CII to RBI: Time to Print Money!

Apr 1, 2009

In this issue:
» India better poised than China over long term feels India's PM
» Construction of hotel rooms take a beating
» Look who's still building giant sized plants in India
» Geithner's plan: A boon or bane for banks?
» ...and more!

Helicopter Ben has a fan in the form of Confederation of Indian Industry's (CII) new President Venu Srinivasan. Just as the US Fed chose to take the long end of the yield curve by the scruff of the neck, Mr. Srinivasan has argued that a similar method should be adopted by the Indian central bank. He seemed frustrated that despite RBI lowering rates, Indian firms are not getting access to funding as most banks are parking their surplus liquidity in government securities. Furthermore, increased government borrowing is also leading to crowding out of private investments. Thus, printing money by the RBI and buying back bonds from the market seems to be the only way out as per the new CII President. Furthermore, since the inflation is also very benign at the moment, the odds that such a step might lead to runaway inflation are also on the lower side. Although he was aware that such a step might unleash a fresh round of sovereign downgrades, it also carried an upside with it in the form of greater GDP growth. The central bank must have indeed deliberated upon such an idea but seems to be adopting a wait and watch approach at the moment.

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Talking of RBI, the central bank has released a report on India's balance of payments developments during the last quarter of 2008. With December being one of the worst quarters in recent memory, needless to say that the report does not make for a good reading. The country's current account deficit, a measure of how much more it imports than it exports, has climbed to US$ 14.7 bn. Never since 1990 has India raked up such a huge number. Furthermore, this time around, even the capital inflows have not been able to offset the same. Infact, even they have witnessed a net outflow of US$ 3.2 bn, meaning that the twin deficits put together have depleted our forex reserves by US$ 17.8 bn. While the development is indeed sad, we are in a lot better position as compared to the balance of payments crisis of 1990 because unlike then, we are sitting on huge forex reserves of more than US$ 200 bn and could easily fund many more months of such deficits. Furthermore, the deficits were caused by sharp fall in exports and drying up of capital inflows, both of which are likely to improve in the coming months. Hence, no reason to press the panic button yet. However, if the scenario does persist, it may cause further downward pressure on the rupee.

Just as odds of bankruptcy at GM and Chrysler continue to rise by the day, there are a few Indian companies who are feeling jittery as well. Because at stake are deals worth nearly US$ 1 bn annually, ranging from outsourcing of IT services to supply of some critical auto components. As per a leading daily, in IT services the worst hit could be TCS, which counts GM amongst its top 10 clients and had also signed US$ 150 m contract with Chrysler last year. As far as auto components are concerned, few of them are already feeling the heat as orders from the two US companies have dried up. Furthermore, payments are also getting delayed on account of the two companies facing severe liquidity problems.

While the rest of the world is going ga-ga over the Chinese growth story and also hinting that India has a lot of catching up to do, our very own Prime Minister feels otherwise. In an exhaustive interview with FT, Mr. Manmohan Singh opined that while China is indeed going great guns currently, over the long term he feels that India is a better bet than the dragon nation. And what did he attribute as the main reason for this prognosis? The main difference is India's democratic set up he is believed to have said. "Democracy has its problems, it's slow moving, the decision making process is slow. But once decisions are taken they are far more durable. I have every reason to believe that what is happening in India to move towards an inclusive growth path, in the framework of a democratic polity, committed to the rule of law, respect for fundamental human rights. If we do succeed we have lessons for a large number of countries in the so-called Third World". This is how the erudite Dr. Singh chose to put it across.

It was known that the economic downturn would negatively impact the Indian hospitality industry but what was probably not known was the extent of the same. While 600 new hotels were planned or under various stages of development across the country, it appears that the number of hotels that would actually materialise would be around half of that. To put things into perspective, while 150 hotel projects have been completely shelved, another 150 properties are on the block. And the companies which are most likely to feel the pinch are those who decided to diversify and enter the sector hoping to make quick money. Indeed, with the recession crippling the nations of the developed world and the downturn afflicting developing nations, it will be a while before tourism starts to soar once again.

The global economic crisis has dealt a severe blow on global trade. What else can explain the fact that the World Bank expects global trade volumes to fall by 6% in 2009, the largest decline in 80 years? To alleviate the catastrophe, the World Bank President has announced a US$ 50 bn global trade liquidity program. The World Bank believes that the drop in world trade was exacerbated by a shortfall in trade credit, which allows exporters and importers to settle accounts. The lack of credit availability was also due to the unwillingness on the part of banks to extend loans. Thus the World Bank has announced this initiative of creating a trade liquidity fund and urged the G-20 leaders to support the effort to reverse a sharp drop in trade due to the global economic crisis.

The worse may not yet be over for the already battered US housing market, where the seeds of the current financial crisis were sown. While house prices since then have crashed, the question that is now on everyone's mind is - whether they have fallen enough? And the answer may well be 'no'. The logical conclusion being the bigger the bubble, the bigger will have to be the crash. Not only that, while prices have melted, they are not cheap as comparable to wages and even more so in a scenario where job uncertainty looms large. Furthermore, as reported in the Wall Street Journal, the prices currently are at a level last seen in 2003 when they were perceived to be inflated even then. Therefore, to find pre-bubble prices one would have to go back to about 2000 when values overall were about a third lower than they are today.

Interestingly, the paper has compared the current bubble with the 1989 property bubble and has observed that the home prices currently are more expensive in relation to average earnings, than at the peak of the 1989 bubble. What's more, when that bubble burst, it took around 8 years before any signs of revival began to manifest. By that comparison alone, the housing market will probably take a longer time to recover, even when the current market is being labeled as a buyer's one.

The US Treasury Department's Troubled Asset Relief Program (TARP) seems to be doing everything other than offering any relief to the troubled banks. It may be recalled that the Treasury had planned to set up multiple funds involving public-private partnership whereby money will be put in by both the government as well as private investors to buy distressed assets. However, as per CNN, the program to buy toxic loans could cost banks as much as US$ 210 bn. That is the losses that the financial firms will have to book by selling the distressed assets. The losses would deal a blow to the banks already struggling from rising delinquencies. In fact, it could force some troubled firms such as Bank of America, Citigroup and Wells Fargo to go back to the government for another round of financing. Further, CNN points out that with just US$ 135 bn left in the Treasury department's TARP, the plan has largely overlooked the cost of the bailout to the banks. The large accounting losses on the sale of poor loans would further erode the banks' equity capital and also dent their return ratios.

Even as the GMs and Chryslers of the world stand on the brink of bankruptcy for not being able to sell what they are already making, German auto major Volkswagen's has been busy working on its plans to make more vehicles. Volkswagen recently inaugurated its new plant near Pune with an investment of Rs 38 bn, one of the largest in the country. The plant has a maximum annual production capacity of 110,000 vehicles and will cater to the Indian market. Also, the company intends on a very high degree of localisation in the cars, thus creating many more jobs for the local supplier industry. The company plans to attain a market share of 8% to 10% in the next five years. All this surely provides some indication of the potential the Indian car market really has.

The Dow Jones industrial average ended the month of March 2009 in the green, this after 6 consecutive down months since August last year. It ended the month up by 7.7% which incidentally is its best since March 2002. The S&P 500 gained 8.5% in March, its best since March 2000. The Nasdaq also saw a healthy gain of 10.9%, its best March ever since its inception in 1971. One of the reasons for this optimism could be the Fed's recently announced decision to buy up billions in long term Treasury bonds which is having the effect of lowering interest rates.

In the meanwhile, stocks in India ended on a firm note today as the benchmark BSE-30 Index ended with gains of nearly 190 points. Buying activity was witnessed in stocks across sectors led by realty, IT and energy. However, stocks from the healthcare and FMCG sectors bore the brunt of profit booking. As for global indices, major Asian markets such as China (up 1.5%) and Japan (up 3%) ended on a firm note. Stocks in Europe are currently trading weak.

 Today's investing mantra
"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money" - Warren Buffett

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