Will this latest Govt. move boost Indian stocks? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Will this latest Govt. move boost Indian stocks? 

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In this issue:
» Indian stock markets fared the worst in 2011
» Central bank has revised exports numbers
» Has the RBI become the government's pawn?
» A solution to helping India's poor
» ...and more!

---------------------------------------- Did you miss the Webinar? ----------------------------------------

Equitymaster's Webinar on the Future Prospects for the Indian Economy with Mr Ajit Dayal was broadcasted on 30th of December, 2011.

The webinar answered questions that could be troubling any Indian Investor today. Where is the Indian Economy headed in 2012? Is Gold still a good investment? Could the Stock Market touch the 21000 figure in 2012?

If you missed watching the webinar, here is your chance to access the same.

Click Here to watch: Indian Economy - From Darling to Damned (Rebroadcast)

And let's understand what lies ahead for India and how could this impact your investments.

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00:00
 
Indian stock markets had a rather volatile outing in 2011 as indices fell by 25% during the year. One of the reasons for this was that foreign Institutional Investors (FIIs) pulled out money from India by the truckload causing the sharp drop in stocks. Foreign fund flows have always had a big impact on the Indian markets and one need look no further than the 2007-09 crisis for this. Indeed, when the global crisis erupted, huge outflows by FIIs had a damaging impact on India even when the fundamentals of the country were intact.

Thus, in 2011 too, money pulled out by FIIs had influenced the movement of the indices. But the story this time was a bit different. Certainly, the escalation of the crisis in Europe was one of the factors that added to the overall negative sentiment. But to put the blame entirely on that region would not be right. Problems back home in India also led to loss of confidence among investors. High inflation, interest rates, lower profits reported by India Inc., policy paralysis in government were some of the main issues that led to big outflows.

Hence, in order to cushion the volatility in Indian stock markets and also deepen its under-developed markets, India will allow foreign nationals to invest directly in the country's listed companies. Foreigners were previously restricted to investing in India's equity market through mutual funds or other institutional channels. Whether this will result in an immediate flow of foreign money into India remains to be seen though. Ultimately what matters is what steps the government is taking to bring in reforms and ramping up the infrastructure of the country. If the political deadlock continues the way it did in 2011, the chances of more investments in Indian markets, be it domestic or foreign, will be poor at best.

Do you think the government's latest move of allowing foreign investors to invest directly in India give the much needed boost to Indian stock markets? Share with us or post your comments on Facebook page / Google+ page.

01:28  Chart of the day
 
Today's chart of the day shows that Indian stock markets fared the worst in 2011 when compared to not just emerging markets but also its developed peers. Besides the Eurozone crisis, economic slowdown in the country was one of the main reasons for such a poor show. Interestingly, the US stock markets generated positive returns in 2011 although there was no significant improvement in its economic fundamentals. The strength was more relative, as uncertainty across all the markets in the world led to the perception that the US was still a safe bet.

Data source: The Economist

02:08
 
A modern society is an economy which is based on division of labour. And in such an economy, getting the data right is of utmost importance. Imagine what would happen if an entrepreneur finds out that the exports number of his produce which had earlier been projected to grow by 100% has now been revised to show almost zero growth. He will indeed be in big trouble if has undertaken a huge capex plan based on the earlier growth numbers.

In view of this, it is indeed worrisome that the RBI has revised its exports figure down by US$ 6 bn in its balance of payments statement for the first quarter of FY12. It should be noted that a similar move was made by the commerce ministry earlier when it had too admitted to overstating certain export numbers by US$ 9 bn. We sincerely think that the data collection agencies better get their math right with respect to such numbers. A lot of future capital allocation decisions by firms and individuals are arrived at after poring through data provided by these agencies. Thus, if these are error prone, the decisions that depend on them may also turn out to be wrong and cause damage to the economy.

02:45
 
That the central bank has taken an independent stand when it comes to maneuvering the Indian economy out of the global financial crisis is well acknowledged. However, the RBI has become a pawn of sorts when it comes to the government's profligacy. The Reserve Bank Of India (RBI) was forced to buy bonds issued by the government in 2008 to help pump prime the economy. Since then purchasing government bonds has become a norm every year to infuse liquidity despite the steep inflation rate.

In fact, the liquidity, more often than not helps the government fulfill its politically motivated social obligations rather than meet economic interests. In the event of the government exceeding borrowing limits, the private borrowers are getting crowded out. More so because the government's borrowing rates influence interest rates in the economy as well. We hope that the central bank puts its feet down on this account as well. Only then will the RBI prove itself truly independent.

03:21
 
Here's a solution on how to help India's poor. Invest in agriculture! According to the Economic Times, it is well recognized that every rupee contribution to GDP from farming has double the effect of other methods of poverty alleviation. Agriculture helps drive demand from other sectors indirectly. Thus, even a 4% growth in the sector can cause a robust increase in demand for other goods. Commercial vehicles, FMCG products, consumer durables etc can all get a fillip from higher rural cash flows. Investing in this sector that provides employment to 60% of India's workforce has an added advantage. Better crop yields can help food inflation slow. India's current policies are more short term in nature and heavily dependent on subsidies. A move towards long term solutions such as investing in infra, technology, trade-friendly policies, R&D etc can greatly help the sector. Adoption of global best case practices will also help the poor Indian farmer. This in turn can help our country become more prosperous.

04:03
 
Rewind exactly 10 years back and the world saw euro bank notes replacing national currencies in the Eurozone. But as things have turned out, the 10th anniversary of the euro currency is not a very happy occasion. Chances are the euro will wither away in its youth. If the Centre for Economics & Business Research is to be believed, there is a 99% chance that the euro will disintegrate in the next ten years. In fact, there is a 60% probability that at least one country will exit the Eurozone this year and this would mark the beginning of the end for euro. As a result of all this, investors have been dumping the euro currency. Consider for instance the fact that for the first time in the last decade, the euro has registered two consecutive losses against the US dollar. In fact, the euro is currently at an all-time low against the Japanese yen. All in all, 2012 will certainly be an apocalyptic year for the Eurozone.

04:47
 
In the meanwhile, the Indian stock market indices continued to trade firm on account of sustained buying interest in heavyweights. At the time of writing, the benchmark BSE Sensex was trading up 338 points (2.2%). All sectoral indices were trading in the green led by realty, capital goods, metal and banking space. Tata Steel and Coal India were seen gaining the most amongst blue chips. All major Asian indices performed strong today with stock market from South Korea and Hong Kong leading the pack of gainers.

04:55  Today's Investing Mantra
"I don't want a lot of good investments; I want a few outstanding ones." - Philip Fisher
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11 Responses to "Will this latest Govt. move boost Indian stocks?"

sanjay

Feb 26, 2012

FIIs pumping money in and out has small investors in trouble most of the time. do u agree? do they just go in and out or make money each time they do this? how can small investors cope with this cycle?

do u just monitor these comments or answer some of them?

regards

Like 

Sarat Palat

Jan 7, 2012

We cannot say it is going to have a positive effect. We have to wait and watch. If FII are moving away from Indian market, naturally the foreign individual invester will be hesitant to invest.

The thing we have to concentrate at this point of time is how we could improve ourself. We all know the problems we are facing. If we could overcome these issues naturally the things will brighten up.

Like (1)

kurupgp

Jan 4, 2012

This will give an opportunity to the politicians and administrators who hold unaccounted money in foreign banks to invest this amount in stock market and convert this into white.

Like (1)

AJ

Jan 3, 2012

2011 is the worst year for the parliament democracy and coalition politics is no good for the general public. This is the clear example of UPA-2. Our great opposition parties saw to it that they have stalled the working of the Parliament for any bull shit reason. Finally the Government did not function, policy paralysis and what not. One thing is very clear our politicians do not look beyond 5 years and they care a damn for the country and its citizens. Everything is quickfix solutions without thinking about longterm benefits.

Like (1)

saby chacko

Jan 3, 2012

I fully agree with the investment towards rural development and increase in agriculture productivity will have greater effect on our GDP than anything else.
There is one important point missed out is that India perhaps has the worst weather forecast system in the world despite launching so many satellites!! People working in our meteorological departments needs to be trained abroad to decipher out the data provided from satellite images regarding weather and forecast it in an accurate manner for the benefit of farmers, fisherman,highway/road building,etc. I think this is also an urgent priority, as our weatherman are really bad in their forecast.

Like (1)

R.RajaRajan

Jan 3, 2012

Surely boost the market.

Like (1)

Habeebur Rahman

Jan 3, 2012

It is most unfortunate that we all have too many democratic rights. In addtion to reaosns that noted in the artical, there is an another reasons i.e. total irresponsibility of opposition parties,without understanding the imporance of Indian economy, opposing all steps taken by the Government to improve economy. If any political party wins with clear majority and allowed to run the state for 10 years, then we can meet and beat everyone in economy.

Like (1)

Shabbir Haidermota

Jan 3, 2012

Why are we Indians always obsessed with foreigners and why can't we shake off this inferiority complex ? Rather than allowing foreigners to invest directly in Indian stock markets to boost them why can't the Government increase the Section 80C limit from the present Rs.1 lakh to at least Rs.3 lakh and then see what effect it has on providing depth to Indian stock markets through domestic retail long term investments. Considering the poor retail participation by domestic retail investors in Indian stock markets, is this not the most obvious source of giving impetus ? Neither SEBI nor AMFI seem to be clear in even attempting something like this which is a tragedy for the Indian stock markets as well as struggling mutual fund industry.

Like (1)

aasheem

Jan 3, 2012

India is with in second to fourth position ( as per TOI survey)in the world , in production of Food Crop, Dairy Products and Hatchery Products.
In spite of that our 35% population is under poverty. The reason being that there is improper or corrupted distribution system, controlled by the corrupted Politicians.
A hooping 40% of our Food Production are wasted during Harvesting, Storing and Distributing and , due to the lack of proper handling system - which has been admitted by Mr Sharad Pawer, Minister, in a recent interview with Mr Phugalia of CNBC Awaz.
The only problem in India is CORRUPTION. Which is being fuelled by MOST of THE POLITICIANS OF ALL POLITICAL PARTIES.
Probably we are heading towards a fate as happened at Libya, Sirya and Egypt.
All politicians are be fooling the Am Janta and Looting their hard earned money paid as Taxes.

Like (1)

Rajesh

Jan 3, 2012

I do not think this would have any material impact.
The move is clearly designed to enable powerful people to bring back their money having colour other than white. With polititians and administrators competing for their place in Guiness Book Of Records for topping the list of 'Most Corrupt Individual' in BRIC region, and Government telling the world that it can not even count its export; chances are bleak that any genuine foreign investor would be lured to invest in India. Stock market may see marginal boost though.

Like (1)
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