Egypt crisis could be a double whammy for India

Feb 8, 2011

In this issue:
» US wants to ally with Brazil against China
» More rate hikes imminent to meet the inflation target
» Copper prices have seen a massive rise
» Big bonuses to get deferred
» ...and more!!

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On first thoughts, the crisis in Egypt could be classified as trouble brewing in the Middle East region with no real consequences for India. But dig deeper and one will realise that this crisis is likely to impact India in more ways than one.

One such impact of the Egypt crisis is expected to be on India's current account balance. It must be noted that India at present has a deficit in its current account largely because its trade balance is languishing in the red. What has so far provided some sort of a cushion are remittances from abroad which have ensured that any further deterioration of the current account deficit has not taken place.

But that could change. For starters, the unrest in Egypt and its impact on the Middle East has sparked fears of a rise in oil prices. These have already touched the US$ 100 per barrel mark. Now, India imports almost 70% of the oil that it consumes. While Egypt accounts for a mere 0.5% of India's imports, the Middle East region accounts for the largest chunk. Thus, higher oil prices would raise India's import bill and would further widen the trade deficit and consequently the current account deficit. But that is not all. There could be some pressure witnessed on the remittances front too. Once again, remittance flows from Egypt were negligible at US$ 3.7 m in 2010. But the total remittances from Middle Eastern economies have been pegged at a significant US$ 26 bn. That is 48% of India's total remittance inflows of US$ 52 bn.

This does not spell good news for the Indian economy which is also struggling with the burden of a widening fiscal deficit. Higher crude prices are set to enlarge the subsidy burden. Indeed the government needs to look beyond a populist Union Budget this time. Inability to contain the stress on government finances could derail India's growth plans. And investors may have to contend with the risks of volatility in FII fund flows, inflation and poor infrastructure for a long time.

Do you think that the crisis in Egypt will have a significant impact on the government's finances? Share with us or post your comments on our Facebook page.

 Chart of the day
In fact, continuing on the above topic, today's chart of the day shows that India's current account balance as a percentage of GDP is in the negative as compared to its Asian peers. Although India has been growing at an enviable pace along with its BRIC peers, the latter in contrast have managed to maintain a comfortable surplus on the current account.

Data Source: The Economist

When trying to wage a war, it is always better to have more allies on one's side. This appears to be US' policy for the currency war against China. The US now plans to rope in Brazil as its ally against China during the next G-20 meeting. The US has been accusing China of artificially undervaluing its currency that is hampering the US' exports. However, this has not resulted in any concrete actions from China who plainly denies this accusation.

For the next G-20 meet, the US plans to join hands with Brazil to voice out the same accusation. If Brazil agrees to this, it would be quite a shift from Brazil's earlier trade policy of cooperating with other emerging markets. However, in recent times, Brazil's own currency has appreciated by almost 40%. This has made its own trade industry vulnerable to the cheaper goods from China. Therefore, there are chances that Brazil may agree to ally with US against China. Whatever it is, US is trying to strengthen its own position as it fights this war. Whether it will win or not, only time will tell.

Gold has a strong calling these days. Not just as a haven for inflation insurance but also as an investment opportunity. So are you amongst those who have chosen to invest a small proportion in the yellow metal? Then rest assured, you are not alone. As per moneynews, investors have put in a sterling US$ 102 bn betting on higher gold prices. This figure for the month of January 2011 makes investments in gold higher than that held by 4 central banks! Now the interest in gold as an asset class is not new. Fund managers like John Paulson, Jim Rogers and George Soros have been buying gold for very long. In fact even Mr Bill Bonner, the founder of Agora Inc, has been one of the earliest proponents of buying gold. But of late investors seem to have got all the more convinced of gold's long term potential. This is thanks to the runaway inflation in emerging markets and the US Fed's inability to recognize the risks in monetary policy. We believe that investors' confidence in this asset class will remain undiluted in the medium term.

Try as it might, the RBI has not been able to shake the inflation monkey off its back. It has already raised key interest rates 7 times this year. But, its anti-inflationary stance is far from over. Oil has once again climbed over US$ 100/barrel. It is expected to rise even further as political unrest spreads in the Middle East, due to the Egypt crisis. Latest food inflation data was perched over 17% on high vegetable prices, including the ubiquitous onion.

The RBI is currently sticking to its estimate of a 7% inflation rate by the end of March 2011. The current rate is around 8.4%, and the central bank has less than 2 months to meet its target. Going by its past record, further rate hikes are on the cards. The Indian economy is projected to grow by its fastest rate in 3 years at 8.6%. But, high inflation has caused these growth numbers to lose some sheen.

Gold and crude oil prices have occupied most of the limelight in recent times. But you would be shocked to know that in a matter of just 8 months, from the lows in June 2010, copper prices have seen a massive 68% rise in terms of the US dollar. While integrated players and producers are making good profits, the major user industries like electrical equipment, cables and automobiles are being adversely affected. The situation is quite similar to the crude oil industry where upstream players are cash rich, while the downstream players make losses.

But why have copper prices shot up so much? There are quite a few reasons for that. The recovery in global demand is one reason. On the other hand, no new mines are reported to have been found or allotted to copper producing companies the world over. This has also added to the mismatch in demand and supply. The current deficit world over is estimated to be between five and six lakh tonnes. This is definitely a grave concern.

If there is one emotion to describe the recent financial crisis, it is greed. In anticipation of hefty rewards (in the form of bonuses), bankers used various gimmicks to boost profits of their respective banks. Recognizing this contagion, regulators across the world have been attempting to clamp down bonuses of banking executives. In fact, US regulators made their most forceful attempt recently. The Federal Deposit Insurance Corporation (FDIC) suggested that bonuses of executives at the large financial institutions get deferred for at least three years. The FDIC is a US government corporation providing deposit insurance to its member banks.

The irony here is that the regions that were not the birth place of crisis have taken more stringent steps towards curbing bonuses. The EU for example has limited cash payments to top bankers to about one-fifth of their annual bonuses. But the question here is whether these measures will keep bankers motivated enough? Quite difficult to say! This is considering that some banks have upped salaries stating that it is essential in order to retain staff.

In the meanwhile, the Indian markets were trading below yesterday's closing levels as selling activity intensified among index heavyweights. India's benchmark index, the BSE-Sensex was trading lower by about 159 points (down 1%) at the time of writing. Selling activity was seen in stocks across sectors with oil & gas, metals and banking stocks leading the pack of losers. As for rest of Asia, markets ended on a mixed note.

 Today's investing mantra
"Stock speculation is largely a matter of A trying to decide what B, C and D are likely to think-with B, C and D trying to do the same." - Benjamin Graham

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12 Responses to "Egypt crisis could be a double whammy for India"

Piyush Upendra Singh

Feb 10, 2011

Talking of remittances inflow from the Middle East, some indigenous FMCG & Consumer good manufactures raise revenues from the Middle East (specifically Egypt for the like Marico & Godrej)- which are left in a doleful situation.

Besides, Egypt's pertinence to the Suez Canal makes the turmoil more noteworthy.


Manoj Kumar

Feb 10, 2011

No! Not at all. Well not until this fire spreads to whole of middle east. We have very good relations with the Arab world and until whole of middle east goes up in flames, India is unlikely to be affected. However, taking some extra precautions has killed nobody.


R S Chakravarti

Feb 9, 2011

When oil prices rise, where does the money go? To the producing countries. Then, surely, remittances from there also ought to rise?



Feb 8, 2011

Non resident Indian?
Non reliable Indian?


Gulab Patil

Feb 8, 2011

I do agree about the Oil price will result in windening the Indias deficit account further. However I do not agree about the remittances from GCC countries will have any impact. Higher oil revenews will boost the GCC countries economy consequently in higher growth.This will further improve the bussiness & remittances to India.


A B Mehta

Feb 8, 2011

As regards investment in Gold, the recommende approach is usually the GOLD ETFs. I am told that Silver is likely to give better return. Do the Gold ETFs also include silver related investments?


Anupam Garg

Feb 8, 2011

Stock speculation is largely a matter of A trying to decide what B, C and D are likely to think-with B, C and D trying to do the same - good 1


Vinod Agrawal

Feb 8, 2011

This is misconceived and misplaced information being circulated in Indian media who does not understand the Middle East economy at all and they are just plying in hands of some vested interested agencies. First of all if due to Egypt crises the Oil prices goes up then it will benefit the Middle East economy which will generate more employment for Indians so ultimately the remittances to India will increase only.As far as the prices of OIL for India is concerned, it will not have any material impact in the long term as even if Souez Canal is closed there is alternate route for bringing Oil to India.Hence the Total impact on the Indian Economy will be negligible unless the Saudi Arabia, Kuwait, Qatar & UAE also engulfed in the uprising against their present Ruling establishments.This is very distant possibility in near term, so please do not spread panic in the Indian Financial Market.


T V Ambareesh

Feb 8, 2011

It is understandable that no economy is insulated from global happennings, however it is sad that ethnic problems in a country with whom we have negligible trade throws alrming picture and its impact on our economy in varied degree. Are we any way safe in our country which plagued with corruption and redtapism. I am wondering which way our economy is vibrant! IT buble we have problems! gulf war we have problems! recession in Europe we have problems! Dollor appriciates we have problems! Ruppee appriciates we have problems!Alas, we are the fast growing economy!


Vivek Mahajan

Feb 8, 2011

Your lead article..."Egypt crisis could be a double whammy for India"...does no more than what average daily reports / analysts do. They try to (mis)match and correlate events in order to fundamentally justify each leg of market move. Watch any television channel, or read any daily newspaper's coverage on stock markets and you will find aplently what has been just said. Having followed your write-ups for a fairly long period now, I understand that the group believes in long term play and remains very bullish on the prospects of Indian economy over the longer term. Therefore, instead of creating more panic in a sharply falling market by writing "double whammies", you would do a much better service to the readers by highlighting a list of your long-term fundamentally sound stocks which you think are looking "cheap" in this falling market.

Now as far as oil and commodities prices are concerned, I am not sure whether you have even cared to see the price behavior of "Baltic Dry Index". With all the hype being created about the US, Europe and the World recovery, why is it that this index (which usually gives investors insight into global supply and demand trends) has come down crashing to its lowest level since January / February 2009 (worst period of the financial crises). If the ships are not in demand and the freights are falling to the lowest in 2 years, how are these commodities being transported?? Without ships???
I leave it to you to find some answer to this mysterious phenomenon. At least it will draw you towards "out of the box" thinking and away from most daily report writers who would only try and justfy daily price movement of the market with some fundamental factors.

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