Will this latest Govt. move boost Indian stocks?

Jan 3, 2012

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.


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.

 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

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.

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.

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.

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.

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.

 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?"


Jan 3, 2012

The government is again not clear on what it needs to do. The only thing that will set up the country and the stock market up for good is reforms that have been pending for a long long time. How can opening up the stock market to foreign investors help us? This will only deepen the swings, previously only FIIs pulled out money at times like these, now the government is only adding another set of investors who will pull out money as soon as a crisis erupts in europe or USA!!

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