yield curve rising by 400bps while long end yields are up by over 150bps. The rise in bond yields have led to fears of prolonged economic weakness and have led to worries on banks balance sheets. The rise in bond yields has also led to fears of banks showing losses on their government bond holdings. The Bank Nifty has fallen by 22% since 15th July 2013. On an absolute basis, interest rates in the economy are at levels where it can kill the economy. Money market securities yields are at over 11% levels while five and ten year government bond yields are at levels of 9.5% to 9.25% respectively. Borrowing cost for government and corporate sector rising at a period when the economic growth is running at decade lows is almost fatal to economic growth prospects.

The only hope for the INR is interest rates coming off in the economy. The question is how will interest rates come off? RBI can reverse its tightening policy but markets will be too worried on any reversal of steps to bring down bond yields. Banks will hold back any cut in lending rates as their nerves are shattered by the RBI’s moves. Markets have absolutely no faith in the government taking right decisions even if the government is actually trying to do the right things for the economy.

The market sentiments are frail at this point of time and any signs of optimism will be regarded as foolhardy. However it is the right time to be optimistic as


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levels of the INR and bond yields reflect fear rather than fundamentals. Fear will take a while to die down but taking the right decisions in times of fear is what makes one successful.

The INR closed at all-time lows of Rs 63.13 against the US Dollar on the 19th of August 2013. The INR has fallen by over 5% since RBI unleashed steps to curb INR volatility on the 15th of July. In the period 15th July to date the Sensex and Nifty have fallen by 8.6% and 10% respectively and the ten year bond yield has gone up by 165bps. The INR fall is definitely not a result of global market volatility as the Euro has strengthened against the USD by 2% while the US Dollar index that tracks the movement of the USD against a basket of major currencies is down 2%. Emerging market currencies have seen mixed volatility with the Indonesian Rupiah that is down 4.6% to the USD 15th July to date. Malaysian Ringgit is down 2.8% while currencies such as Thai Bhat, Korean Won and Philippine Peso are down by less than 1%. Brazilian Real that is down by 8.6% is the only currency that has depreciated more than the INR. Brazil, Indonesia and India have problems that are largely domestic in nature leading to the severe underperformance. The INR fall is not a result of worries over the US Federal Reserve (Fed) tapering off bond purchases starting September. US equities are marginally down since 15th July though US treasury yields have moved up by around 30bps. US treasury yields are factoring in an uptick in the US economy and have risen by 140bps from lows over the last couple of years. FII’s are blamed from the INR fall but their pace of selling is hardly anything to write home about with sales of USD 1.6 billion in debt and sales of around USD 1


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billion in equities, 15th July till date. FIIs had sold over USD 6 billion in debt from 1st May to 15th July 2013 and had bought USD 2.3 billion of equities in the same period.


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INR is a Man Made Disaster and Hopefully Something Good Can Come out of it

The Indian Rupee (INR) is trading at levels that can only be described as disastrous. Levels of Rs 63 – Rs 64 to the US Dollar is all time lows for the currency that has depreciated by a whopping Rs 20/ 45% over the last couple of years. What has made the INR tank against the USD and join the ranks of countries such as Argentina and Iceland that have seen their currencies lose most of their value over the last decade? Brazilian Real is the only other currency that has depreciated more than the INR, falling by over 53% over the last two years.

Brazil’s problems largely stem from its sharp fall in GDP growth from levels of 7.5% seen in 2010 to below 1% levels seen in 2012. Weak commodity prices with Reuters CRB commodity index down over 30% since the financial crisis erupted in 2007-08, bureaucracy, corruption and weak infrastructure are to be blamed for Brazil’s GDP growth fall.

India’s problems stem from over confidence on growth, mismanagement, bureaucracy, corruption and weak infrastructure. The INR fall is completely man made and policy makers blaming withdrawal of stimulus by the Fed for the fall is pure nonsense.


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India offers a great learning tool for policy makers across the world on how not to manufacture currency disasters. India’s fall from strength in the mid 2000’s to position of weakness post 2010 is well documented. High fiscal and current account deficits, rising inflation, falling economic growth and weak capital markets are the cause of the INR fall. What did the policy makers do to take the INR down to record lows and more importantly push India out of any kind of reckoning in the world economic order?

The following five man made factors are the cause of the INR fall.

1. The government, public and private sector were living in a fool’s paradise believing that economic growth will never slow down. The government allowed subsidies to burgeon, as rising oil prices were not passed on to the consumers while public sector banks lent heavily to infrastructure projects of the private sector where revenues were more in air than in reality. The private sector floated projects based on valuations of licenses and commodities rather than on future cash flows. The end result, huge subsidy bill taking up fiscal deficit by 300bps, rising non-performing assets of banks that have gone up multi fold and fall in valuations of over 80% of many companies in the private sector. Government finances, banking sector balance sheets and health of corporates weakened considerably leading to fall in valuations of the whole country that is reflected in the INR fall.


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2. The illusion of high foreign exchange reserves made policy makers ignore a potential spike in Current Account Deficit (CAD). India’s foreign exchange reserves touched record highs of around USD 320 billion in February 2011 (around eleven months of imports) but have plummeted by 12.5 % since then to levels of USD 280 billion (around seven months of imports). CAD has risen from levels of below 3% of GDP to levels of 5% of GDP over the last few years. CAD was financed by capital flows that led policy makers to believe that a high CAD would not impact the INR. Structural issues of oil and gold imports, rising inflation and high fiscal deficit was ignored until too late.

3. Growth was given priority over inflation. The focus on growth by all stakeholders concerned pushed inflation to the back seat. RBI was castigated in public by both the government and the corporates for taking any action on inflation as it was felt that growth would suffer. The numbers are stark. In the period 2008-2012, wholesale price inflation came down to below 0% from over 10% levels and then went back to over 10% levels. RBI in the meanwhile raised the benchmark repo rate by 100bps and then cut the rate by 425 bps and then raised the rate by 375 bps. The seesawing of policy rates along with seesawing of inflation indicates that the central bank was being reactive rather than being proactive. The economy has suffered due to the wide fluctuations in inflation and policy rates leading to the INR being dumped later on.


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4. A falling INR hurt the pride of the government. The government felt that India was too much of a growth story for the INR to fall. The noises made by the government when the INR touched Rs 57 in June 2012 suggested that the INR was being pulled down due to reasons other than macro-economic factors. RBI forced speculators to reduce long USD/INR positions while the government made noises on reforms and growth. The government and the RBI did not show urgency in tackling the INR fall last year and that has hurt them heavily this year.

5. The INR fall to levels of below Rs 60 has awaked the animal spirits of the government and the RBI. The FM has been going all over the world to bring in foreign investments while the RBI has strangled liquidity conditions and reintroduced capital controls. The end result is a fall to record low levels of Rs 64. The hasty “animal spirit” decisions have caused panic in the markets as any hope of economic growth pulling the INR up has been laid aside. Policy makers are not focusing on growth at the right time and markets know that policy actions cannot stem the fall in the INR. Wrong policies at the wrong time.

Is there hope for the INR going forward? Yes, if the stakeholders learn from their earlier mistakes and take the right decisions.

The mistakes India has made on the INR will help other countries to tackle currency issues.

Something good can after all come out of the INR fall.


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Published on: 21st August 2013

Why I am not going to talk about the INR any longer

The INR is the talk of the world of right now, even Paul Krugman is talking about it. Everyday the currency is hitting fresh lows against the USD and media is playing the field. I am surprised that the TV channels have not called in the usual suspects on prime time and played to gallery on the INR fall.

Yes, the INR hitting record lows of Rs 64.52 against the USD and falling by 45% over the USD in the last couple of years is a big issue for the country. Frankly even the most pessimistic of Indians would not have expected the INR to fall by such high percentage. At this point of time everything is in hindsight and one just cannot predict where the currency will end going forward.

However one factor is certain. This particular difficult period for the INR will play out sooner or later and markets, media, policy makers and investors will go back to doing what they do best, finding another theme to play on. Hence going on and on about the INR when the currency is falling every day will not help anyone positively.

The INR fall draws parallel to the Eurozone debt crisis that reached its peak in mid-2012. Greece was supposed to default, bond yields of Spain and Italy shot through the roof, the Euro was trading at multi year lows to the USD and equity markets across the world were at calendar year lows. The outcome was better, the Eurozone did not collapse and the Euro is trading 11% higher against the USD. Greece is almost forgotten by markets though the country itself is feeling the effects of austerity.


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The INR fall is going to hurt. Importers and corporates with USD debt are the worst hit. FII’s are hit on their INR investments. Policy maker’s panic is hitting markets, investors and the economy. However there are a few gainers in this INR fall including exporters and savvy investors looking to bottom fish in both equity and bond markets.

I definitely do not have any contribution to make on the INR fall from here on. I am as much in the dark as anyone else on why the currency is falling continuously. Ultimately it is a demand supply game and more USD demand coupled with lower supply pulls the currency down. At some levels of the USD/INR pair, USD supply will increase leading to the INR regaining some of its losses. Until then, watching the USD/INR chart will only give one more pain and stress or give one more words to write or talk about the demise of India, the inefficacy of policy makers and other such things.

The INR fall is actually positive for the country. Politicians will not take the economy for granted and harp on pro citizen policies that actually hurt the citizens the most. Subsidies, freebies and tax exemptions lead to inflation, falling economic growth and a worthless currency.

Corporates will not rush to the mirage called cheap money that is available when liquidity is easy in the world. Importers and exporters will give more thought to currency management.

Investors will not close their eyes to the global macro and blindly put their money in whatever asset class that sells.

I am looking at the positive side of the INR fall and where it goes from here on is not going to be my primary focus.


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INR at 68 – INR will touch Rs 70 to the USD if RBI Hikes Rates

The Indian Rupee (INR) is trading at record lows of Rs 60.73 to the USD. Government bond yields rose to its highest levels in 45 days on the back of the weakening INR. Bond yields have risen by 50bps from lows seen over the last one month, tracking the INR that has depreciated by 10%. Bond markets are taking out rate cut expectations from yields as the RBI has indicated that INR volatility will be a strong factor in policy decisions.

The bond markets taking out rate cut expectations is understandable given the current market environment but the market starting to fear rate hikes is another animal all together. The latter will be a death knell for the INR, bond yields, Sensex and Nifty and economic growth. The INR can easily touch Rs 70 to the USD while ten year government bond yields can rise by well over 100bps. Sensex and Nifty can fall to two year lows while India’s economic growth will come off to below 5% levels, growth levels last seen in fiscal 2002-03.

The reason a rate hike can cause damage to the markets is that the fear of a prolonged economic slowdown will gain hold of the markets. India’s GDP growth has come off from levels of 8.4% seen in 2010-11 to levels of 5% in 2012-13. The Indian government is fiscally constrained to push up growth as it is focused on bringing down the fiscal deficit to levels of 4% of GDP from levels of 4.9% of GDP seen in fiscal 2012-13.

RBI has had a bit of leeway in lowering policy rates from 8.5% to 7.25% over the last fourteen months as inflation has trended down. Inflation as measured by the


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WPI (Wholesale Price Index) has come off from levels of over 9% to below 5% levels over the last couple of years. Rate cuts by the RBI and lower fiscal deficit commitment by the government has brought down the ten year bond yield by 100bps over the last one year.

Economic growth revival has some hope when interest rates come off in the economy. The weakness in the INR is a natural consequence of falling economic growth and the only way the INR can strengthen is when growth picks up. Growth picking up is dependent of low interest rates when business and investment sentiment is weak.

A rate hike will not help the INR. The belief that interest rate spreads will rise between US treasury yields and INR bond yields will bring in FII flows is a fallacy. FII’s will consider many factors when looking to invest in INR bonds and these include cost of hedging the currency and the credit risk. A rate hike will only increase cost of hedging the currency risk as the INR will go into a free fall on the back of plunging GDP growth expectations. Credit risk on Indian credit will rise sharply on a weakening economy.

RBI is aware of the damage it can cause if it uses interest rates to stem a weakening currency. Rate cuts are highly unlikely to stem the INR fall and markets should not start to factor in rate hikes.


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Personal Finance Article General


Loosely Regulated Markets – Few Profit at the Cost of Many

The NSEL (National Spot Exchange) by deferring settlements has brought focus on markets where regulators are absent or are not being stringent on enforcing rules. The settlement amount is pegged at around Rs 5000 crores according to various media estimates. The NSEL was forced by the government to stop trading in many contracts leading to the settlement crisis as players were not given time to cover their positions.

NSEL is not regulated by the FMC (Forwards Markets Commission) that regulates the commodity futures exchanges. NSEL was not regulated by any other market regulator and the fact that the Department of Consumer Affairs had to pull up NSEL for contract violations, suggest that the exchange was loosely regulated.

SEBI the capital market regulator is not involved directly in the commodity markets but the fact that the promoters of commodity exchanges including listed entities such as Financial Technologies and NSE (National Stock Exchange) come under the SEBI authority makes the regulator indirectly involved in commodity exchanges. RBI is involved on the banking side of the business as banks deal with the brokers and exchanges.


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The regulators are all working together to sort the NSEL settlement issues. However the regulators cannot prevent any loss incurred by an investor who is involved in transacting in the NSEL. The promoters will get away with fines and warnings and the big speculators/ traders and brokers may be able to absorb losses as they would have made enough money by moving illiquid and non-transparent commodity markets. The small trader, speculator and investor will suffer losses and some of them may sink under losses.

The NSEL issue is applicable to all markets where there are no regulators present. Unregulated products carry huge risk as seen by the ponzi schemes that have collapsed in recent times such as chit funds, real estate investments, turkey farms etc. The investor in these products has no recourse to either the regulator or even the law in many cases. Needless to say that the perpetrators of such ponzi schemes are the ones who laugh all the way to the bank though some of them are brought to justice.

Unregulated or loosely regulated markets are not exclusive to India. China is facing a huge crisis in the form of “Shadow Banking” where unregulated investment products have accounted for a parallel lending market that has in turn led to asset bubbles and over investments. The collapse of many hedge funds globally post the 2007-08 credit crisis has led to huge losses for many investors. Many other countries have seen ponzi schemes collapse or bubbles burst in unregulated markets leading to extensive losses to investors.


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The NSEL issue brings to fore the risk of investing in unregulated markets. One market that is unregulated but is the flavour of the day is real estate. There are many investment products floated with real estate as the underlying investment. Private equity funds, PMS products that involve both equity and debt of real estate companies and even some mutual fund schemes that have real estate as the underlying theme. Investors should be well aware of the risks to products with an unregulated market such as real estate as the underlying investment.

Similarly, investors should either stay out of investments in products where the underlying market is loosely or not at all regulated or should carry out even due diligence in the products to understand the risk return trade off.

Let the speculators/ traders and big investors make or lose money in unregulated markets. You will only get the end bits if you play it right but you will end up losing heavily if you play it wrong.


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Old is not Gold is the message from Washington Post

Jeff Bezos the founder of Amazon.com bought over the venerable US newspaper Washington Post for USD 250 million. The figures are stark and send out one clear message to investors and businessmen. Old is not gold. History means nothing in a changing world. Go by future and not by past. If a business is making money just because it exists it is no reason to run or buy the business. If a business is being built for the future, then that is the business to be in or buy.

Washington Post was run by the present owner since 1933. Amazon.com started in 1994. Amazon has a market capitalization of USD 137 billion while Jeff Bezos is worth USD 25 billion. Washington Post is worth a paltry USD 250 million even though it has age, position, brand and everything else going for it.

One can say it is the new economy taking over the old economy. The present owners tried hard to make the paper compete in an internet world but could not succeed. The management clearly did not have the foresight of going web earlier and could not catch up when the web overtook print media in the US.

The reasons for Jeff Bezos buying Washington Post in his personal capacity could be many but the fact is that the cost of the acquisition is pittance as compared to his personal wealth. He may or may not succeed in turning around the paper but he will definitely change the way the paper functions. Washington Post will now become a 2013 entity that is looking ahead into the future and not a 1933 entity living on its past glory.

The stark contrast in the fortunes of Amazon.com and Washington Post should set minds of businessmen and investors in India and across the world thinking. The


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first thought should be is whether the business is living in the present and looking to the future. A business built in the past and looking at the present is not a business to be in. The second thought should be whether it is worth it at all to be in a business even if it is profitable. A profitable business that is not growing or not getting market value will see other businesses growing and overtaking it. Ultimately it may get acquired like Washington Post.

India has seen such drastic valuation changes in the last two decades. Stark examples are the market caps of companies of old business houses. TCS market cap is Rs 366,000 crores while Tata Steel market cap is Rs 20,000 crores. Idea market cap is Rs 52,000 crores while Hindalco market cap is Rs 16,300 crores. Tata Steel is ages old while TCS is not even one third the age of Tata Steel in the Tata group of companies. Idea is baby while Hindalco is a grandfather in the Birla group. TCS and Idea are new age companies and they are by far the most valuable for the groups.

Tata’s and Birla’s have done well to be in new age businesses but many old business houses are seeing the young go past them and are becoming irrelevant in the scheme of things. Many should question their own existence while investors should shun such businesses houses.

The Jeff Bezos buying Washington Post news should be etched in the minds of business houses and investors for decision making. Future wealth creation depends on it.


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Classroom


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SELECTING STOCKS FOR THE FUTURE Series 56 – Another Cheap Utility Stock Infotech Enterprise – One Cheap IT Stock

FIXED INCOME INVESTMENTS TUTORIALS Video on Inverted Yield Curve

Video on on Characteristics and Pricing of Money Market Securities

Fixed Income Investment Tutorials 45 – Collateralized Borrowing and Lending Obligation(CBLO),Call Money

WEEKLY FIXED INCOME MARKET ANALYSIS

5th August 2013 – Bond Yields To Move In Tandem With 12th August 2013 – US Payroll Numbers to Keep the Bond Market Nervous 19th August 2013 – Fifteen days of Agony for the Bond Market 26th August 2013 – Bond Yields will Trend Higher before Coming Off

RAVI SERIES ON PERSONAL FINANCE Video on Ravi Series on Personal Finance – Giving Time is Important for

Investments VIDEO ON RAVI SERIES ON PERSONAL FINANCE – THE PAST CAN BE THE WORST

INDICATOR FOR THE FUTURE VIDEO ON RAVI SERIES ON PERSONAL FINANCE – HOME LOAN REPAYMENT

http://investorsareidiots.com/2013/08/selecting-stocks-for-the-future-series-56/

http://investorsareidiots.com/2013/08/infotech-enterprises-one-cheap-it-stock/

http://investorsareidiots.com/2013/08/infotech-enterprises-one-cheap-it-stock/

http://investorsareidiots.com/2013/08/video-on-inverted-yield-curve/

http://investorsareidiots.com/2013/08/video-on-inverted-yield-curve/

http://investorsareidiots.com/2013/08/video-tutorial-on-characteristics-and-pricing-of-money-market-securities/

http://investorsareidiots.com/2013/08/video-tutorial-on-characteristics-and-pricing-of-money-market-securities/

http://investorsareidiots.com/2013/08/fixed-income-investment-tutorials-45-collateralized-borrowing-and-lending-obligationcall-money/

http://investorsareidiots.com/2013/08/fixed-income-investment-tutorials-45-collateralized-borrowing-and-lending-obligationcall-money/

http://investorsareidiots.com/2013/08/bond-yields-to-move-in-tandem-with-inr/

http://investorsareidiots.com/2013/08/bond-yields-to-move-in-tandem-with-inr/

http://investorsareidiots.com/2013/08/rs-57300-crores-of-supply-for-the-bond-market-this-week-10-year-to-go-to-8-50/

http://investorsareidiots.com/2013/08/rs-57300-crores-of-supply-for-the-bond-market-this-week-10-year-to-go-to-8-50/

http://investorsareidiots.com/2013/08/liquidity-conditions-to-improve-in-september/

http://investorsareidiots.com/2013/08/liquidity-conditions-to-improve-in-september/

http://investorsareidiots.com/2013/08/18814/

http://investorsareidiots.com/2013/08/18814/

http://investorsareidiots.com/2013/08/video-on-ravi-series-on-personal-finance-giving-time-is-important-for-investments/

http://investorsareidiots.com/2013/08/video-on-ravi-series-on-personal-finance-giving-time-is-important-for-investments/

http://investorsareidiots.com/2013/08/video-on-ravi-series-on-personal-finance-the-past-can-be-the-worst-indicator-for-the-future/

http://investorsareidiots.com/2013/08/video-on-ravi-series-on-personal-finance-the-past-can-be-the-worst-indicator-for-the-future/

http://investorsareidiots.com/2013/08/video-on-ravi-series-on-personal-finance-home-loan-repayment/


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LEARN TO BE YOUR OWN FUND MANAGER LEARN TO BE YOUR OWN FUND MANAGER PART 27– PORTFOLIO MAINTENANCE

LINK BETWEEN CURRENCIES, COMMODITIES AND EQUITIES SERIES

Link Between Currencies, Commodities and Equities Series 29 – The US Dollar

http://investorsareidiots.com/2013/08/learn-to-be-your-own-fund-manager-part-27-portfolio-maintenance/

http://investorsareidiots.com/2013/08/link-between-currencies-commodities-and-equities-series-29-the-us-dollar/

http://investorsareidiots.com/2013/08/link-between-currencies-commodities-and-equities-series-29-the-us-dollar/


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Market Analysis September 2013

Indonesia and Brazil have Raised Interest rates to stem Currency Volatility –India Should not Follow

Indonesian Central Bank raised benchmark policy rates by 50bps on the 29th of August to stem the trend of a falling Rupiah. Indonesia has raised rates by 125bps since June 2013. Brazil has seen its central bank raising rates by 175bps over its last four policy meetings, the last rate hike of 50bps taking place on the 29th of August. Brazil’s currency the Real has taken a beating against the USD on the back of falling economic growth. Turkish Central Bank has tried to use its policy rates judiciously by keeping the benchmark policy rates unchanged but raising other lending rates including the overnight lending rate to stem the fall in the Lira, that is seeing weakness due its high levels of external debt.


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The RBI has resorted to tightening of liquidity and raising overnight money market rates to stem the fall in the Indian Rupee that has fallen to record lows against the USD on the back of worries of financing its current account deficit. RBI measures have not worked in preventing the INR fall but has taken up bond yields sharply by 150bps from lows. Rising interest rates at a time when the economy is slowing, with first quarter 2013-14 GDP at decade lows, is highly negative for growth expectations and for the INR.

RBI will have to take a judgmental call on using interest rates to fight the INR. The moves by Indonesia and Brazil have not helped in tempering the slide in their currencies. However given that its peers are raising rates, RBI will be under pressure to do the same.

RBI has signaled that it does not want long term rates to go up when it started buying long dated bonds in OMO (Open Market Operations) in the third week of August 2013. The central bank will find it difficult to manage interest rates and the INR at the same point of time with bond yields up by 50bps post the OMO purchases.

Interest rates do not help in fighting currency movements. RBI will have to accept this fact. Capital controls too will have negative effect on the currency. The central bank will have to use its policy tools judiciously if it wants to do something constructive for the INR. Hence following Indonesia and Brazil will definitely not help.

Currency Movements

The USD appreciated 11.32% against the INR in the month of August 2013. The Brazilian Real, the Indonesian Rupiah, the Malaysian Ringgit, the Korean Won,


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the South African Rand, the Australian Dollar, the Turkish Lira and the Thai Baht have seen their value decline against the USD by 3.07%, 6.48%, 2.47%, -0.4%, 5.1%, 1.09%, 5.18% and 2.91% respectively in the same period. The central banks of some of the countries have taken steps to control the fall in the value of their currencies but this has had only a temporary effect. The countries with weak economic fundamentals have seen greater amount of capital outflows and therefore the currencies have depreciated to record levels in some cases.

Australian Dollar declined as the nation revised the budget deficit estimates to Australian Dollar (AUD) 30.1 billion from the earlier AUD 18 billion. The Reserve Bank of Australia is expected to keep the interest rates unchanged in the September 2013 meeting. The Brazilian Real declined as inflation remains a concern for the economy.

The USD index that tracks the USD to a basket of six major world currencies (Euro, Japanese Yen, British Pound, Swedish Krona, Canadian Dollar and Swiss Franc) has remained flat at 81.53 for August 2013.

The likely withdrawal of the stimulus by the Fed has increased expectations of higher returns from US equities. The reversal of funds is therefore seen in the emerging market economies and the respective currencies have had a drastic impact. The Fed decision on the tapering of stimulus from September 2013 could have a negative effect on the emerging market economies in the coming months. The emerging market currencies are therefore expected to remain under pressure in the coming months.


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Markets

The month of August saw a decline in the Sensex and the Nifty by 4.89% and 6.01% respectively on account of deteriorating economic fundamentals and the depreciating rupee. Indian equities fell along with government bonds and the INR. The INR touched record lows of Rs.68.83 to the USD and the bond yields increased 53 basis points to 8.77% in August 2013 from 8.24% in July 2013. FIIs were net sellers in the debt and equity market to the tune of Rs.14, 453 crores in the month of August 2013.

The WPI inflation increased to 5.79% in the month of July 2013 over 4.8% seen in the month of June 2013. Inflationary pressures would remain on account of the INR depreciation and higher crude oil prices due to tensions in Syria and Egypt. Brent crude Oil rose 8.58% to USD 116/bbl. and gold rose 6.17% to USD 1412/Oz in the last month. The rise in oil prices increased USD demand from Oil Marketing Companies (OMC) and the RBI as a measure to curb INR depreciation introduced a foreign exchange swap facility to meet the daily needs of the state owned OMC.

The World benchmark indices also declined on a month on month basis as emerging markets witnessed outflows and the developed markets remained cautious about the Fed’s stance. European markets were marginally flat to negative on a month on month basis as the worst looks to be over for the Eurozone economy. The European Central Bank indicated that interest rates in the euro zone will continue to remain low for an extended period of time.

The Dow Jones Industrial Average declined 4.38%, the NASDAQ was marginally up by 0.11% and the S&P 500 declined 1.62% on a month on month basis in


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August 2013. The second quarter GDP growth rate for the US economy was reported at 2.5% per annum as against the first quarter growth rate of 1.8%. Positive economic data is expected to taper the bond purchases program of the Fed, leading to a withdrawal of the stimulus for the US economy.

The Consumer Price Index (CPI) data for the Japanese economy was reported at 0.7% growth on a year on year basis and a 0.0% growth on a month on month basis in the month of August 2013 thus showing a positive change. The Nikkei rose 48.42% and the Japanese Yen depreciated 24.97% on a year on year basis to reach 98.25 per USD.

Table 11: Monthly Market Movement Analysis


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