Rajan targets inflation, now will government go after growth?

But economists point out, pushing down inflation, by making the cost of money, or interest, high, also pushes down growth.

When IIT & IIM alumni Raguram Rajan took over as the Reserve Bank of India governor, some newspapers and TV business news channels went gaga. 

He was treated as the messiah who would rescue India from its current economic mess of growth stagnancy and high inflation. Stagflation was well known in the 1970s, it was least expected to make a comeback in India in 2013, more than two decades after India liberalised.

But if the TV channels are to be believed, Rajan’s honeymoon ended today after he unveiled his maiden monetary policy.

The markets took a swift tumble, though they began to recover after that, and particularly after he held a press conference (that Rajan has chosen to meet the media after announcing his policy is a welcome step towards more transparency).

Conventional economic wisdom links inflation to high growth. It is simple. If there is rapid growth, there is more money, which in turn pushes up the price of items (because there is a time lag between demand and supply). Thus, high growth comes at the cost of inflation, if all things are right.

‘Boring investments are the best’ :Head, Private Wealth Management, Deutsche Bank India: Business Line

Buying stocks when everyone is bullish, at stretched valuations, always ends in tears.

“Simple and boring is the way to successful investments. Leave the flashy experiences for the movie theatres,” Ajay Bagga, Head, Private Wealth Management, Deutsche Bank India, tells Business Line. Excerpts from an interview:

Do you take your own financial decisions or do you rely on advisors?

Having worked in the financial services industry for over 23 years, I prefer to make my financial decisions. But I do have the humility to recognise that things change fast. So a good financial advisor can add value, not only in terms of the breadth of advice but also in all the related convenience and services that they can bring to the table.

How do you differentiate the goals and investment requirements for the same, for each member of your family?

It is a mix of financial goals, time horizon and risk appetite, and woven around each family member’s financial situation. So for an older member in retirement, stability of returns is most important, while for youngsters just starting their careers, long term risk adjusted returns are critical.

Which factor do you look for most in an investment — risk, returns, liquidity or income generation?

It depends on the overall asset allocation and the role that the investment plays in it. For example, I use equities for very long term financial goals and don’t trade in them for the short term. Income funds are used to smoothen cash flows and generate present income. Real estate is for stay or for long term capital appreciation. Gold gives an inflation hedge and is a store of value during an emergency. What is critical is that one should understand what one is investing into, for what objective.

Morgan Stanley -Taper Paper

http://www.docstoc.com/docs/160615197/Morgan-Stanley--Taper-Paper

Reduce equities as you grow older:: Business Line

I have been investing in mutual funds via the SIP mode since January this year. My age is 57. I took voluntary retirement from a public sector bank in 2011.  I have spread my investments in FDs, Shares and NSCs.

The schemes where I have invested are as follows: IDFC Premier Equity -  Rs 2000; Franklin Flexi Cap- Rs 1500; Franklin Bluechip- Rs 1500; HDFC Balanced- Rs 2000. Are my investments on the right track? Please suggest changes, if any, which may have to be made.

S.Mohan

It is interesting to note that you have embarked in mutual funds so late in your life. You also invest in shares, which means that you are likely to have penchant for high-risk. Given your age, such high levels of exposure to equity (both directly and indirectly) may not desirable. Although some amount of equity is necessary to generate above-average returns, it must not account for more than 30-35 per cent of your portfolio. Regular cash flow and safety have to be given priority. You have also not stated the purpose of these investments. So it would be difficult to comment if your investments are on the ‘right’ track. Now, if your holdings in shares are in blue-chip, large-cap names from the Sensex or the Nifty you can retain a part of it. If you hold mid-cap shares, exit them in rallies as they tend to be quite volatile and can erode the value of your portfolio quickly. Since you invest in mutual funds, temper your appetite for direct equity.

If you get a pension, you can augment it by investing in monthly income plans. You can perhaps invest a portion of your FDs in those deposits where you get a monthly interest payout. Invest this interest amount in MIPs every month. Please note that though most MIPs make it a point to give dividends regularly, payouts would depend on market conditions and available surplus. You could consider HDFC MIP Long-Term, Reliance MIP, Canara Robeco MIP for your investments. Your portfolio needs minor modification. Stop investments in Franklin India Flexi Cap and switch to Fanklin India Bluechip and park Rs 3000 in it.

Frankln Flexi Cap is a multi-cap fund with significant mid-cap exposure. You already have investments in IDFC Premier Equity, a high quality mid-cap fund. Strengthen your portfolio by focusing more on large-caps. Retain IDFC Premier Equity and HDFC Balanced. Have a target in mind and book profits or even exit schemes when you reach your expected level of accumulation.

Fed official press release : September 18, 2013

Release Date: September 18, 2013

For immediate release

Information received since the Federal Open Market Committee met in July suggests that economic activity has been expanding at a moderate pace. Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.

Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $ 40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H. Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

 

The Fed and Asia After all this, now that? ::HSBC Research

The Fed and Asia
After all this, now that?
Rough summer. But turns out the Fed isn't tapering just yet. Markets are thrilled, and much needed reprieve for
battered EM investors is on its way. With Chinese data having turned up, and the BoJ running at full speed, it looks
like Asia might get its mojo back. Whether this will stick depends on reforms. The window will not be open for long:
the Fed still thinks it will be done with QE by mid-2014 and tapering has probably been postponed by only 3 months.
True, the BoJ will provide support for longer. But remember that the latest sell-off was about more than tapering: it
was about increasingly wobbly fundamentals.
You will have heard: no taper for now, plus lots of dovish noise. That's a big relief for Asia's hard-pressed emerging markets.
True, in the last couple of weeks, things had already stabilized, but the Fed's decision to keep pumping money should provide a
further lift. Add to this the BoJ's aggressive monetary easing, which is only in its early stages, and financial conditions should
stay highly supportive for a while longer. Even India and Indonesia, experiencing the greatest balance of payments pressures of
late, should benefit nicely.
To put things in perspective, consider the attached chart. Here we show the balance sheet size of the world's major central
banks. Continued asset purchases by the Fed, even if slightly reduced in December as our US economists suspect, will inject
further substantial sums of cash. The ECB, for the time being, might see its balance sheet shrink slightly on repayments of
earlier emergency loans (although our chief European economist, Janet Henry, remains worried about the strength of the
Eurozone recovery, implying that the ECB could ultimately be forced to provide additional accommodation). By contrast, with
the way data is tracking in the UK, additional easing appears unlikely for now.
That leaves the BoJ. All the worries about tapering this summer were always a bit misplaced. With Japan's central bank turning
on the spigot (fire hose, rather), there's plenty of liquidity made available right on emerging Asia's doorstep. In our view,
investors never fully appreciated the impact BoJ easing cycles have had historically on neighboring economies. And with
this cycle being far more aggressive than others, there's a solid backstop in place for when the Fed decides to rein in its asset
purchases.
All reassuring stuff. But there is another perspective to the recent sell-off in Asia. In this view, tapering fears were just a trigger
for a market plunge that had much deeper sources. In many Asian economies, growth fundamentals have gradually deteriorated
for years. Easy cash has been a decidedly mixed blessing for the region. While it helped to buffer export dependent economies
from the malaise in the West, it also blunted any incentives for structural reforms and enabled a dependence on debt to sustain
prosperity amid slowing growth in productivity.
The fact that the money train will continue for a while means the risk of a hard-landing or a balance of payments crisis has
been greatly reduced, if not averted. But, the Fed only postponed its tapering and even the BoJ will not print money forever. To
avoid another rough summer, policy-makers in Asia will need to use this brief window to implement structural reforms to put
Asian growth on a more sustainable path. That would make for a true bull market.
Frederic Neumann
Co-head of Asian Economics Research

Brokerage Notes on FED: MS

The surprising FOMC decision to continue QE at an $85 billion a month pace convinced investors to fully embrace for
now the Fed’s dovish rate guidance through 2016, supporting a substantial repricing of the medium-term fed funds
rate outlook and strong corresponding 7-year-led gains in Treasuries to the lowest yields in five weeks. It’s not clear
that QE itself is broadly so important at this point – although the MBS market did rip higher with the New York Fed
expected to be buying up nearly 100% of gross supply – but the signaling effect on the rate outlook from the decision
to surprise a clear investor consensus on tapering was more powerful than any adjustments to the Evans rule
thresholds likely would have been. The FOMC’s projections that the economy will be at full employment at the end of
2016, the inflation rate will be near the 2% target, but that the nominal fed funds rate will only be at 2% (and the real
rate thus near zero) are hard to reconcile, but the signal from the QE tapering surprise drove the market to fully
embrace that projection, with eurodollar futures moving into line with a 2% end 2016 overnight rate, and the timing
priced for the first hike shifting out to mid from early 2015. So with the QE surprise, the Fed was able to fully achieve,
for now at least, pretty much complete market acceptance of its rate guidance after what had been increasing
challenges by investors to not only Fed guidance but, more so, rate guidance from the Bank of England and ECB.
As far as where we go from here, we thought we understood the Fed’s thinking on diminishing benefits of ongoing QE
versus rising costs and risks, and we thought we basically understood their reaction function to incoming data after
what had seemed to be increasingly clear guidance on QE tapering plans since May. Clearly that ended up being
wrong, and at this point we have no clarity on what might drive a decision to move forward with QE tapering at the
October or subsequent FOMC meetings. The FOMC statement highlighted risks from tightening financial conditions –
“the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in
the economy and labor market” – which raised the question, What tightening in financial conditions? Looking broadly,
there hasn’t been any of any significance that we can see. Sure, there’s been a significant rise in mortgage rates, but
risk assets are at record highs, the Fed’s broad trade-weighted dollar index hasn’t moved much (up about 2.5% since
the recent lows in early May), lending conditions have continued to ease, and heavy demand for record corporate and
SSA issuance has clearly demonstrated that capital market conditions remain highly accommodative and supportive
of growth. At his press conference, Chairman Bernanke indicated that in addition to concerns they had about
financial conditions, generally the Fed wanted to see more data confirming its forecast for a sustained pick up in
growth before starting to scale back QE – “We're looking again to see confirmation of our broader scenario, which
basically is that we'll continue to see progress in the labor market, the growth will be sufficient to support that progress,
and that inflation will be moving back towards target. And that's what will determine our policy decisions.”
At this point who knows what that means specifically in terms of near-term incoming data looking ahead to the
October 29-30 and December 17-18 FOMC meetings. We don’t have any good sense of what the Fed’s reaction
function is at this point, so our initial baseline is flip a coin on QE tapering at upcoming meetings. One thing to keep
in mind as a potentially increasingly important consideration for policy decisions may be Vice Chairman Yellen
effectively taking more of the lead even before Chairman Bernanke steps down early next year. According to the
Washington Post, White House officials are signaling that she is likely to be nominated to succeed him, and the
announcement could come next week (“Yellen most likely to get Fed chairmanship, official says”).

Brokerage Notes on FED: HSBC

Post FOMC
Too risky to taper now
The FOMC chose to delay tapering for four key reasons:
mixed economic data, low inflation, tighter financial
conditions, and near-term fiscal policy risks
Based on our assessment of these factors over the
remainder of this year, we expect the FOMC will decide to
moderate the pace of QE purchases in December
However, downside surprises on these factors have the
potential to postpone tapering into 2014

Brokerage Notes on FED: UBS

The Fed Balks
„ “Await[ing] more evidence that progress will be sustained…”
The FOMC on September 18 decided to maintain its current purchase program at
$85 billion per month. The policy statement noted that the “Committee decided to
await more evidence that progress will be sustained before adjusting the pace of its
purchases”. In putting off a tapering, the Fed surprised market participants, the vast
majority of whom expected a modest taper at this meeting.
Chairman Bernanke after the announcement cited two key risks: the ongoing fiscal
drag and the tightening of financial conditions. Regarding fiscal policy, he noted
that “a factor that did concern us in our discussion was some upcoming fiscal
policy decisions. I would include both the possibility of a government shutdown,
but also the debt limit issue.” In the FOMC statement, the committee noted that
“the tightening of financial conditions observed in recent months, if sustained,
could slow the pace of improvement in the economy and labor market.”
„ Resetting the clock to Q1
The budget concerns suggest that the Oct. 29-30 meeting may be too soon for the
Fed to begin the long-awaited tapering of quantitative easing as negotiations may
still be ongoing. Also, we believe the Fed would prefer to avoid a Dec. 17-18
meeting tapering that could be viewed as too risky in the midst of the key holiday
shopping season. In our view, particularly now that any Fed warnings regarding a
taper are likely to be discounted by market participants, there are higher odds of a
disruptive sell-off in equity markets in response to a taper announcement.
As a result, we now believe that the Fed will not begin tapering until the first
quarter of 2014, with the January 28-29 FOMC meeting somewhat more likely
than the March 18-19 meeting. Chairman Bernanke stressed that policy changes
need not take place at meetings with press conferences (and updated forecasts), an
argument that was also supported by the statement language. By late January
economic conditions are likely to be showing the economy improving at a pace
that would likely allow them to claim that conditions are now ripe for a tapering of
policy. However, an earlier budget resolution, an acceleration in payroll growth
and a sustained decline in 10-year yields (to 2.50%) could result in an earlier taper.
With tapering delayed, the expected termination of overall Fed balance sheet
expansion now looks like the end of next year instead of mid-year. Accordingly, the
first fed funds rate hikes now appear likely only in mid-2015 rather than the start
of the year.
The constructive near-term bond market effects of these changes in the Fed
outlook re-enforce our confidence that annual average real GDP growth will
pick up next year to 3.0%.

Brokerage Notes on FED: Citi

U.S. Macro Flash
Comment on FOMC Decision: Accommodation Full Speed Ahead
 The FOMC's announcement today that asset purchases will remain at $85 billion for
now was not our call. While we still believe that the start of tapering may be
resolved by year-end, the bar is higher than we thought and we can't rule out a
lengthier debate dragging into next year. The emphasis on maximum
accommodation extended to forward guidance on both QE and rates. Updated
economic and interest rate projections show the economy at or near full
employment in 2016, while expectations for the funds rate remain far below what
previous experience would anticipate.
 The logic behind the Committee's hesitancy was laid out by the Chairman.
Policymakers were less confident that improvements in the economy and labor
markets would be sustained, despite much progress. They also expressed concern
about recent "rapid" tightening in financial conditions and want to see the response
to higher rates in housing and across economic activity. And, they were more
uncertain about the effects of fiscal restraint, highlighting the possibility that the
upcoming debate over government spending and debt authority enhances downside
risks.
 On all counts, the Fed's points surprised us. Financial conditions are tighter but still
highly supportive with historically low interest rates. It is especially notable that the
policy statement echoed our own judgments about fiscal effects to date, namely that
"taking account of federal fiscal retrenchment, the Committee sees the improvement
in economic activity as consistent with growing underlying strength..." This view
suggests today's decision was a tough one and that tapering may still be a meeting
to meeting call, down to a small handful of data points, market developments and
safe passage through fiscal legislation. The last of these could prove the most
problematic for tapering this year.
 The summary of economic projections underscored the view that policy would likely
remain very accommodative deep into recovery. The updated forecasts were well in
line with expectations that we outlined in the weekly. The median expectation is that
unemployment will be well within ranges most officials view as normal or consistent
with full employment by 2016. Rate forecasts anticipate a 1% funds rate in late-
2015 and 2% in 2016. Both would be about 150bps below what even relatively
dovish policy rules would prescribe. On initiating rate hikes, Bernanke indicated that
"fed funds rate increases might not occur until the jobless rate is considerably below
6.5%.” Message sent.

FDI in pharma sector - Centrum

MNC pharma companies may increase stake

Our analysis of FDI investments in pharma sector reveals MNC pharma
companies invested over 96% in brown field projects and only 4% in
green field projects. We expect the parent companies of Glaxo SK
Pharma (GSK), Merck, Ranbaxy Labs (RLL), Sanofi India(SIL) and Wyeth
to increase stake in their Indian arms due to attractive valuations.
We expect India to become the manufacturing hub for MNC pharma
companies due to the low cost manufacturing base. Major risks include
an increase in prices of essential drugs by MNCs and gaining control
of niche segments like anticancer, vaccines and injectables in India.

$ Over 96% investment in brown field projects:  Our analysis reveals
that over 96% of FDI investment in India went into brown field
projects and only a miniscule 4% to green field projects. MNC pharma
companies are keen to acquire manufacturing facilities and companies
in the area of anticancer, vaccines and injectables due to global
shortage in their capacities. Moreover, these businesses are available
at attractive valuations.

$ MNC pharma companies may increase stake: MNC pharma companies are
likely to increase stake in their Indian arms due to attractive
valuations and recent liberalization of government policies. Their
stocks are currently available at compelling valuations compared to
FMCG stocks despite their superior margin profile. We expect the
parent companies of GSK, Merck, RLL, SIL and Wyeth to increase stake
in their Indian arms.

$ Indian companies valued at premium: MNC pharma companies paid huge
premiums for Indian acquisitions. Piramal Healthcare (PHL) was
acquired at 9x sales. Daiichi Sankyo (DIS) paid Rs737 per share of RLL
which had an intrinsic value of Rs365. Other major acquisitions
include Matrix Labs by Mylan, Shantha Biotech by Sanofi Aventis, Dabur
Pharma by Fresenius Kabi and Agila Specialties by Mylan.

$ Benefits & risks: We expect MNC pharma companies to benefit from the
vast Indian market, low cost manufacturing base, world class
manufacturing facilities and the pool of skilled scientists. We expect
the parent companies of GSK, Merck, RLL, SIL and Wyeth to increase
stakes in their Indian subsidiaries due to attractive valuations.
Major risks would be monopolization by MNC pharma companies leading to
price rise and shortage of essential drugs. Non-competence agreements
by MNCs could prevent sellers from competing in future.



Thanks & Regards,

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