Ways to lure FIIs to debt:: Business Line

What India needs is a stable and forward-looking policy regime to attract long-term capital.

At a recent Reserve Bank of India’s post policy conference call with researchers and analysts, the officials indicated their preference to seek out long-term real money investors in the Indian debt markets as compared to what is called “Bond Tourists”.

All these years, debt inflow into India has been characterised by predominant flows from the global banking system and asset management companies with limited interest from long-term real investors, namely, pension, endowment and sovereign wealth funds.

The easy money following the global financial crisis resulted in strong inflows into high-growth emerging markets.

In India, while the inflows helped fund the high current account deficit, they also made the country complacent about its capacity to continuously fund the high current account and fiscal deficits.

Fed tapering

The possible tapering of asset purchases by the US Federal Reserve had a strong impact on the Indian markets across asset classes.

The Indian rupee was among the worst affected asset classes with the rupee/dollar USD/INR pair, which from was at around Rs 53.50 to a dollarUSD a year ago touched a record an all time low of around Rs 68.85.

The prime culprit behind the currency depreciation is the strong FII debt outflow and a slowdown in ECB inflows. During the June-October 2013 period, FII debt outflow aggregated almost Rs 71,500 crore, the largest since throwing open the Indian debt market to the FIIs. While the temporary measures taken by the RBI have helped stabilise the rupee, the postponement of the tapering timeline has provided India with breathing space to set its house in order.

Given the investment opportunity that a large capital-deficit and high-growth-potential country like India provides, the country should be able to attract a larger proportion of the global pool of assets under management, estimated to be around $110 trillion (both debt and equity).

Even a small increase in allocation of funds into India would entail a much larger inflow into the country.

Given the low interest rates globally, yields prevailing in India would definitely be attractive for international investors.

However, what the country needs is a stable and forward-looking policy regime as well as a transparent operating framework that can attract long-term capital on a sustainable basis.

Therefore, the focus of India’s regulatory regime, including fiscal and tax incentives, should be on attracting international flows from long-term players. Two measures that could help are:

Reduce the withholding tax rate for long-term investors: The latest Budget reduced the withholding tax rate on interest payments on bonds, both corporate and Government Securities held by FIIs, to 5 per cent. However, this has been made applicable only for interest payments for the next two years.

While seeking long-term funds, offering lower withholding tax only for two years could be counterproductive. Therefore, the Government needs to take a re-look at this tax, allowing lower or nil withholding tax for longer period investments.

Any reduction in the withholding tax rate would broaden the investor base, especially real money investors, and need not be a major revenue loss for the country as in the past investors have used structures and double taxation treaties to reduce their tax incidence.

INR denominated bonds in the overseas market: Another option is allowing Indian corporates to issue INR denominated bonds in the global markets.

According to this structure, the bonds would be listed and traded in the overseas markets, thereby providing comfort to the international investors on the settlement mechanism. From the country’s perspective, it serves the twin purpose of reducing the exchange rate risk borne by Indian corporates, as investors would assume the exchange risk. It would also curb speculative flows resulting in better exchange management. Investment in such bonds could be a first step for many international investors before investing in the domestic debt markets.

Being part of a dynamic market environment with many emerging markets competing for the same pool of funds, India needs to reinvent itself to be able to attract offshore investment pools to fund its large investment requirements.

(The author is Senior Director – Resources, IDFC.)

Ant psychology and investors :: Business Line

Stock market investments need out-of-the-box thinking rather than programmed responses.

Charles Thomas Munger. The name has an instant resonance. And with a blink, you recall another name - Warren Buffet. Both these names are inseparable. Buffett has himself referred to both of them as “Siamese twins, practically.”

And Charles Munger is often addressed as the legendary investor’s alter ego.

So, while Buffett remains the face of Berkshire Hathaway, Munger has no lesser claim to credit for the fortunes of the company.

The multi-disciplinarian 

Both men have as many striking differences as similarities. One may typecast Buffett as purely an investor and philanthropist. And rightly so, for the man devotes his time almost exclusively to his business.

Munger, on the other hand, is a generalist for whom investment is only one of a broad range of interests. In many ways, his personality has traces of his own hero — Benjamin Franklin, who along with being a great scientist and inventor, was also a leading author, statesman and philanthropist, and played four instruments.

On similar lines, Munger hops around science, architecture, psychology and philanthropy with as much passion and curiosity as he does with business and investments.

Thinking errors

Munger very aptly follows this multi-disciplinary approach in all kind of situations.

He draws influences from fields as diverse as physics and psychology to his investment process. For long, he had been interested in standard thinking errors.

Without diving much into academic psychology textbooks, he developed his own system of psychology more or less in the self-help style of Ben Franklin.

In a series of articles that will follow, we will pick up insights from a speech that Munger gave on ‘24 Standard Causes of Human Misjudgment’. But before we start discussing these thinking errors, let us tell you why these lessons have very powerful implications for investors.

Ant behaviour

We may take great pride in our evolutionary superiority over other creatures. But we also often behave like ants.

Munger has pointed out some very intriguing observations about the behaviour of these social insects.

Each ant, like each human, is composed of a living physical structure plus behavioural algorithms in its nerve cells.

Mostly, the ant merely responds to stimuli with a few simple responses programmed into its nervous system by its genes.

For instance, one type of ant, when it smells a pheromone given off by a dead ant’s body in the hive, immediately responds by co-operating with other ants in carrying the dead body out of the hive.

Harvard’s great E.O. Wilson performed one of the best psychology experiments ever. He painted dead-ant pheromone on a live ant.

Quite naturally, the other ants dragged this useful live ant out of the hive. This, despite the poor creature kicking and protesting throughout the entire process. Such is the brain of the ant.

Of course, our brain is far more complex and advanced. Ants don’t design and fly airplanes. But under complex circumstances, don’t we also find ourselves behaving counterproductively like ants?

And aren’t stock markets a perfect playground for this kind of behaviour? We’ll discuss this and a lot more in the forthcoming articles.

(This article is sourced from Equitymaster.com, India’s leading independent equity research initiative.)

On vacations, curb the urge to splurge :: Business Line

Taking time to decide on your purchase can help control your temptation to spend.

Did you take a short vacation recently? If so, did you spend more money than you were expecting to during your vacation? Most of us have similar spending experiences. What explains our spending behaviour during vacations?

You typically take a vacation with your family after a continual period of hard work in the office. You, therefore, believe that you are entitled to splurge on luxury products and services.

Psychologists call this self-licensing. In other words, you are spending more on vacation not because you do not have self-control but because you believe you deserve a treat.

But not all of us experience the self-licensing effect. You and your spouse may actually agree to be careful about your spending decisions during the vacation. Yet, you will most likely let loose your purse strings when you go vacation-shopping. Why?

Switching state

Picture this. At the start of the vacation, you and your spouse may decide not to buy new clothes. But what if you both spot a generous discount sale of your favourite brand when on vacation? You will most likely indulge.

The reason is what psychologists call as hot-cold empathy gap. You took a decision not to buy when you were in a “cold” state — a state when you did not feel the urge to spend. So, taking the decision was easy.

But you switch to a “hot” state when you observe a discount sale — a state where you feel the urge to act on your desire. You can also suffer from what psychologists call shopping momentum. That is, you weigh the costs and benefits while making your first purchase decision during the vacation.

But subsequent purchases become easy because the brain fails to switch-off from the initial buying decision.

Reducing spending

The question is: Can you reduce your vacation spending? If you are spending because of the self-licensing effect, you need to re-evaluate your decision. But if your spending decision is driven by hot-empathy gap and/or shopping momentum, you are suffering from self-control issues. So, what should you do?

You should find ways to prevent yourself from making impulsive purchases. Suppose you are interested in an expensive tribal painting. Walk away from it first. Why?

Taking time to decide on the purchase can help you in two ways. One, when you distance yourself from the object that you touch and feel, your desire to own it may reduce. Call it dampening the endowment effect. And two, the shop may have sold the painting by the time you decide to spend. Either way, you would have avoided spending. Of course, walking away from the object you desire is not always easy.