Will Rajan unleash QE in India?

Sep 23, 2013

In this issue:
» Why India Inc hates the new land bill
» Should you get swayed by MNC delisting offers?
» SEBI's U-turn on 'safety net' in IPOs
» Time for US Fed to think global
» ....and more

In the aftermath that followed the 2008 crisis, the concept of QE or quantitative easing has become quite popular with central banks. Started by US, it essentially translated to central banks pumping money into the economy at cheap interest rates. The entire exercise was copied by the Eurozone and subsequently by Japan. Not that the program helped US or the Eurozone much. But it did lead to a flood of cheap money that eventually found its way into the emerging markets and created asset bubbles. Now there is news that our very own central banker plans a stimulus program for India as well.

As per a leading daily, the finance ministry and the Reserve bank of India (RBI) are looking at ways to provide cheaper money to some sectors. The sectors being considered are those that need the push if the economic growth needs to revive. These include engineering, infrastructure, small and medium enterprises amongst others. The plan is to provide funds at cheap rates to these sectors with the hope that these funds would help turn their fortunes.

With the RBI in a hawkish mode, the investment cycle in the country has come under pressure due to the high interest rates. Sectors that are capex heavy have suffered the most. However due to inflation that continues to remain high and the languishing rupee, the RBI has been unable to cut down the rates. Even in the latest monetary policy , the new RBI governor has hiked the short term interest rates. As a result these sectors have had little to celebrate about. Therefore any stimulus would be welcome news.

Whether these measures provide the boost to the economy or not is something that remains to be seen. The more pressing point here is that the sectors, for which the stimulus is being considered, are some of the biggest contributors of the stress in the banking system at present. Therefore providing them with additional funds may add further to that stress. The RBI and finance ministry have to keep this point in mind in their stimulus plans.

Another thing to remember is that QE and other such stimuli are at the best short term fixes. They may provide short term boosts to the concerned sectors and the economy as a whole. However for India to continue on its path of growth in the long term, more steps need to be taken. These include sorting out policy issues, bringing in and implementing the reforms, and improving governance. Only when these bottlenecks are removed, can growth flourish in the long term.

Do you think RBI's plans for selected QE in India will help stimulate long term growth? Let us know your comments or post them on our Facebook page / Google+ page

-------------------- Last chance - Equitymaster's Wealth Alliance registrations close today! --------------------

We reopened registrations to Equitymaster's Wealth Alliance for a very short time only because the technical setup for accepting installment payments became available late.

But this opportunity too is closing at midnight today!

So if Equitymaster's Wealth Alliance is something you feel like trying, we urge you to sign up right away.

Once the current round of registrations closes at midnight today, it may be a LONG time before we reopen them again.

So act now! If you sign up and don't like it, we will gladly give you a refund. Click here for full details...

 Chart of the day
The real estate sector has been under pressure for a while. Higher interest rates and the overall economic slowdown have made buyers cautious. As property prices have remained high despite the slowdown, the buyers are unwilling to commit to such high amounts of investments easily. This in turn has hurt sales. However, the property prices have remained high not because of the excess demand, but because of the developers' unwillingness to ease property rates. If we look at the chart, the real estate developers in the country are burdened with nearly Rs 578 bn of unsold inventory. Over the past 5 years, the inventory pile-up has just been increasing. Even though sales have remained more or less flat. Therefore if the developers wish to blame anyone for their woes, then they need only to blame themselves. Rather than running behind the huge margins that they enjoyed earlier, it would be better to cut rates and increase sales. Given the pileup, this is the option that they would have to eventually resort to. But when would this happen, is anybody's guess.

Real estate inventory increases while sales fall
Source: Business Standard

Land is one of the most crucial factors of production in an economy. As such, clear and appropriate land laws are important to ensure smooth and fair land acquisitions. Unfortunately, India has suffered from antiquated and vague laws pertaining to land ownership and acquisition. But last month, the Parliament passed the Land Acquisition Bill.

As per an article in Business Standard, corporates seem very disappointed with this new Bill. What are the reasons? Here are some highlights of the bill. The bill proposes higher compensation for land acquisition. For rural areas, it will be 4 times market value, while for urban areas it will be 2 times market value. Many corporates are of the opinion that such high acquisition costs would either make projects too expensive or simply unviable. In fact, Ajit Gulabchand, the chairman of infrastructure firm Hindustan Construction Company has said that he would not initiate any new project for the next two to three years.

But that's not all. The new Bill requires a new layer of approval by way of social impact assessment. As a result of this, the project life cycle would increase by at least one year. In addition, it could be challenged in the court at every stage. There are several other requirements such as the provision of rehabilitation and settlement for all affected families that will add to the costs. All in all, the new Bill means high acquisition costs, longer project cycles and more litigation.

The MNC theme has been doing the rounds of Indian stock markets every now and then. First it was the prospect of their delisting. Gains made in few cases like Alfa Laval's delisting got investors greedy. SEBI's minimum public holding mandate of 25% by June 2013 also raised the hopes of MNCs choosing to delist. However, that did not turn out to be the case as many MNCs instead chose to dilute promoter stake.

Then came the buy backs. Stocks of Hindustan Unilever (HUL) and GSK Consumer again let the ball rolling. Their successful buybacks led to the respective stock prices going through the roof. Yet again there are speculations that the rupee depreciation will coax more MNCs to go the HUL or GSK way. Investors are ignoring the fact that not every MNC is as focused on Indian markets as these two. Buying expensive stocks in the hope of finding a 'bigger fool' can be a cardinal mistake. And the risks of betting on instances like delisting and buy back are way too high. Needless to say gullible investors take cues from such rumors and speculations; only to lose money in the bargain. It is time that they learn to keep off the noise and focus only on the long term fundamentals of solid stocks.

Market watchdog, the Securities Exchange Bureau of India (SEBI) had proposed a plan last year to protect retail investors from bad experiences in primary markets. This included having a safety net mechanism for initial public offerings. This entailed promoters, bankers and related parties to buy back shares in case prices fall sharply within three months of listing. However, SEBI has scrapped this idea due to resistance by the respective parties. It has provided an alternative instead. That of companies to justify their valuations at the time of IPO! In other words, SEBI wants such stocks to be priced at significant discount - in terms of valuations - to that of their peers. In addition to this, retail investors would be getting additional discounts of 5-10%. As reported in the Mint, this facility is believed to be available for retail investors investing a maximum amount of Rs 50,000.

From the looks of it, it does not get any better for retail investors! While SEBI's intention to safeguard retail investors may be right, we cannot help but think that this would make investors all the more tempted to invest in IPOs to make listing gains. Especially in cases of good quality companies which could see massive surge in prices on the back of strong demand from non-retail participants. Nevertheless, long term investors could significantly benefit from such a move.

How attuned has the US Fed been to issues outside the US? Probably not much importance was given to them in the past. As per an article in Moneynews, for five years, the Fed has been mostly focusing on challenges back home. Issues such as the financial crisis, recession and unemployment have dominated its agenda. But going forward, it will need to change its way of thinking. The current US Fed chief is due to retire. And hence it will be up to the next in line to make sure that the Fed's thinking is more global. For the US is not immune from happenings in the global arena. And some of its growth prospects do depend on how well the global economy performs. Further, its massive stimulus program, though intended for bolstering the US economy, has so far had more repercussions on the emerging markets. Vice President Janet Yellen has emerged as the top candidate for the post of Fed chief. And her recent globe-trotting stint would probably come in handy should she be chosen as the chief. But whether she rises up to the challenge remains to be seen.

In the meanwhile after opening the day on a negative note the Indian equity markets continued to languish. At the time of writing, the Sensex was down by about 367 points (1.8%). The other major Asian markets closed the day on a mixed note with China, Korea and Taiwan seeing gains while the others closed in the red. Europe too has opened the day in the red.

 Today's investing mantra
"People always want a formula - but it doesn't work that way - you have to estimate total cash generated from now to eternity, and discount it back to today. Yardsticks such as P/Es are not enough by themselves" - Warren Buffett

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "Will Rajan unleash QE in India?". Click here!

6 Responses to "Will Rajan unleash QE in India?"


Sep 29, 2013

All the govts now to get votes give free ration, house etc without seeing the economic impact. Rural employment assurance scheme of 100 days is spoiler as many enjoy money without working. This leaves farm sector starving for manpower and they plan to go seeking machines for all works thus eroding employment routes. When once due to money problem, if the scheme stops, then we can find how many will be unemployed and starving. Unless indian labour is made productive,indian cannot grow. Corruption and political interferance in day to day affairs of civil functioning is also eating India's economy and all money goes to swiss bank. Even for opening one small latrine, ministers are invited. For giving freebies, ministers are invited. It is not so in Kamaraj time in tamilnadu. Ministers should stop with policy direction and should not interfere in day to day admin. Only these steps will save india from economic downfall. Whether it is Raghuram raja or yashwant sinha or manmohan singh or subba rao , no one can stimulus growth and arrest inflation without the basic steps needed for which political courage is needed from central and state govt.


Vidyadhar Sule

Sep 27, 2013

Quantitative Easing(QE) envisaged by the RBI governor for certain sectors is fraught with the risk of more inflation.As a temporary relief to the designated sectors it may seem to give a boost to it but in the long run this measure may counteract and plummet that particular sector.Moreover in Indian conditions this measure may actually give rise to one more scam since the end use of the cheap funds pumped in by the RBI is left to the whims and fancies of the polity.This is obvious as the Top boss does not seem to have any control over his ministry.



Sep 24, 2013

HONESTY has no place in India. NSEL fraud is a recent case who will accept the blame and who will be punished. People like Yashwarden Birla whose all companies are in trouble are waiting for such opportuinities. They will float new companies in collution with some bank executives and politicians. Vijay Mallya, Ruia's, Adani's and many more. Another fraud will be born.

Like (1)

B K Nandi

Sep 23, 2013

Since long time inflation is persisting in India. RBI could not dare to reduce the high interest rate for a long time. Now currency depreciation has become a regular factor of the Indian economy. So it is difficult to understand how QE would be the medicine of these negative factors of the economy. These factors imply that India has already huge money in the market. It is totally different from the countries where QE is tried. India is running a parallel black money economy which made all RBI tools blunt. The scams generating corrupt government has to change the way they work, the UPA government has to stop encouraging corruptions, scams. Most of PSU have become just white elephant. Just QE type of easy patching will not correct anything and on the contrary under the corrupt Monmohan Singh government this patch will be counter effective. UPA and its allies will loot more and more. QE will be just a time pass of the new RBI governor.

Like (1)


Sep 23, 2013

as previously us crises occurred and thus there federal reserve had applied a QE tools and thus they successfully came out with that situation so i belive that some moment its helpful for India to deal with certain crises

Like (1)

Digambar Kulkarni

Sep 23, 2013

Cheaper funding to Sectors like Power and Infrastructure will certainly accelerate the Ecinomy in India. Funding will be necessary till the projects are completed in the field. For execution of projects there must be clear Reward and Punishment policy.
QE would help.

Like (1)
Equitymaster requests your view! Post a comment on "Will Rajan unleash QE in India?". Click here!