»5 Minute Wrap Up by Equitymaster

On This Day - 14 MAY 2010
Has SEBI gone completely wrong here?

In this issue:
» Higher capital requirements from mutual funds
» Agriculture sector has staged a quick recovery
» RBI not intervening in Rupee movements
» US$ 11 bn debt fund for India's infrastructure
» ...and more!

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One great feature of capitalism is that it unleashes human potential. It is the closest thing to a meritocracy. But not always. There is a tendency for power to concentrate. For the wealthy to get wealthier. It is here that that role of regulators becomes critical. To ensure a level playing field. To promote as much competition as possible.

Stock markets are integral to a capitalist economy. And we admire India's stock market regulator, SEBI's initiatives in promoting transparency and competition. SEBI is now proposing higher capital requirements for mutual funds, investment banks and brokers. The minimum net worth requirement for mutual funds used to be Rs 100 m. It has now been increased five times to Rs 500 m.

The apparent reason is that mutual funds will be able to absorb more losses if they have higher capital. But we think SEBI has got it completely wrong this time. Quantity does not always assure quality. After all, weren't all the firms that caused the global financial crisis, very large? We think, by hiking the net worth requirement, SEBI will create a high entry barrier. One that only the wealthy can cross. Not necessarily the most talented. It will end up promoting a rich boys' club beyond the reach of many. But this is just our view. Tell us what you think of this move by SEBI.

 Chart of the day
Monsoon rains may come 10 days early this year, a former chief of India's meteorological department says. Given how important the monsoons are for India's agriculture and in turn its economy, we hope he is right. We also decided to see how accurate the predictions of the met department have been over the last several years. As today's chart of the day shows, the met department's predictions have usually been correct. But they do get it wrong from time to time. Like last year. Hopefully, their prediction of 98% normal rains this year will come good. We wonder though, when will India be stop being so dependent on the whims of the weather gods.

Source: PTI

Decoupled it may not be but it is certainly unruffled. This description, courtesy the Financial Times, sits rather lightly on the economy of Asia ex-Japan. And why not. The economies of the developed world have gone into a long snooze. Whereas Asia, ex-Japan, is behaving as though the crisis never happened.

But isn't the difference in the two economic zones baffling? After all, even the developed world unleashed stimuli just as quickly as the Asian economies. The difference perhaps lies in the manner in which the consumers of the two zones behaved. Developed economies had overleveraged consumers and overleveraged governments. However, these concerns are not anywhere close to being equally big in emerging Asia. Thus, when either the governments or the consumers or both loosened their purse strings, growth followed.

Furthermore, even penetration levels of a lot of goods and services are abysmally low in emerging Asia. This provides a further fillip to growth. However, things are gradually beginning to heat up. Supply is failing to catch up with demand at the same time the Asian central banks are adopting a loose monetary policy approach. They may have to tighten up a bit more or else inflation and asset bubbles could rear up their heads yet again. From a long term though, Asia's future does look as bright as ever, especially in China and India.

Globally, banks are now reporting their performance for FY10. The focus has once again shifted to entities in emerging markets. Interestingly, Economist has published a report on how banks in emerging economies could face the same set of problems as their global peers. The report at the outset acknowledges the inherent strength of Indian, Chinese and Brazilian banks. Be it their improved efficiency, better asset quality or larger size. But it also points out that their attempt to expand globally may come at a high cost.

The BRIC-originated banks are seen as the engines of growth for global economy. At the same time, the crisis in the West has done a lot of good to their reputation. Primarily, because they are gatherers of large savings rather than givers of large loans like their peers in the West. But they are also expected to face as much resistance in establishing a global presence as did the American and European banks. As it is, globalization of banking is no more a sought-after model as it once used to be.

It is India's biggest need of the hour and its biggest bane, both at the same time. Infrastructure, or the lack of it, is perhaps India's biggest bottleneck at this moment. From power to roads, and from ports to sanitation, everything is in a state of disarray. The good news is that as per a recent report, the government is planning to set up a large US$ 11 bn debt fund dedicated to India's infrastructure needs. While the specifics are still being worked out, the basic idea is slated to be the refinancing of lending institutions. While the thought surely seems noble, what remains to be seen is how far the government carries through with this idea on a consistent note.

Gone are those days when the RBI felt compelled to intervene regularly in the forex markets. What else would explain the fact that the RBI has stayed on the sidelines from December 2009 to March 2010. This is its longest hiatus since mid 2006. The central bank now intends to intervene only if there is considerable volatility in the rupee. Even speculative activities fuelling gyrations in the currency would be strong enough reason for the central bank to step in. However, the RBI is not particularly concerned with the rupee levels. Or whether the Indian unit has been strengthening or weakening.

Various other macroeconomic indicators have also begun to form the basis for RBI's intervention. These are the dollar's performance against global majors and movement of Asian currencies. India's monetary policy when assessing rupee volatility would also have a bearing. Thus, it appears that the central bank's tolerance for volatility in the rupee has increased. This means that Indian corporates may have to brace themselves for possibly more fluctuations in the forex market. The RBI certainly does not want to participate as actively as it once did.

Some good news for people reeling under food inflation. In a confidence boosting announcement, the agriculture minister, has said that India will be in a position to export sugar and wheat next year. After the worst monsoon in 37 years, this would mean that the agriculture sector has staged a quick recovery and supply would outstrip demand. However, all this would depend on a normal monsoon this year. While food inflation has been increasing week on week, a timely start of the monsoons would act as a trigger for cooling of food prices.

Meanwhile, the BSE-Sensex languished deep in the red today despite sporadic attempts to recoup its losses during the day. At the time of writing, the BSE-Sensex was trading 120 points below the dotted line. Profit booking amongst metal, energy, realty, banking and auto sectors resulted in the plunge. As for global markets, most other Asian markets ended the day lower, while the European markets are also currently trading in the red.

 Today's investing mantra
"In the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative are the conclusions we draw there from." - Benjamin Graham

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