22 September 2013

22 Sept: Pivotals: Reliance Industries, SBI, Infosys, Tata Steel:: Business Line


Technicals: Astrazenca pharma, MRF, Pidilite, Karur Vysya Bank, PNB, Bank of Baroda:: Business Line


Index Outlook: Uncertainties loom large:: Business Line


The impossible trinity:: Business Line

If it weren’t for the plunging rupee, the RBI would have been stuck with its earlier ‘dilemma’ of reviving growth and containing inflationary pressures.
If you happen to be a central bank - dilemma is long passé; trilemma is the new reality of the financially liberalised world. Back home, the Reserve Bank of India (RBI) has been caught in the ‘impossible trinity’ trilemma where it has to tackle three concerns all at once — free capital flows, stable exchange rate, and independent monetary policy.
What is the ‘impossible trinity’ ? The trilemma propped up in the context of the Mundell-Fleming Model developed in the 1960s which analysed the effectiveness of monetary policy in an open economy (free capital movement) under different exchange rate regimes.
A central bank may find it difficult to pursue all three targets at the same time and has to pick any two.
Let’s take the example of a central bank that decides to follow a tight monetary policy, raising interest rates to keep a check on inflation. With higher interest rates in the home country, foreign investors will be attracted to invest , in turn leading to an appreciation of the home currency.
Now, if the central bank decides to intervene and control the volatility in the exchange rate, it may start to negate the effect of its monetary policy .
That is, the central bank’s conduct of the monetary policy is not independent of exchange rate management, given that capital is freely mobile. Thus in the face of free capital flows , it has to let the currency finds it own way.
On the other hand, if the central bank decides to pursue an independent monetary policy, as well as manage exchange rates, then controls will have to be imposed on foreign capital flows. This is because with a change in domestic interest rates relative to the rates prevailing internationally, foreign investors will move in and out of the country with consequent implications for the domestic currency.
While some countries work within this framework, others including India try to find a solution mid-way. India is open to foreign capital flows but subject to certain restrictions.
Again the exchange rate is largely market determined, with intermittent intervention to reduce currency volatility.
However this may limit the independence on the monetary policy to some extent.

RBI’S TRILEMMA

During the last few months as the rupee began its free fall, the RBI stepped in with a host of measures to suck out liquidity. It seemed convinced that such excess liquidity was used to speculate in the currency markets.
If it weren’t for the plunging rupee, the RBI would have been stuck with its earlier ‘dilemma’ of reviving growth and containing inflationary pressures.
But as it shifted its focus to managing the exchange rate, the monetary policy now had to juggle with yet another issue.
With some of the currency concerns receding, the RBI has now eased some of the liquidity tightening measures in its latest monetary policy review.

Bet on bonds, after Ben-Rajan drama:: Business Line

Stocks have already reacted but high rates make debt attractive.
At last, the two big events that had markets in a tizzy over the last four months are over and done with: Ben Bernanke’s decision on tapering Fed’s stimulus and RBI governor Raghuram Rajan’s call on interest rates. Both gentlemen have managed to surprise the usually clairvoyant market.
Bernanke by deciding not to taper after making ominous noises about it since May and Rajan by hiking interest rates, when many expected him to cut. If you are an investor who has spent the last four months chewing your nails and waiting on the sidelines, these events are a cue to act. Here’s how you can overhaul your portfolio now.

ICICI Prudential Child Care Gift Plan: Switch:: Business Line


Monetary Policy: Sweet and sour:: Business Line


The unexpected repo rate hike announced by the new RBI governor Raghuram Rajan in the monetary policy on Friday spooked the markets. The hike to combat inflation overshadowed the moves to ease liquidity tightening measures imposed earlier.
The rate of the Marginal Standing Facility (MSF), at which banks borrow overnight from the RBI, was lowered by 75 basis points to 9.5 per cent. This means lower short-term borrowing rates, and should see interest rates on one-year commercial paper settle at 9.5 per cent from 10.5 per cent currently.
For corporates , this should translate into lower cost of borrowing on their working capital requirement, a sizeable relief in a cash-strapped scenario.
For banks, the lower cost of short-term funds is a welcome reprieve.
Currently, close to 60 per cent of banks’ borrowings is funded from the MSF window, and thus these rates matter more. By indicating that repo will once again become the operational rate, the RBI is signalling more cuts in the MSF to bridge the gap with the repo to 100 basis points (currently at 200 basis points).
As MSF rates go down, the cost of incremental deposits will also reduce. So, there may not be many base rate hikes for the time being.
But whether banks pass on the benefit of lower cost of funds to customers will depend on the liquidity position which is currently tight. As flows continue to increase on account of FCNR deposits and overseas borrowings, liquidity may start to ease and aid banks in the ensuing busy credit season. But for now, lending rates may not come down in a hurry.
Mohali adds to Ranbaxy ’s woes
It was a sober week for pharma major Ranbaxy Laboratories. The stock tanked over 27 per cent during the week following a ban on import into the US of drugs manufactured at its Mohali (Punjab) facility.
After its inspection of the Mohali facility in September and December 2012, the US Food and Drug Administration (FDA) cited significant violations of good manufacturing practices, including failure to adequately investigate manufacturing problems and establish adequate procedures to ensure quality.
Though generic Atorvastatin is the only key product supplied from this facility currently, the import alert may hamper Ranbaxy’s growth in the near-term for two reasons. One, Ranbaxy was banking on the Mohali plant for filing new products as the plants at Paonta Sahib (Himachal Pradesh) and Dewas (Madhya Pradesh), meant for the US market, have been under import alert since 2008. Out of the 38 products filed so far, nearly half were from the Mohali facility.
Also, select high-margin exclusive products, including the generic version of anti-hypertension drug Diovan, are believed to have been re-filed from this facility.
Now with the import alert, approval for these products will be delayed. Given the pricing pressure on Ranbaxy’s portfolio in the US and its high dependency on this market, new launches are critical to drive growth. The temporary halt in approvals will risk Ranbaxy’s revenue and profit growth.
The second reason is that India being a low cost manufacturing base, the company was also hopeful of improving its margins by shifting production from its Ohm Labs facility in the US to India. But, with all three facilities running into regulatory issues, margins are not likely to improve in the near-term.
Instead, now, with the Mohali facility also subject to the terms of the consent decree signed in 2012, the company will have to spend more to get the facility back on track. This will further dilute Ranbaxy’s margins.
Early resolution of the regulatory issues will be critical to the stock’s performance.

How India can boost its foreign exchange reserves ::Business Standard



Dollar notes.
Regrettably, another voluntary disclosure scheme may be needed to strengthen India's foreign exchange reserves, says Jaimini Bhagwati.
It can be argued that the fundamentals of the Indian economy over the medium term continue to be sound. This claim may currently sound specious; but, since monsoons have been adequate this year, demand will pick up and spur growth.

The major impediments to higher growth over the next 12 months stem more from how soundly India finances its current account deficit and reduces its fiscal deficit.

Given India's limited options, this article reluctantly suggests a voluntary disclosure scheme (VDS), which could conceivably be implemented within the next two months.
Fuel, fertiliser and food subsidies are among the big-ticket subsidies provided by the Indian central and state governments. 
Some food subsidies are warranted. By contrast, fertiliser subsidies are even less justified than fuel subsidies, though politically difficult to reduce in the near term. Consequently, inflationary pressures will persist and so will the causal factors of confidentiality and convenience, which drive incremental cash investments in gold.

BJP's suggestions on how to SAVE India's economy

Economist Dr Subramanian Swamy, whose Janata Party merged with the Bharatiya Janata Party in August, has issued the following press statement on the Indian economy and demanded the implementation of a four-point agenda to save it.
Here is what Dr Swamy had to say:
By all economic criteria, the Indian economy is today sick and in a tail spin heading for a crash unless effective steps are taken soon to reverse the trends by  a new economic reform policy.
Some of these criteria are:
Foreign exchange reserves divided by short-term foreign debt is at a very low (1990) level.
Balance of payments' current account deficit as a ratio of GDP is highest since 1990, at 4.0%.
Total fiscal deficit in the Central and State Budgets now exceeds the danger mark of 12% of GDP, thereby committing a crime under the Fiscal Management Act passed by Parliament in 2005.
Reverse short-term capital outflow by panic cashing of Participatory Notes, hawala operations, and rigged short-selling of the rupee in Dubai and Singapore, has accelerated destabilizing the rupee/$ rate, which as a consequence has fallen by record amount.
India’s household savings rate, which was the highest in the world in 2004 has fallen, and is also shifting to hoarded non-financial assets, which is causing a huge fall in the growth rate of GDP, due to decline in investment and in employment.
These trends are aggravated by the sharp rise in corruption and the reckless spending spree through stupid leaking schemes such as NREGA and the Food Security Act during the UPA tenure. The Indian economy is today in a financial ICU and on a ventilator.
Hence unless the economic situation is rectified by new reform policies, disaster and default of debt payments await the Indian people.
The announcement yesterday by RBI Governor of an increase in the REPO rate shows his short-sightedness and foreign mentality. His economics has been known to be the same as that caused the US Depression of the 1920s, namely following a conservative fiscal policy.
Just when investment and capital market needed an injection of adrenalin, Dr Rajan asphyxiated the investor. By mid-2014, the Union Government will be on the  verge default of payments for past obligations.
The NDA government in 2014 will have to usher some radical reforms to remove the  dark clouds of despondency that has descended on the nation to revive the economy  and put it back on a growth path of more than an annual growth rate of 10% per year.
My suggestions for this would be as follows:
(a) Make income tax-deductible all recognisable forms of financial savings such as bank term deposits, share certificates etc.
This will boost the rate of savings (If direct income tax is abolished, it will mean minimal paper work for the people).
(b) Issue Ordinance nationalization of all bank accounts of Indian citizens in 70 countries that permit secret banking. This will net Rs 100,000 lakh crores or $ 1.6 trillion for government revenue.
(c) Confiscate and Abolish Participatory Notes, arrest under PMLA the prominent hawala operators, require special passport clearance of Indian citizens for travel to UAE, Singapore and Macao.
This will bring the rupee/$ rate down to Rs.40 within two weeks. NDA’s goal should be to make Rs 10.00 =$ 1.00.

Goldman Sachs - The Mortgage Analyst :: PDF link