What India needs to become 'New' (Jan 17, 2015) |
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In this issue:
» Will the Swiss franc spike impact India Inc.?
» Are low oil prices here to stay?
» A round up of the global markets
» ...and more!
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When the RBI announced its decision to cut repo rate by 0.25%, the Indian markets went into a tizzy and soared around 600 points that day. Since inflation had come off its highs, there was already considerable pressure on the Indian central bank to reduce rates so as to give that extra fillip to GDP growth. And Dr Rajan relented. But will this be enough for a sustained growth in the Indian economy in the years to come?
We have highlighted in the past, how the government will have to work in tandem with the central bank to bolster growth. In that regard, Prime Minister Modi is certainly making all the right noises. In the recent ET Global Business Summit, he has highlighted the need for India to think big and aim towards become a US$ 20 trillion economy from the US$ 2 trillion that it is today.
Certainly, the Modi government appears more pro-reform than the erstwhile UPA government. What more, it has also stressed the need for infrastructure development in the country which we believe is a step in the right direction especially given that the current state of infrastructure is quite poor. So there is room for considerable improvement which can just add to India's GDP by leaps and bounds.
But there is more. India has consistently not been ranked favourably when it comes to ease of doing business. This was very aptly highlighted by Infosys founder Mr Narayan Murthy. As reported in the Economic Times, Mr Murthy believes that there are two important things that the country needs to focus on. One is improving the ease of doing business for entrepreneurs and industrialists. And the other is reforming the tax system and making it simple.
These two points are important because (1) they will enable the creation of jobs which is critical for a country such as ours where the working population is set to rise in the coming years, and (2) they will encourage investment in the country not only from Indian players but also from foreign investors wanting to invest for the long haul. Tackling these issues will also go a long way in reducing poverty.
Indeed, although there is a lot of work that the government still needs to do, the sense of optimism is palpable. As highlighted in a previous edition of the 5 Minute Wrapup, when compared to its BRIC peers, India certainly shows a lot of promise in terms of growth going forward. The kind of potential that is staring in its face, a new India is certainly in the offing. Now the government just needs to get down to serious business and get the reform implementation going on the ground.
And this is what, we will also be discussing in the Equitymaster Conference 2015, for which registrations are now open.
The 2014 Conference received a great response and feedback from all the attendees. And now, we have even Bigger Plans in place for the 2015 event as well.
The theme for this year's conference is "A Tale of Two Indias: Building Wealth In The New India".
Well, it's about the "New India" that is emerging from the shadows of the India we live in today.
And it is about how YOU could benefit most during the rise of this "New India". That will be the main point of discussion during the Equitymaster Conference 2015.
Clearly, you may not want to miss such an opportunity. So do book your seats and hurry up as there are limited seats available. We've been able to reserve just 100 seats for our valued readers like you. So don't delay!
Click Here To Sign Up For The Equitymaster Conference 2015
Do you think that the Modi government can improve the ease of doing business in India? Let us know your comments or share your views in the Equitymaster Club.
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Now, while India has a whole 'to do' list in order to make the economic buoyancy a real one, China it seems, is content printing money. As we told you earlier, central banks, not just in the US and Eurozone, but also in Japan and China are unlikely to mend their ways soon. In fact the central bank of China has recently announced a loan of 50 bn yuan (US$ 8.1 billion) to banks at discounted rates. The banks are supposed to re-lend the money to farmers and small businesses. As we know, the multiple rounds of QE in the US, which were also designed to lend to corporates, never ended up boosting growth. Nor did they create jobs. And there is every possibility that the excess money with banks never gets borrowed by consumers and corporates. But in the process ends up creating more asset bubbles. China's full-year growth in 2014 is expected to miss the government's 7.5% target. And that would mark the country's worst economic performance in 24 years. Thus as the government of China and its central bank get desperate to save the economy from a vicious cycle of low growth, more money printing cannot be ruled out. So investors need to remain cautious about the excess cheap liquidity finding its way into India too!
As central banks contribute towards volatility in the global financial markets, the Swiss National Bank (SNB) also decided to join the party. It scrapped its three-year-old peg of 1.20 Swiss francs per euro and cut the benchmark interest rate to -0.75%. This considerably shocked the global stock and currency markets. And caused the Swiss Franc to move up by 30% against the Euro.
Will this have any sort of impact on Indian companies? Those with Swiss franc loans, as highlighted in the chart, may have to face the possibility of repayments rising. The good part though is most Indian companies typically hedge their foreign currency exposure. Further, the bulk of India's foreign exchange exposure typically tends to be in dollars, followed by the euro and the pound sterling. So in that sense, the sharp appreciation of the Swiss currency would probably would not have too much of an impact. However, it does highlight the fact that currency markets have become volatile as the actions of central bankers become uncertain.
The impact of Swiss currency on India Inc.
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Oil prices continue to breach new lows each day. Being a commodity, oil price is driven by the demand supply dynamics. Hence, arriving at intrinsic value and predicting where prices will go in future is difficult. The reason being oil is not an asset which has future cash flows to discount like stocks.
Thus, rather than predicting oil prices which is often disguised luck, it pays to ascertain how long will they stay at the levels they are. And that is relatively easy to know if one considers price in the current context. The recent fall is because of shale oil boom. This is a case of oversupply. As such, the current trajectory of low prices will stay unless the US shale producers go out of business. At least, this is what the OPEC aims to do. While this has been a curse to oil producing nations it has been a blessing in disguise to countries that import crude.
Take the case of India for instance. Not only has the fall in crude reduced petrol/diesel prices it has also given the government an opportunity to shore its coffers. As an example, excise duty on fuel has been raised a few times after decline in prices. While this may be an opportune time to shore up coffers and bridge the deficit the real test of the Modi government shall begin once oil prices rise again. It would be interesting to see how the FM manages its fiscal math then.
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The week gone by witnessed some interesting developments with significant consequences for the global stock markets.
The US stock markets were down by 1.3% during the week on concerns regarding strength of the global economy and falling oil prices. This was despite the some positive news on the economic front. As per the recently released data, factory production in the month of December increased for a fourth straight month in a row.
Most major markets in Europe closed with strong gains. The stock markets for Germany and France were the biggest gainers with respective indices up 5.4% and 4.8% over the week. With the recent move of the Swiss National Bank to ditch its policy to cap the rise of the Swiss franc had major implications for currency markets. While Euro hit fresh 11 year lows against the dollar, gold prices ended above US$ 1276 , at highest since August last year.
The major Asian stock markets closed the week on a mixed note with China and Hong Kong gaining 2.8% and 0.8% over the week while stock markets in Japan and Singapore were down 1.9% and 1.1% respectively. The markets in Japan declined as investors sought safety of Asian government bonds after the Swiss National Bank's move. However, the stock markets in China remained unperturbed and were boosted by announcement from People's Bank of China about a CNY 50 bn provision to support agriculture industry and small companies.
The Indian stock markets ended the week in green (up 2.4%) with a major boost coming from Reserve Bank of India's decision to cut repo rate by 2.5%. Barring oil and gas and metal, all sectoral indices ended the week on a positive note with the stocks in the realty and capital goods sector leading the gains.
Performance during the week ended January 16, 2015
Source: Yahoo Finance
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Weekend investing mantra |
"Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it." - Peter Lynch
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Today being a Saturday, there is no Premium edition being published. But you can always read our most recent issue here...
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| This edition of The 5 Minute WrapUp is authored by Radhika Pandit. |
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Avdhesh
Jan 18, 2015RBI reduced the repo rate by 0.25%... Article needs a correction as it mentions 2.5%