Is 'US in need' a friend indeed?

Nov 3, 2010

In this issue:
» RBI prefers capital flow into equities
» RBI's rate hike will impact short term growth
» Impact of QE2 on emerging markets
» Japan the next big economic disaster- Roubini
» ...and more!!

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The US President's visit to India this week is the most talked about event. Newspapers and magazines are filled with stories of security measures, the staying arrangements, etc. Protests have already started breaking out over what he may or may not do.

The India Inc has its hopes lined up on this visit as well. They hope for deals that would ease transfer of technology from US to India. This in turn would promote development in the fields of biotechnology and defense. Another key hope is that the Indian government will lobby for easing the conditions imposed on outsourcing of work by US companies to India. Hopes for the agricultural sector are that the visit would foster tie ups to increase food security in India and possible participation of India in Africa's agriculture.

However, the visit is not really a one sided thing where India asks and US gives. US needs India as it is a tremendous market for US exports. Indian companies are also a source of investment in US. During the visit, US officials hope to work out terms and agreements that would foster major deals between US companies and their Indian counterparts. US economy has been reeling under the burden of the crisis. It hopes to ink deals with Indi that may help it come out of the doldrums.

Whether India's hopes will be realized or will this be just another Head of the State's token visit is something that remains to be seen. Will Mr. Obama's visit yield anything concrete for India? What do you think? Share your views or post your comments on our Facebook page.

 Chart of the day
The Federal Reserve is scheduled to announce its next round of quantitative easing. This is expected to unleash a flood of capital flows towards the emerging markets. Cautious of the possible impact on inflation, countries are raising their benchmark interest rates. While India and Australia have acted ahead by raising their benchmark interest rates, countries like China, Russia and Brazil have left it unchanged. China has stated that it would prefer to wait and watch before taking any decision. On the other hand, Brazil and Russia have little scope to increase rates, which are already one of the highest in the region.

Data source: Central banks of respective countries

The RBI's move to raise interest rates yesterday was not a one off. Several of its Asian peers have resorted to such tactics to avert inflationary pressures in recent times. However, given the problem of excessive capital inflows into Indian markets, the move did not find too many supporters. The higher difference in interest rates compared to those in the West has raised concerns over inflow of hot money. However, the RBI believes that interest rates alone cannot determine capital inflows. While the central bank seems comfortable with Indian equities attracting foreign capital, it may keep a closer eye on domestic debt markets. Having said that the RBI governor is also looking to absorb the capital inflow to narrow the current account deficit. We are not sure if this tactic to avert one economic problem could give rise to another. That of asset bubbles.

Meanwhile, Finance Minister, Mr. Pranab Mukherjee believes that the rate hike move may have a small, negative impact on economic growth in the short term. However, for medium to long term growth, he believes that the move was necessary. He senses that the moderate rate hike is a good move from the RBI to control inflation and high asset prices, especially in the real estate sector.

The world in on the edge of its seat waiting for the US Fed to announce the details of its fresh round of quantitative easing (QE). The magnitude of easing, as well as the effect it will have on emerging markets is what investors and policy makers are keen to see. A Financial Times report estimates that this round of QE will initially involve US$ 500 bn of asset purchases spread over about six months. However, there is something peculiar in store for emerging markets. If the Fed falls short of these expectations, the markets may lose confidence in the Fed's ability to revive the US economy. Such an eventuality could mean that the new money may quickly find its way into emerging markets. All in the hopes of higher growth rates. On the other hand, if the size of the QE is in line with or above expectations, the liquidity thus induced may very well leak out of the US. And instead land up again in what seems to be a favourite destination of investors these days - emerging markets. As far as India is concerned, this could manifest itself in the economy in the form of an appreciating rupee, higher inflation as well as higher asset prices. Looks like the RBI is going to have its hands full bursting potential bubbles for some time to come.

Almost all the economic experts are busy giving out their views on the impact of next round of quantitative easing. But perhaps none carries more weight than the one given out by the former Fed Chairman Paul Volcker. Now 83, Volcker is of the opinion that quantitative easing is likely to spark inflation in the future. However, he also opined that the measure is not quite alarming and is certainly within the capacity of the central bank to deal with in the future. "Dealing with inflation and inflation potential is always a challenge. It is manageable but not easy", Volcker is believed to have said.

Of course, who would know it better than Volcker himself? As Fed Chairman from 1979 to 1987, Volcker raised interest rates to as high as 20% in order to tame inflation and this measure eventually triggered a recession. However, with the US Government running a huge debt, Bernanke may not have any such leeway. And this makes Bernanke's problem doubly difficult. Thus, it would be interesting to see how the whole episode indeed pans out. History though, is certainly not on the side of the US Fed.

Nouriel Roubini hogged the limelight when he predicted the global financial crisis. And he has not painted a rosy outlook for either the US or Japan going forward. He opines that while the developed world will show 'anemic' growth, Japan is an accident 'waiting to happen'. Japan has been in a near depressive state for 15 years now. And not enough has been done in terms of structural reforms to revive the economy. To make matters worse, politically too the country has reached a total stalemate. The population of Japan is ageing. This has translated into massive unfunded liabilities for the public sector. Productivity is low. And to top it all, the Bank of Japan has taken a leaf out of the US Fed's book. It lowered its benchmark interest rate and pledged to spend 5 trillion yen (approx. US$ 62 bn) to buy assets including government bonds and corporate debt. Things are indeed not looking good at all for the Japanese economy.

In the meanwhile, the Indian stock market were trading well above the dotted line with buying activity being witnessed in stocks across the board. At the time of writing, stocks from the metal, consumer durables and healthcare spaces were leading the pack of gainers, while those from the oil & gas and FMCG sectors were the top underperformers. The sentiments in rest of Asia were positive as well, with Hong Kong, Japan and Singapore ending the day on a firm note. China, however, ended in the red.

 Today's investing mantra
"Cash combined with courage in a time of crisis is priceless." - Warren Buffett

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18 Responses to "Is 'US in need' a friend indeed?"

ajay shah

Nov 7, 2010

i m reading this column since many months. one particular word you r using every now n then is so called "bubble", be that of stocks,real estate n many more..thereby r u trying to prevent ppl from buying these shares/assets/commodities or is it just a lack of understanding/knowledge on your part.on one hand u r trying to hardsell your some portfolio schemes n on the other hand u r trying to prevent public directly buying it from market by showing "bubble" other words u mean to say that if that bubble really bursts then go down the drain in your company together but not alone...?? if this is the case then frankly speaking i would love to go down on my own as i myself doing a lot of stock technical analysis n research so that i m the sole responsible for whatever come may...


ruchir shah

Nov 6, 2010

America is the most selfish country in the world. They never talk about some one but always have big I for them.

Our Indian leaders need to learn a lot from Americans the diplomacy and how we can benefit our selves by Mr. Obama's visit.


swati tiwari

Nov 5, 2010

US needs INDIA more due to business point of view,they r capitalist and they don't even like to breath without profit factor. so India will be benefited is quit..........


manoj karani

Nov 5, 2010

obama is coming in india is most beneficial for us in everykind to grow more. so let's give someway and gets more from him best of luck !
don't forget india till wants supports of us in many terms. our nation has to do more to become super power but till we are very much behind this due to the lack of govt. policy implification and also public attitude or behaviour not so far changed and even media and intellectual people not supports for rights things but only focusing on their interest. this is the main things which we are not on a stage as we can compare more powerful nation to any other devlop nations. we have to do much much more about our nation. each and everyone need to see the ground reality of theirs and ours then compare each other.


Sujeet Mishra

Nov 4, 2010

India always treats US as its friend, but US treats India as its dumping ground. In our 60yrs of independence US would have merely helped us just a couple of times, with some expectations in return. India should stop behaving as a underdog and should keep its word strongly. US is a player, but we think US as our friend, now even we become players and put our words strongly to US.
US never helped India in any of its major issues of concern-terrorism, technology, nuclear power etc are few to name. US presidents main purpose for visiting India is to show concern for our problem and get the nuclear reliability bill signed. Once the bill is signed , not even a single delegate from US will out to look at our problems.
Presently US economy is crumbling due to crisis, and the two nations which were list affected by crisis were India and china. US don't have any answers for the questions put by china,, as china never allows any country to have an upper hand on it. where as the scene is totally different in case of India, India doesn't have answer for the questions put by US and its becomes an underdog infront of US. All the agreements till date with US are only in favor of US.
"so US can never prove to be a helping hand to India during its needs, so it cannot be a friend indeed".



Nov 4, 2010

US president is coming with a strong will to get things that will boost the US economy especially after the recent poll debacle.

But,I am not sure if our government has a stronger will to protect Indian economy.


r k mandal

Nov 4, 2010

Our indian newspaper is still in gulami period.they only see their profit so they write each & every moment regardin obama but they dont see that us does not believe on us & our security system. they rome with their facility. why we should give more importance other than a nation head.



Nov 4, 2010

The high profile visit of president Obama is only to negotiate with India in favour of US companies, probably on Nuclear Suppliers' Liability bill. US will never give precedence to the needs of other countries. US economy is in doldrums and the President of USA will try to find ways and means to improve it. They are not even serious about the security threat to India due to Terrorism. They are so self-centred and can never be friend in need.


G. Natarajan

Nov 4, 2010

President is so much obsessed with US economy and job loss and early revival. Our Prime minister can suggest tips for recovery and the mutual concerns and early RECOVERY OF US ECONOMY will be mutually beneficial.



Nov 3, 2010

This is just a "Much Hyped India Tour"... The deals will go as it is... as in the past...

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