Thursday, October 21, 2010

Indian Stock Exchanges Going Global?

I have written previously about how global markets are getting more integrated and showing signs of high correlation.  Regarding this, I had also highlighted the point of imperfect information dissemination and how domestic markets have changed.  The previous article talked about how exchanges and other capital markets, which were earlier domestic in nature, especially of emerging economies such as India have now gone global or have initiated the process of doing so.

A valid concern then arises whether any of our stock exchanges have the ability and necessity to become truly global. Ability? Of course yes. India enjoys a strong technological advantage, thanks to its IT sector. Supplemented with the appropriate investor friendly policy environment, India has better chances in comparison to its competitors. Furthermore, necessity, as economics teaches us, arises from a near inelastic demand curve. And presently, I would say that this inelastic demand is present in the form of the huge investor interest in the growing returns of the securities of Indian capital markets.

As I write, the US short term interest rates are close to zero, and the US long term rates are around 2-3 %. The interest rate prevailing in India is currently around the 6-7 % range. Thus, this vast interest rate differential makes a compelling case for carry trade. But cash- laden investors in the West are looking for even higher returns in the form of equities.

The question we should be asking to ourselves is that, can Indian stock exchanges make it big on the international stage in the next 10-20 years? I say yes.

India is among the many emerging economies that they consider and competing for the same factors of production and markets for its production. The race to fight for these economic resources and markets for sale has only intensified since the economic crisis begun.

The race for other factors of production shall continue, but I would like to focus on capital as the most necessary factor for the coming years. Capital is a very important input for growing economies and if India needs to sustain existing growth levels of 9%, it has to tap external savings and investments. In simple economic terms, investments in an economy are equal to the domestic savings, budget surplus and net imports. Hence increasing capital inflows in the form of foreign investments on the NSE traded stocks will be a great boost to the Indian economy.

Just recently in May, when the government announced plans for compulsory 25% stake sale in all listed public companies, there was a lot of hue and cry over whether the market would have enough liquidity to absorb  so much of stake sale. The estimated amount of equity issuances over the next 3 years is around $30 billion. This amount is trivial in comparison to what large corporations in the US issue. For instance, HP is planning to come out with a $33 billion bond issue in the coming weeks.

Another important factor is competitiveness among the national exchanges itself. NSE is closely followed by BSE and another MCX-SX is waiting in the docks If not NSE then there will be some other exchange. But in my opinion, with its current position in terms of the market position, management and technology advantage, NSE is the most amenable to such expansion.  

NSE has recently signed a cross listing agreement for futures of flagship indices with CME and earlier with SGX, but these listings are just to give foreign investors a feel of Indian markets and assist  in portfolio diversification. The real deal will be when the NSE can convert the volumes and listing numbers the large foreign bourses boast about.

My last argument for having such high hopes of seeing an Indian stock exchange reach the heights of a global exchange is the comparative advantage Indian capital markets have over other emerging economies markets. In the recent World Economic Forum’s Global Competitiveness Index, although India fell two places to 51st rank, its financial markets were rated 17th across the world. This shows how the existing level of competitiveness in the Indian exchanges and the future can be built on this grounding.

Wednesday, October 20, 2010

The IMF or EMF??

We rise in glory as we sink in pride. This is what I have to say to the EU leaders and ECB officials, as they quickly dismiss any talks of an IMF rescue for Greece. The IMF seems to me the best way out for Greece with all its fiscal mess and politics involved in the matter. Let’s face it, that today no eurozone country is audacious or willing enough to get into this ‘delicate’ issue of sovereign default and debt assurance, specially after grinding through such terrible economic times. What Greece is looking right now is for some generous donor to grant an easy loan with low interest rates and in return it will promise to cut down its fiscal deficit by adopting real disciplinary measures.

Here are a few reasons in a nutshell as to why I feel Greece’s bailout is a ‘delicate’ issue:
ü      Any loan or bailout money provided to Greece would be along with a number of constraints attached to it. Nobody would be willing to give a ‘no-frills’ loan to Greece considering its past record of conceited accounting practices and inexperienced policy makers. It is obvious common sense that any entity would like to protect its investment and make sure it oversees its utilisation.
ü      Secondly, there is an inevitable political angle as well which needs to be looked into. There already massive protests across Greece by its unhappy citizens over the government’s resolute commitment to cut public spending and public sector pay freezes. Already unions have endured enough, and one feels that the tipping point is not far away. Thus, in such a heated political environment, having foreign country or interests dictate control and supervision over its policymaking will further add to the fire.
ü      Thirdly, all hopes of the Euro’s future are hinged on a quick, transparent and stable Greek recovery, as the fear of contagion spreading to Portugal, Italy and Spain is high. As a consequence, any hiccups in the bailout may cause sharp reactions from bond markets. Which leads to my argument that what is required is a patient and calibrated approach, but not many would be looking at long term scenario, except the IMF.

Who will take out the chequebook?
Setting aside the IMF as one major contender for this job, let us examine who are the possible contenders. First on the list is the EU, which cannot explicitly bail Greece out as per the treaty clause which governs its functioning. Second, would be unilateral loans form the rich and prosperous European states, which in its current circumstances narrow down to Germany. Germany is the real powerhouse of Europe, also being one of the main beneficiaries of the introduction of Euro currency. Thus, more than an obligation, the last thing Germans want is a euro collapse in a fragile recovery period of today.

But, the German public is outraged by the idea of bailing out the profligate Greeks with their hard earned savings. To me a German bailout looks less probable than a German supervision. This leaves us with only 2 remaining choices. One is a real institution with more than 60 years experience of handling such cases, none other than the IMF. The other is EMF, which is fictitious and is a yet to be started fund. And so one feels the idea of EMF is promoted purely on pride and less logic.

It drives me nuts to read how EU policy makers are so blindly hopeful on setting up the European Monetary Fund as it is currently named. The IMF is clearly a better alternative even though the setting up of EMF is great for future crises but not the present Greece concern at hand. In simple terms, on having met with an accident does a person go to a experienced and reputed hospital, or does one choose go to a new, inexperienced and a politically correct clinic. Of course one chooses the former over the later. Then why make a distinction here for Greece.

Greece certainly needs help, and IMF for me looks like the safest bet. Disillusioned European leaders and policymakers need to shun their pride and also look at another positive from it. An IMF rescue will set a good example for the rest of the eurozone nations. An EMF rescue even if possible will imply a ‘too big-to fail’ guarantee, which will make future defaults even more dangerous.

Saturday, October 16, 2010

Right To Banking??

Yes you read it right, coming shortly to a political theatre near you! After the super successful populist agenda on the Right to Education and the work in progress i.e. Right to Food, here comes the much awaited sequel ‘Right to Banking’!! If you thought two additional rights were enough to send you back to your Civics class in school, well here is another one.

Well I am not this hyper always, but the way the government is selling this in the newspapers does deserve such enthusiasm. Almost every other morning, there are articles by civil servants and the who’s who in the govt. pledging their allegiance to the cause of financial inclusion. The day is not far when ‘financial inclusion’ moves to the more populist and sympathetic name of ‘right to banking’.

The hype surrounding financial inclusion has been influenced our minds so much that we cannot even think beyond what is being presented to us. In a classroom discussion, when I raised my hand to put forward objections to the government’s drive to push and force commercial banks to open up more branches and extend services to rural India, I was told to keep quiet. It was as if I had committed a sin and even the slightest leaning towards capitalism in my speech would be enough for them to brand me an arrogant elitist. It came as a rude shock to me, has the issue become totally one sided? And if yes, what happened to our democratic moral of free speech and opposition.

One has to give some credit to the government for making financial inclusion a buzzword in pink papers. The RBI has tried moral suasion to ask banks to extend their services to the unbanked rural population. But now with the fresh issue of banking licenses to be issued by end of this year, the RBI is going to indirectly force more rural coverage by the prospective bidders as an important prerequisite for the license. This should be a source of worry for the existing commercial banks, especially the foreign banks which already having drawn big plans for urban expansion, might have to rework their strategy.

As a part of Manmohan Singh’s government’s pledge towards inclusive growth, financial inclusion is being seen as a separate issue altogether. Financial inclusion is really just one of the many a component of the overall inclusive growth strategy. Other things such as social inclusion, education, healthcare, infrastructure and energy requirements etc. must go hand in hand to make financial inclusion happen. By just simply opening bank branches will not help the cause.

Account Opened, Now What?
Infrastructure is needed in the form of roads connecting bank branches, security and law& order to protect deposits, communication to connect the banks computer networks and housing for the banks staff. Opening an account is not the last step; the average rural illiterate has to be taught how to operate the account, the details of interest and deposits, rules and nomination policies as well as the procedure for consumer grievance redressal.

Just handing out the money to the farmer is not the end of the story. The farmer also has to be supported and encouraged to improve productivity, has to be given access to electricity and meet his other energy needs, has to be part of holistic community development and most importantly, he has to be feel social included. Only then can the bank expect to receive back the principal with interest. Otherwise it would have to wait a few decades for another populist government to come and waiver off its loans. 

Friday, October 15, 2010

Greece faces a tough year ahead

For those of you who have just joined us and asking what in the world is happening. Here’s the situation: We’ve got in our hands the possibility of the first sovereign debt default by a Euro currency member. Greece has an external debt of 170% of its GDP and is currently running a 13% fiscal deficit. The nation’s problems are increasing day by day. Productivity and employment are at very low and painful levels, for the country to even think of self sufficient recovery.

Much of the panic subsided on Feb 3rd, as the government’s plan to reduce substantially it’s budget deficit to 3% by 2012, was supported by the EU. The plan proposes up taking very unpopular measures to control spending, like slashing public sector spending, pay freezes and wage cuts and increasing taxes. This hasn’t gone down well with public at all. They have already absorbed the 4% pay cut and are expecting the worst is yet to come. However, fear is again creeping into the minds of investors.

There is no doubt that this year's plan to cut deficit from 12.9% to 8.7% will be very difficult and regaining confidence even more.
The bond markets are increasingly skeptical about the government’s plan as the spreads on Greek bonds are rising. What Greece needs foremost is quick cash to refinance it debt which becomes due in a few months. The debt is estimated to the tune of €20 billion. It has been successful to raise €8 billion on Jan 25th through the sale of 5 year bonds. However the rate of interest was very high at 6.2%. With more speculation on Greece’s future going rounds, picking up further debt from markets will become next to impossible for the government at prevailing interest rates.

The government has tried to blame the speculators who have bought credit default swaps (CDS) to insure themselves against a Greek refusal to oblige on the debt. They have alleged that buyers of CDSs are driving up the spreads on bonds and have made borrowing more difficult. That in turn has made the Greek government helpless and led to its current state of affairs. While there have been some officials and economists in Europe who have sympathised on these grounds. But I have two words for them.

Shut up!
The Greeks have no one to blame than themselves. Markets don't show sympathy, they respect discipline and trust. Years of profligacy and dodgy accounting practices in an  attempt to fool the EU and the investors, has left them in a terrible position. There is increasing furore in France and Germany on why it should bail out a cheater. Their displeasure is completely understandable and rightly so.

Its time Greece did the right thing and took some excruciating steps to control the budget and announce some real cuts and meaningful trust-building measures. Passing the buck around, will neither impress the EU nor the investors holding Greek bonds. Its time it pressed the button of urgency and did things swiftly and not smirk around looking for easy deals with the EU or the big members. The more it waits. The more the threat grows, specially for the other European economies, which also have high debts to service, namely Portugal, Spain and Italy. Its time it pleaded guilty. 

NSE to NYSE !!

In a surprise response to my previous post, a lot of my peers have asked me how our exchanges can dream of going global, when after all they are 'desi'. One even quipped that beggars can't be choosers! But I stand firm with my belief and to prove my point, enlist the following things below, which could see NSE becoming another NYSE, along with the significant premise of India becoming a superpower.

Firstly, let me make it clear why I chose NSE over its bitter rival BSE. Ever since the launch of NSE and its electronic trading platforms, the BSE has been playing catch up all the while. So for me, amongst Indian stock exchange contenders, NSE comes above all. BSE has a lot to do to set its house in order.

Second, although NSE should dream global, it should currently set its target on regional dominance. In my opinion, the ideal strategy would be for NSE to try and spread its reach in the next 5 years or so by becoming the dominant stock exchange of the Indian subcontinent. The secondary capital markets of India’s neighbors are not known for their price discovery and liquidity. Thus, for the large firms in the subcontinent, which are looking for raising large capital NSE can be a more viable option instead of looking westwards.

The process of transforming the NSE to South East Asia’s major bourse will be a learning experience for the exchange and regulatory authorities. Many structural changes would be required, but these will only lead to the ultimate goal of being the world’s dominant stock exchange.

On the regulatory side it will require a lot of push and pull as well. This leads to my third point, about capital account convertibility. The foreign investment environment should be completely freed from any capital convertibility controls, which if present will be a big problem for expanding the NSE’s reach globally.

Fourth, its listing requirements will have to be adjusted from time to time, although I am bullish on the INR, it will be safe to assume that dollar could still be the unit of account. Looking at the short term i.e. in the next 7-8 years INR could continue to be in the listing norms and even the currency for transaction. Various macroeconomic variables in the future will decide whether INR will continue to be the global NSE’s transaction currency.

NSE should currently set its target on regional dominance... the dominant stock exchange of the Indian subcontinent... for the large firms in the subcontinent, which are looking for raising large capital NSE can be a more viable option instead of looking westwards.

Second on the regulatory radar and fifth overall, is the change in the accounting standards subjected to the firms listed on the exchange. Investor confidence is one of the fundamental requirements for building this global exchange. Therefore, a common measure to assess companies listed and the overall index products of the exchange would be facilitated by a recognized accounting standard. Maybe the IFRS or an evolved version the IAS; this only time will tell.

Sixth, we need to see rapid expansion on the products being offered by the NSE. Although it lost out to the Bombay stock Exchange for the country’s first IDR, this will serve as a rude wakeup call and set the ball rolling.  Foreign companies are looking for bullish and deep capital markets like India to raise money in the form of IDRs and foreign bond issues. NSE has to be ready to be able to provide that kind of platform and logistics to gain from the coming opportunity in times ahead.

Seventh, would be to build partnerships with other foreign bourses. NSE already has Nifty futures trading on the Singapore Stock Exchange, and just recently has tied up with the Chicago Mercantile Exchange for cross listing of index futures. Nifty futures will be traded on the CME, while the Dow Jones and S&P 500 futures will be traded on the NSE. The move is a step towards alignment to global markets.

This is a great opportunity for the clients in India who are looking for portfolio diversification. We have largely seen a homeward bias from clients so far, maybe because of a lack of opportunity from diversify, but I believe this will be beneficial for them in terms of their portfolios as well as having a global perspective.

The Hindu Business Line reported:
“According to market participants, trading in SGX Nifty futures has been happening almost a decade but volumes picked up only in the last couple of years. At the end of April 2010, open interest stood at 1, 91,741 contracts, which are 65 per cent more than a year-ago period, according to SGX. Trading volumes surged to 7, 79,641 contracts, which are 52 per cent higher over a year.

As part of the agreement, Indian rupee-denominated S&P 500 futures contracts will be listed for trading on the NSE and in return CME will list U.S. dollar-denominated contracts on India's benchmark stock index futures contract, the S&P Nifty.”
NSE faces many short term challenges and within them growth possibilities, which could very well decide its future. With an eye on global partnerships it needs to fend of a coming rival...

The National Stock Exchange (NSE) has signed a letter of intent along with London Stock Exchange (LSE) to evaluate cross listing of index products as well as explore joint strategic opportunities. Both the bourses have explored the possibility of a cross-listing agreement of their flagship indices.

While FTSE Group may license the FTSE 100 index to the NSE, the bourse would license the Nifty to LSE for trading option contracts. Initially, only Nifty options will be considered for listing at LSE as NSE already has licensed Chicago Mercantile Exchange (CME) for trading Nifty futures contracts.

Also recently, there were reports of NSE being in talks with Japan’s Tokyo Stock Exchange, exploring probably what reports suggested was cross listing of the two exchanges’ flagship index futures.

Eighth, NSE faces many short term challenges and within them growth possibilities, which could very well decide its future. With an eye on global partnerships it needs to fend of a coming rival, the Multi Commodity Exchange of India Ltd. It needs to fully exploit the growth potential in India before looking beyond its shores.

While researching online I found an interview of the CEO, NSE who was talking about his firm’s plans future plans in India:

“One is to go out increasingly to underserved market those that are smaller in terms of not being economically viable for intermediaries. To improve the economics of serving in those areas, they may try helping brokers by picking up the tab on public infrastructure. Increasingly, that will try to reduce the cost of commercial public infrastructure, so the brokers do not feel the disincentive to service them. That may bring in the so-called marginal investors.

Second, the derivatives arena will continue to evolve, unlike cash equity which typically moves at gross domestic product (GDP) plus (rates). The plus comes from some chunks of the unlisted economy becoming listed. Derivatives will continue to bring out newer products and services.

Third, the domestic institutional sector still doesn’t use derivatives. Domestic institutions are beginning to get used to these products. Mutual funds are beginning to use a bit but still a small proportion; that would increase.

Fourth, newer asset classes—currency, interest rates are classic products which really need hedging. Arguably, the two most important prices are currency and interest rates, but they are hard to hedge. That will build over a period of time.”

Sunday, October 10, 2010

Reforming the Monetary Policy

Monetary policy has become one of the most valuable tools for the administration and development of an economy. Its ability to control the money supply and influence interest rates has a far most influential reach than any other policy. One of the most significant reasons is that the time lag between implementation and result is the least among alternatives. Central bank policy reviews have become one of the most anticipated indicators, for both investors and general public alike.

The policy reviews provide and insight into the overall economic conditions and coming future central bank and government policy changes or tax alterations. The citizens eagerly wait for their newspapers to tell them if home loans are going to get cheaper, if the inflation is going to eat away their savings, is their neighbour going to buy a new car or a scooter, etc. On the other hand, businesses, foreign investors and economists get an analysis of the country’s current scenario and state of economy. Thus, that leads me to the point that how monetary policy has become a part of our daily affairs and that’s why it is so effectual.

However, with great power comes great responsibility. The central bank has to be more responsible about its  guiding principles. Thus, I feel the most significant facet of a central bank’s monetary policy is it’s objective. I say that because as we have seen in the past, different central banks set different objectives and so have varied approaches and of course giving diverse results. To keep it simple let me list down these broad objectives:
  • Price stability or inflation targeting
  • Economic growth and low unemployment

There has always existed a trade-off between these to policy objectives. Generally it is according to the history, social-political scenario or economic conditions of the country which configures the monetary policy planning.

The European Central Bank has its primary objective of monetary policy to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term. This conservative approach has been criticised by many to be neglecting growth and high unemployment. But, like I said there are social factors which influence as well. There are long memories of people in Europe specially Germany of hyperinflation. So they are sure to be conservative. On the other hand, USA’s fed follows a more aggressive policy of concentrating on economic growth. Although the fed has always claims to have been following a mixture of both.

What’s for the future?
This present crisis has exposed an unpalatable truth that the monetary policy has to be very dynamic and holistic in nature, in order to keep up with today’s ever-changing economic and international trade environment. A number of fresh approaches have come to light in the past one year.

One such is Macroprudential regulation. Financial stability was considered to be one of the ‘other’ objectives of the central bank. But, last year the banking crisis showed that we need better regulation of the system by the central bank which includes measuring cyclic macro prudential indicators and reviewing banks individually rather than setting just petty capital adequacy norms.

One of the other important roles of the central bank is the role of custodian of foreign exchange and maintaining reserves. This include policies targeting BOP surpluses and adjusting monetary policies keeping in mind the position of the current and capital account reserves. For some economies which have a fixed exchange rate system, this forex management forms a crux of the central bank policies. We could see central banks taking this up more seriously and making it one the core guiding principles, especially as globalisation has brought so many opportunities and equally challenging threats to domestic firms. Thus, it should get more attention then it presently gets.

Another interesting method is the multiple indicator approach with Reserve bank of India follows. It includes tracking a number of indicators on whose basis its monetary policy is drafted. I will discuss it at length in my next post.

As the world comes out of a difficult recession in many years, reform will not exclude the central banks as well. As an institution it has gained huge importance in our daily lives as well; and making it more robust, prudent and flexible should be the right way forward.

Saturday, October 2, 2010

Railways: India's story till now & the Budget

The Indian Railways sums up the current state of the Indian government’s PSU machinery and the bureaucratic setup of the country. It is a business entity controlling an important component of the economy, yet not realising its full potential. An organisation still split up by its social obligations, bogged down by red- tapism and inefficient public sector wages paid to its employees, who most probably joined because of the employment benefits and pension, than by the task at hand. Just like other PSUs it had seen a successful start, which fizzled soon after.

It is said that responsibility and accountability start from the top. For the Railways, corruption and jugaad originate from the top. There is always a big political hullabaloo before the cabinet is sworn in, and speculation on which political ally will be given the Union railways ministry always abounds. The ‘honourable’ minister is requested for favours for constructing stations or making trains pass through fellow parliamentarians’ constituencies. Adding to that, the preceding minister’s serendipity that it was a cash mine with profits of Rs. 9000 crores(in 2005) after years of successive losses.

The Railways after independence already had a network of around 53,600 route kms. Today, it stands at 65,000 route kms. An increase of just roughly 12,000 route kms of network in 60 years!
Well, the Railways has always been more or less a socio-political entity. But it wasn’t like this always. It was once the symbol of India’s economic pride and by numbers it still is. It has the largest railway network in the world under single management. The Indian Railways carries the most passengers (4 billion) in the world. It is also one of the largest employers (15.8 lakh employees) in the world.

However, it has also been under-performing and has shown relatively little and almost stagnant growth in terms of laying more lines, better freight handling, infrastructure facilities and train wagons. The Railways after independence already had a network of around 53,600 route kms. Today, it stands at 65,000 route kms. An increase of just roughly 12,000 route kms of network in 60 years! It is indeed very shocking that the Railways not taken up any major expansion initiatives. This lack of initiative cuts across many government agencies.

Another major negative has been the cross-subsidisation fare policy of the Railways. Under this policy, the revenue collected from freight charges is used to cross subsidize the losses from the passenger fares collection. Passenger fares have always been kept low as a populist measure, but the ever-rising oil (fuel) prices have been causing massive losses to the Railways. The PM’s Office has even suggested that this system be abandoned in favour of something more relevant and effective. It had suggested passenger fares be indexed to oil prices. But, even this was not accepted in this year’s budget. And so by keeping fares low this year as well, we can again expect it to incur huge losses.
It seems the Railways, like few of its fellow PSU brethren is on a journey with no destination.
Also, a problem characteristic to all PSU is evident here as well. There is no clear roadmap for public-private partnerships. In natural monopolies like the railways it is essential to bring external technology and competition into the system, so as to give consumers a better return for their money. Private players will bring with them funds and expertise, which is vital to revamp the existing Indian Railways.

Like a sail..keep drifting
The railways has to bring its act together, and the process should start from the top. In the current budget, announcements of setting up medical colleges and sports academies are unnecessary money laundering excuses. There was no mention of the ‘world class’ stations, a promise made last year. No mention about modernisation of the machinery and facilities. No more faster trains. No vision, no serious number crunching. It seems the Railways, like few of its fellow PSU brethren is on a journey with no destination.

Thursday, September 30, 2010

RBI policy review and my views

There is excess liquidity for sure both in the Indian and Global financial markets today. Thanks to the near zero interest rates in the developed world; it is felt that the developing world is sitting on asset pricing bubbles. So it is more interesting to notice how these bubbles can be spotted today. The 20% food price inflation is not just a problem in India, but the rest of the developing world as well. Also the stock market was defying all logic 3 months ago, but recent quarter results have quelled some fears of over valuations. Moreover even commodities including oil have staged an upward trend in prices, even though the developed world is still healing its wounds. Thus it is a very difficult situation for the RBI to be in today, especially to be overseeing the global economic rebalancing also taking place in Asia’s favour.
Governor Subbarao has dishonourably failed on his most important job of controlling inflation and maintaining the value of the note he himself signs. Such high inflation in a recovering economy can spell misfortune in subsequent cycles.
The inflation is putting increasing pressure on the economy and the common man, which is not a sign of healthy recovery. Also foreign flows of capital into India have been touching enormous amounts, and the weaker dollar is a nightmare for the exporters and RBI alike. But it was as expected that on Friday, 29th January 2010 the RBI hiked its CRR by 75 basis points, as looks to mop up Rs. 36,000 crores of excess liquidity. RBI had indicated in its previous policy review in Oct 2009, of its intent to gradually withdraw monetary support, but had just increased the SLR back to 25%.

I was expecting 50- 100 basis point hike in CRR, and along with it increases in Repo rates as well. My analysis proved worthy on two grounds. First, the CRR rate would have been increased in a calibrated and gradual manner instead of giving sudden shocks to the financial systems. Second, the RBI would have succumbed to Manmohan Singh’s cabinet to control inflation.

However I do not expect a rise in bank rates and other rates too soon, because then the RBI leaves the door open to even more foreign capital inflows. This would nullify the desired outcome as more money would still be chasing the same amount of commodities. Also it will further cause the rupee to be more susceptible to the volatile dollar currency markets as the foreign investors would be looking to hedge their currency risks and attracting more speculative movements.

Could do better
Although we all feel that the RBI has done well enough to save the economy in the crisis and its previous prudent polices have indeed protected the banking system, but to me its recovery management has failed in many ways. Firstly, India witnessed a slowdown, not a recession, so the work was already half done. Secondly, the earlier populist fiscal policies of the government were more than a helping hand to its monetary policies. RBI’s ineffectiveness was visible initially (in last quarter of 2008) where banks refused to bring down their lending rates; especially at the time economy needed the most. Thirdly, its failure to control inflation is big embarrassment for the usually pompous banker. Governor Subbarao has dishonourably failed on his most important job of controlling inflation and maintaining the value of the note he himself signs. Such high inflation in a recovering economy can spell misfortune in subsequent cycles. What and how it unfolds precisely is difficult to predict just like today’s economic crisis.

Wednesday, September 29, 2010

A World Oft Forgotten

Within the mainstream news these days, two parallels clearly emerge, the success of developing economies such as India and China, contrasted with the failure of erstwhile capitalist western nations. But sadly the third world remains the ‘third’ world which is still reeling under the bandits of economic growth: high poverty, low literacy, religious fanaticism and administrative inefficiency. It is as if there is no place for this third world on this planet. The everyday East-West comparison in newspapers and journals woefully neglects their presence. Globalization and its benefits are completely absent from the region. They do have footprints of globalization, but as dumping grounds of the products not suitable for the aforesaid two worlds.

As I am writing this blog post, a family somewhere in the far neglected corners of the world is being pushed below the poverty line. To my interpretation, the rise and revaluation of poverty line measures in such regions have been higher than the effective number of people coming out of poverty.

They do have footprints of globalization, but as dumping grounds of the products not suitable for the aforesaid two worlds.
Today the world has changed more than we can grasp in one go. New measures need to be employed to pull up such neglected and backward regions.  First on my mind is the need to shift from macro initiatives to the micro level. Focus should shift to micro-level programmes like micro-lending which have done so well in emerging countries. I feel that measuring and monitoring micro level support plans can be monitored and evaluated more easily and quickly.

Second, would be to eradicate “energy poverty” as coined by Thomas Friedman in Hot, flat and crowded. In simple terms, to enable the masses to fulfil their aspirations by giving them secured supply of electricity. Today, any rural programme even the basic ones from education to vaccination drives require electricity. Overcoming the third world’s inability to connect to the globalised world will be a big step in helping grow confidence.

There are many more measures which are being talked about. But these are the major recommendations which I feel are indispensable. The third world needs to be given more attention. But with tightening budgets of major donors in the West and exploitive bargain hunters of the East, I feel my worst fears for them are going to be true. 
No wonder they pray so much.

Sunday, September 26, 2010

Reforming the Media: Influences & Suggestions

Media Corporations are getting bigger and bulkier than before, as they try to capture market share of multiple platforms of radio, print, television, movies and internet. The competition is high, margins are small and their business cycles are dynamic. There is so much stress and competition that today news reporting can be easily influenced in cash or kind. Let us see the various mechanisms of influence

  1. Direct ownership: In many of today’s media corporations number of companies or interest groups have stakes in ownership and management. Shifting their focus to shareholders satisfaction and biased news coverage at times.
  2. Influence of Advertising companies as clients: To keep their shows and prints running, media companies need advertisements. Thus media companies have to service their relationship with clients and that does imply a favour here and there.
  3. Knowledge & data processes: You may have seen on business channels on tv, smartly dressed people with big company banners sharing their thoughts on the markets, which are as volatile as the market itself. Media needs these industry thinkers to lend credibility to their shows, but then it makes the audience credulous to their views.
  4. Pre-existing political influence: Media thrives on the news makers and politics is very much intertwined with media coverage. Barack Obama showed us the power of social media in the US Presidential elections last year and I feel all of our Indian politicians are no less then drama queens. It is very well prevalent observation that India’s biggest print newspapers are lenient towards different ideological political parties.
Moreover, large advertisers can influence even competing media outlets by threatening to withdraw their advertising; numerous small advertisers can exert influence if they share a common interest and can coordinate (e.g., when represented by an advertising agency). As a result, media competition alone is not always sufficient to prevent commercial media bias.

The Possible Solutions
There maybe many more ways of influence, present but what is more important is to see what all can be done to improve news reporting, specifically financial journalism. I have certain measures in mind, radical they may seem but radical change is the need of the hour.

Firstly, removing advertising from public TV stations as imminent in France and Spain. This reduces commercial bias of their content and pressures their competitors to reduce bias; it also shifts ad revenues to private media, complementing plans to subsidise media consumption and media entry.

Secondly, making the consumer or viewer or reader more aware that certain views and opinions of this show or column maybe biased. This can be done by running a disclaimer before or during the programme, reminding viewers that it is just an opinion, not advice.

Thirdly, moral suasion is what is most required and most practical. Readers should advocate more investigative journalism, especially in business and finance. This should prevent scams like Enron or Satyam to ever happen again. Most importantly nip improbable frauds and thefts in the bud, and prevent full blow ups in the future.

Another important step would be to remove views or suggestions from the main report and keep them collected on a few pages or a different show. An easy example is the ‘Times View’ section in India’s leading English daily, which comes along with the news event; at times even on the front pages. This is bad journalism, as it induces the reader to opinion of the newspaper, rather than give him time to formulate his own. Opinion sections like these should be put in separate pages of the editorial.

Saturday, September 25, 2010

Has Financial Journalism Lost Its Teeth??

John Friedman of MarketWatch was at the press conference announcing the Bank of America's acquisition of Merrill Lynch and wrote,
"the media were so polite and deferential to the two CEOs; they behaved as if the press conference were a victory lap for the financial services industry."

The above comment just so simply describes the present appalling state of financial journalism. It is true as I pointed out earlier and how easy it is for the media to be susceptible to external influences and how financial dailies and shows can influence the markets themselves.

Too much respect for seniors
One of the main problems affecting financial journalism today is the that business reporter are too close to the Wall Street that they forget the Main Street, and have too much respect for the institutions they are covering. If you have pre-bias towards the organization your covering, then most certainly you would end up asking sugar coated questions.

Also the innate behaviour to idiolise famous public figures like Warren Buffet, Richard Branson or George Soros is very damaging to prejudice free reporting. Every word that comes out of their mouth is said to be the view of the market or industry. It is shown as an implied piece of advice. Rather the journalists should be reviewing their decisions and investments.

Losing reality
Besides the above pre conceived impressions that have set in, many angry bloggers point out gradually financial journalists become part of niche circles in the industry and lose touch with the base and the common people they are writing for. They become very influenced by the views of the circle and many a times their daily columns show their responses to each-others opinions.

A major part of the flaw lies in the fast paced media culture, where ‘journalists are like fireman, going from one fire to another, dousing flames and moving on’. So they publish what is seen and avoid going to the heart of the story and dig out the facts. This surely leads to ‘the death’ of investigative reporting.

Listen then seek to be understood
During an interview recently on the Editors Weblog, the Financial Times's Managing Editor Daniel Bogler said, "It's unfortunate that the financial literacy and understanding of how things work in the City and of basic accounting and so on, is actually very thin in financial journalism." Thus this amplifies the need to have more knowledgeable people covering events which they fully understand and thus are more effectively communicate with their readers or viewers.

Looking back over the rapid collapse of the world's financial markets, and the uncertainty ahead, I very confidently say it is, a financial system failure, a regulatory failure and a media failure.
Everyone is willing to talk about the first two, but they are not willing to discuss the last one. We are all in this. It's a media failure of omission and commission.

Tuesday, September 21, 2010

Two Worlds Apart

The world is clearly split today. With one half looking forward to a bright future and with big aspirations in their hearts and the other half of the world looking behind, still picking up rags from the remains of the last bust and trying to rebuild their economies. One half of the world is flush with liquidity and raising money is just a blink away. Whereas the other half is still carrying heavy debt burdens on their shoulders and has no idea how to lessen it. One half of the world is witnessing rapid economic progress and expectations of growth, even better than before the recession. Meanwhile, the other half is still finding it hard to recover and repair, with its problems ranging from looming inflation to mounting unemployment.

The world that was once ‘emerging’ has now arrived and the world that was once long arrived, is now trying to re-emerge. Okay enough of euphemism, let’s make it more simple! What I mean is the rebalancing of global economy is taking place more quickly than anticipated, with the current recession being just a catalyst. According to my understanding, the change was always happening, but not noticeable.
The world that was once ‘emerging’ has now arrived and the world that was once long arrived, is now trying to re-emerge.
The welfare states of the West were gradually piling up debts and unproductive government spending was further exacerbating this debt. The 2 ‘lost decades’ of the Japanese economy clearly highlight the implications of an economy saddled with expensive welfare programmes. However, not many have taken notice. For instance in America, healthcare as a percentage of GDP was just 5% in 1962. It has grown to 15% in 2010 and even after the present Obamacare reform; estimates are poised at 20% in 2017 and 25% in 2025.

Difficult fiscal outlooks are not the only problems the West faces today. Other depressants are heavy national debts, aging workforce, slowdown in consumption, expensive factors of production and the growing social and cultural discontent, especially towards immigrants and minorities.

On the other hand the East is brimming with optimism and consumption is rising at a frantic pace. Emerging economies are filled with opportunities. Innovation is growing with leaps and bounds. They successfully decoupled themselves from the collapse in the West, which was a surprise to many pundits. But again many had learnt their lesson from the Asian crisis in the 90s, and their adjustments in policy making were gradual, but not that impactful or noticeable. Strong domestic consumption accompanied with prudent foreign exchange controls built over the last decade or two have helped them recover from the crisis and in general brought in public glare their economic might. Even politically they stand taller than before. The extension from G-8 to G-20 is a significant reflection of today’s time.

Cooperation or Isolation?
What the West needs is not to grow discontent against their growth but, to learn and partner in their success. The West still holds the cards on many fronts. Ranging from intellectual asset base and technical prowess to existing influential shareholding in global institutions like IMF or UNSC. But now starts the real challenge to build partnerships, rather than blocs and give the world a better tomorrow.

Sunday, September 19, 2010

Why Germany Lost To Spain And Continues To Lose In Finance

Part 1-
On the onset I would like to start by saying that, it was a fantastic match, which surely lived up to the expectations of a World Cup Semi-final match. For keen observers of the game, it was a real treatise; quality of the highest order. The blackboard strategies and planning were implemented well by the players on the pitch, and it took the match to another level. Nevertheless, Spain proved to be a better side, with their fine passing and skill. For me, the Spanish flair and game-play had more of a Barcelona character than the traditional Spanish style of play. (7 out of Spain’s 10 outfield players were Barcelona players.)

It was heartbreak again for Germany, and the prominent thought on everyone’s mind was ‘Not again!.. when will they?’. The next day, the match had a better hangover on me then any vodka-rum mix has had. Thus, in one of my erratic moods, I started to think about last night’s thought. How Germany often falls, just before reaching the zenith. I tried to correlate it with the recent Euro debt crisis and the role Germany has played in it.

Yes I think, Germany truly deserves the blame for exacerbating the Debt crisis, by holding on to bailout kitty until the last moment, and then the surprise and uncalled ban on short selling and CDS. If you look deeper into the German economy and their socio-political structure, you will find them to be very different to their fellow Europeans. Germans are more thrifty and prudent, but yet still pertinacious and very conservative in their opinions and preferences.

The Germans have always held pride over their seemingly impregnable defence, which has been their legacy for the last five decades. They have invariably been a defence focussed team, but what we saw in the beginning of the world cup was a radical shift in strategy. The Germans were bursting with energy and youth, and so an aggressive and attacking approach came naturally to them. Thus, they performed exceptionally well in every match except the last, beating some good opponents by 3 goal margins. (I said ‘good’, so please lessen by one if you included England.)

But I was really surprised to see their strategy in the Semi-final. They left their wining for their old defensive strategy. From what I understood they planned to soak up all the pressure and to release only on the counter-attack. But, what really transpired on the pitch was the frustration of German players of not getting the ball enough, and eventually then not holding the ball in possession long enough.

From then onwards it was a downward spiral, till they finally suffered a goal and so they were forced to go all out and attack. If you remember closely they had more chances in the last 20 mins than before. So what really did them in? In one word- Hubris. The Germans felt that they could rely on their archaic style of play and because they have always been so good in the past, then why not depend on it as always. It is truly said, that when you walk with your head in the clouds, you either flying or dead. Either ways you lose touch with reality. So did Germany and they paid the price for shunning the modern for the old.
But why finance?? Follow up in sometime.

On India’s 63rd Birthday

“Long years ago we made a tryst with destiny, and now the time comes when we shall redeem our pledge, not wholly or in full measure, but very substantially. At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom.”  - Jawaharlal Nehru

Nehru himself would be ashamed to see his “free India” ruled by his own family for a majority of years and possibly even the years to come. If that wasn’t enough, just to see his dynasty, not using his own name, but rather that of a man, whose only dream was to empower every Indian to rule himself, would send Nehru back to the dead. But unlike Nehru, we have lived with the quotidian lies and false promises, and have become immune to the pain of seeing our values being floundered and our patience been mistaken for innocence. So I stand up today and differ from the contented and biased editorials, to assess ourselves critically on our 63rd birthday.

On our 63rd birthday, the Commonwealth Games preparations have exposed how the Indian bureaucracy is still corrupt, unproductive and a drain on the economy. The Games were supposed to be a symbol of national pride, but have become source of disgust and embarrassment. They are a perfect example of what is wrong in the present system, where the intermediaries eat away most of the benefits of the beneficiaries. Today, being an average and lazy engineer in the government department is better than being a hardworking and disciplined gold medalist for your country.

On our 63rd birthday, our black economy is growing at double the rate that our economy is growing. The government has no idea how to curtail the inexorable rise in prices. The Finance Minister is perennially pointing to our persistent fiscal deficit. There is more than what meets the eye. In a Planning Commission Report dated June 2010, it has been reported that of every 1 rupee the government spends on the PDS, only 27 paise reaches the poor! (Source:
The government has not shown any inclination in removing the corruption and rot inherent within the Public Distribution System (PDS). Today, it is a well known fact that politicians along with bureaucrats have formed a tight nexus with illegal hoarders and speculators. Such things are never written in newspapers and never said in the policy review meetings of the RBI.
Manmohan Singh has shown us all in the last 6 years how economists are good yet hypocritical planners and pathetic yet popular implementers.
On our 63rd birthday, the rich urban India is a minority amongst the majority poor rural India. The average urban voter is disillusioned with the polity, for he feels that there is no point in voting. So much so, that there were serious discussions on “None of the above” option to be given as a choice. Urban India feels realizes that it is not within their control to stop the uneducated and criminal politicians from coming to power. Populist measures are used to appeal to the rural majority and the government is able to manipulate them in such a way that they feel that the government is acting on their behalf.

Like many other people of my age, I feel like a minority within another minority. The minority of being a ‘General’ citizen of the country is the quiescence of the social trends existing in the country. Students are being taught the benefits of violence, strikes and political appeasement rather than merit. There maybe a time a few generations down the line, that children born to general category mothers in general category wards in general category hospitals will blame God for not being born in a govt. approved caste.

On our 63rd birthday, we will today hear from our Prime Minister after weeks of silence, even as the country has witnessed major problems from honour killings, derailment of trains, growing protests in Kashmir, exponential increase in the spread of the violent Naxalites and the permanent menace of inflation. Many of us had forgotten that we even have a Prime Minister.

Manmohan Singh has shown us all in the last 6 years how economists are good yet hypocritical planners and pathetic yet popular implementers. Probably it is because they all believe that in the long run; all conditions (or equilibriums) adjust on their own to the policy planned (or ideal state). Classic textbook stuff will teach you that in the long run, market players adjust to the changes. Unfortunately today, my fellow country countrymen are the ‘market players’. The ‘adjustment’ is in reality an inurnment. The changes are often shocking, malfeasant and pervasive. I think probably Manmohan Singh forgot to read Keynes best critique at his time in Cambridge, or like we say in college “It was out of syllabus”. Keynes said and I shall repeat with great enthusiasm,” In the long run my dear, we are all dead!!”

So those of you, who are hoping to see the violence in Kashmir cease, forget it. The renegade Naxalites cornered up and taken care off, don’t expect it. The complacent, corrupt and inefficient bureaucracy cleaned up, get a life. And the inflation coming down “in the next six months”, don’t fall for it. All in all, we are here in for a long journey, driven by a group of people who are only keen to get off at the next stop available and ask for a refill from the passengers. My advice to fellow passengers: fasten your seatbelt, wear your helmets and be sure to carry a parachute large enough for you and your family, because you never know how low the road might stoop or how high you will drop from.

Why Germany Lost To Spain And Continues To Lose In Finance II

Part 2-
Drawing parallels, this is exactly how they behaved with financial markets. Their surprise ban on short selling and CDS was indeed odious, and still it was prolonged. The Germans, it seems, still feel that they live in a dystopian world, and they are the ones who have to set it right, with their traditionalist rules. Some German editorials on the web are talking of an Anglo- Saxon conspiracy to destabilize Germany through the Greek crisis!
German politicians abhor financial innovation of the 21st century and still believe in the archaic policies of the past. A time when laws were biased and an average investor had no real protection from defaults and frauds. Calling new innovative models like CDS “speculative” might be partially correct but blaming it completely for the mess is blatant hypocrisy.

Germany needs to learn from its world cup semi-final opponents Spain, how to embrace others and their diverse characteristics. And blend them into your own system. It said that Barcelona’s current flair and flamboyant style of play was brought to the football club in the 80’s by its Dutch coaches. From thereon, after years of adjustment and adaptations Spain borrowed the same game-play and has been successful in using it in the last 6 years.

Germans must come out of their conservative shell, and embrace the modern world and its free markets better. The way their engineering industry has grown leaps and bounds in the new era of alternate energy, policies too should open up more. Germany is conspicuous by its absence on the world stage, despite being de facto Europe’s powerhouse. It often remains quiescent on serious international issues and when it does speak out (rarely that is), it is rather disappointing.

The German starting XI reflects its diverse multi-cultural background and the new attacking flair innate within the young team. However, it seems the coach did not identify with this and imposed the “old German way”, which cost Germany the match and eventually the cup.

As I see it, Germany will continue to lose football finals and in finance, until wakes up like the rest of Europe and accepts the changing times.

Wednesday, September 15, 2010

Evaluating Crisis Management Options

Now as we know in a recession, typically the economy slows down, credit becomes expensive and exclusive, industrial output is negative or roundabout zilch, consumer confidence takes a toll and route to other cyclic gloomy events. In financial terms to sum it up; the investment dries up as private participants register heavy losses and stay bearish for a while.

Thus it is obvious that the emptiness in economy and even the financial markets have to be filled in by someone. That someone has to pump blood (that is money in this case) into the economy, in order to maintain life. That someone has to mend the loopholes, revise regulations and show sympathy to regain both public and private confidence in the system it governs. That someone has to wait for businesses to digest the losses, consumers to get more optimistic and investors to feel safe again. I hope you have realised by now that our ‘someone’ is none other than the government itself.

So now we know that it is the government only which is the final responsibility and authority to step in. The next thing to question is what all options it has to choose from:
1)      Spending large amounts of money or reducing taxes to increase money supply.
2)      Using central bank reserve and lending rates to boost money supply.
3)      Or do nothing and let the market and economy correct itself; as the classicalists suggested a century ago.

What is usually seen, is a combination of both the fiscal policy (first) and monetary policy (second). Moreover, what constraints the government to go the whole mile is the presence of the third option. Invariably it exists in the back of the mind of policy makers. It is brought to public domain in business journals and newspapers by some economists who remind about the benefits of perfect competition and warn about crowding out private investment. Sociologists will hark back to the founding principles of capitalism. In addition we are also alarmed by opposition political parties, who suddenly become more concerned about the tax payer’s “hard earned money”, raising slogans about their management (probably motivated as their own pockets get thinner too).

Thus a balance is maintained wherein prudent policy makers are stopped from overspending and crowding out private investment. So the government has to be very careful in order to not fuel a bubble in the economy which bursts as soon as it exits. Thus another major aspect is the timing of withdrawal of economic relief policy in both monetary and fiscal fronts. I will discus this in detail in my later posts.

It is also of course implied that a fiscal or monetary policy cannot be implemented in isolation. They both are interdependent on each other. The leakages in a policy can be countered by the other. For instance the concept of Quantitative Easing which is being adopted by central banks all over the world involves the central bank buying government securities in order to facilitate the fiscal expenditure. However if this was not done, the excess supply of treasuries would have pushed up interest rates and choked off investor confidence and credit flow in the economy.

Thus, we have seen what are the alternatives to be considered, which are evaluated on the basis of market and economic conditions. Now let us see what has really happened this time.

Tuesday, September 14, 2010

Do or Di(v)e for Euro

The response to the trillion dollar support package announced by EU for Greece has mostly been negative. The investors feel that it is still not enough to save the sinking European pride. The pride and unwavering faith in the euro was mistaken to be the absolute truth. With pacts and regulatory bodies in place, the Europeans thought their model was unique in economics and finance; just as their political clout was.
The Eurozone countries' average fiscal deficit as a percentage of GDP is a around 7 % which is well over the limit of 3% as per the above pact.

However, today for most, including me, the Euro has failed in this present set up and so has the European Union. It is quite shocking to see that none of the Eurozone countries are within the fiscal deficit limit set by the Growth and Stability Pact. Their average fiscal deficit as a percentage of GDP is a around 7 % which is well over the limit of 3% as per the above pact.

The reason for this as mentioned by me before ( rests in the clash between the two roles played by Euro member nations. Firstly, all members maintain sovereignty in their political, economic and foreign affairs which in many ways lead to many voices and adversely makes Europe sound like one noisy and divided entity. The EU in simple terms was designed to make their voices coherent as one and a collective European opinion which the world would respect. Sadly, today the collective consensus reached in Brussels is not respected by fellow member states themselves. So what we have seen till date is that member states have put national issues before their European obligations.

Their second role is to work together as a united region and uphold the European legacy, to command respect in a multi-polar world of today. Often egos are bruised, like Angela Merkel’s in the run-up to the stimulus decision, and often issues are dealt with a strong hand in unison. But rest (or most) of the times, members go around trying to show their might, trying to not let the EU take the stage lights off them.

Held at ransom
The message markets have sent is clear. The market is no longer going to be fooled by smart talking and insubstantial measures. They want to see the real deal. Some legally bound promises and structural changes to the Euro system are essential to placate market sentiments. After the Greek catastrophe, Euro bonds are already on a thin line.

Eurozone member states need to come up with concrete plans to limit their fiscal negligence and until then no sums of money promised will be adequate enough to win back confidence. They have to act fast or otherwise, a second dip is not far away.