Is India's FM trying to manage stock markets? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is India's FM trying to manage stock markets? 

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In this issue:
» What could impact Indian markets in the near term?
» Gold speculators rattled by Bernanke comments
» Vijay Mallya drags Kingfisher Airlines in new controversy
» The danger of debt looming over Asia
» ...and more!

Finance Minister. The term brings to mind one of the most high profile government positions a person could dream of! The position of an FM is akin to that of a company's CFO. But managing a country's finances is a very, very big responsibility.

The size of the Indian economy and the fiscal deficit problems that the country is facing should be enough to keep the FM busy. At least, that is what we think...

Yesterday, the Asian stock markets tanked. The Japanese benchmark index Nikkei plunged over 7%. The Indian stock markets too dropped by nearly 2%. The triggers for this panic were some comments made by the US Federal Reserve Chairman Ben Bernanke and weak economic data from China. Mr Bernanke's comments were pertaining to the future of the quantitative easing program. But we'll keep that discussion for some other time.

What really shocked us was Mr P Chidambaram's immediate response to the stock market decline. He hurriedly came out to manage investor sentiments by telling them not to link the global factors to India. He even went on to explain how everyone had misunderstood the comments of the US central banker. "There was no need for any nervousness," he seems to have said.

One thing is certain. Mr Chidambaram appears to be the most nervous person at the moment. And he is going out of his way to keep investors from fleeing. What is he really afraid of? Is he worried about FIIs deserting Indian markets? It seems so.

The Indian rupee is highly vulnerable to FII flows, which tend to be very volatile. And given India's dependence on imports, a falling rupee is the FM's worst nightmare.

But the FM's verbal efforts to restore investor confidence seem futile and unnecessary. Is Mr Chidambaram going to come out and soothe investors every time someone says something and the markets fall? That is certainly not befitting a person heading the Ministry of Finance. We wonder whether the Finance Minister would ever come out to warn investors when stock markets scale an irrational high.

Do you think India's Finance Minister is trying to manage stock markets? Please share your comments or post them on our Facebook page / Google+ page

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    01:10  Chart of the day
    On a macro level, what will significantly impact the Indian stock markets in the near future? We asked this question in Equitymaster's Investor Survey 2013 which concluded recently. Over 44% respondents believe policy/ regulatory initiatives could have the biggest impact on stocks in the near future. Our Finance Minister should take some cue from these numbers we believe. The lack of policy and regulatory reforms has been one of the biggest hurdles in India's growth story. And this, in turn, impacts corporate earnings and stock prices.

    The other major factors included FIIs and the upcoming 2014 general elections in India. Unfortunately, the movements in Indian stock markets are largely dominated by foreign investors. This continues to be a perennial risk.

    Data source: Equitymaster Investor Survey 2013

    We believe that the financial markets are filled with two types of people. The ones who buy and sell based on the long term trend and the intrinsic values of the asset under consideration. And then there are the others who simply buy something in the hope that they will eventually find a seller willing to pay higher price for the same thing. It is this latter group of people who seem to be dominating the gold markets currently. For no sooner does a central banker announced something, there is a mad scramble to move in and out of the yellow metal. This has of course given rise to the recent price volatility in gold.

    Thus, it was no surprise that Ben Bernanke's recent comments once again led to the same behaviour amongst these short term investors. Should this be a reason to worry for the long term investor? We don't think so. For the long term trend is still intact and it is that there is a strong chance that gold would continue to rally as long as the central banks continue to flush the system with cheap liquidity. Thus, if one is a long term investor, there is no reason to get scared by the huge volatility in gold prices. In fact, if one hasn't purchased the metal already, this could be a good time to accumulate the same and make it a good 5%-10% of one's portfolio.

    "If you owe the bank US$ 100, that's your problem. If you owe the bank US$ 100 million, that's the bank's problem." This quote never applied more appropriately to Indian banks than it does now. The restructuring woes of Indian banks are not just restricted to agricultural loans. As much as they would like to claim otherwise, some callous credit appraisal practice is equally to blame. Top that with the attitude of defaulting promoters who want to break every rule in the book.

    The case of Kingfisher Airlines has become a lesson of sorts to Indian bankers in terms of bad credit appraisal. But Mr Mallya seems keen on offering some more!

    As per an article in Business Standard, Vijay Mallya has escalated his battle with the lenders of Kingfisher Airlines to a new level. He has cancelled the power of attorney (PoA) given to the banks for the pledged shares of the company. The PoA is issued to the trusteeship, a neutral party, to safeguard the interest of lenders in case of a default by a borrower. Hence Mr Mallya's act can be deemed to be illegal. However, the bank in question, IDBI Bank, that was hoping to offload the shares to recover some of the NPAs is now in a fix. We wonder what is stopping the government and RBI from insisting on liquidation in such a case. Also hope the banks that are crying hoarse about restructured loans will take some lessons to heart.

    Once upon a time Infosys Ltd was the apple of investors' eye. With immaculate corporate governance, better than industry margins and spectacular growth, the company was delivering robust shareholder returns. In the minds of the markets, it was performing very well because it was able to beat its own quarterly guidance quarter after quarter.

    But in recent times the same stock has tended to lose most of its sheen. The reason - it was no longer able to beat its quarterly guidance. And worse it decided to stop giving quarterly guidance. As crazy as it sounds, it is true that this is one of the biggest reasons why the stock has taken a severe beating in recent times. It is not quarterly guidance that should guide investors' opinion of a stock but its fundamentals.

    Fundamentally too the stock has underperformed its peers. Due to its ultra conservative approach the company lost out on some big deals which benefitted its competitors. But as per the company's CEO the worst is behind them. The company is going out to win big deals. The deal pipeline is healthy and the benefit of this would be visible in coming times. As per him the worst for the company is over. True that the company made some mistakes, but it has realized the faults and is now trying to mend things. In our opinion one should look more at long term trends of a company rather than relying on quarterly estimates. Having a myopic narrow-minded approach is not the recipe for building long term wealth.

    Many Asian economies burnt their fingers badly in the late 1990's Asian financial crisis. As a result of which the following years saw these countries boost their savings rate and focus on prudent financial management. These measures helped the region get back on track. Not just that, growth also began picking up on the back of manufacturing and exports. Little wonder then that many of these economies began growing at a faster rate than their developed counterparts. But a more worrying trend has now begun to emerge. The global financial crisis was a result of the developed world gorging too much on debt. So the aftermath has seen the US and Europe focus on de-leveraging. Asia is seeing a reverse trend. Growth in Asia now seems to be fueled by debt and has raised concerns of another crisis looming there.

    Debt burden in Asia's emerging economies now exceeds what it was in 1997. What is more, much of the run-up has come over the last four years. The overall debt-to-GDP ratio rose to 155% in mid-2012, from 133% in 2008, according to an article in the Wall Street Journal. If Asian governments understand the implications of this trend and take steps to cut down debt then there is nothing to worry about. Otherwise the threat of another debt crisis, this time in Asia, seems imminent.

    In the meanwhile, the Indian share markets were trading in green. At the time of writing, the BSE Sensex was up by 49 points (0.3%). The sectoral indices were trading mixed with stocks in the capital goods and metal leading the gains. However, stocks in the software and healthcare were witnessing maximum selling pressure. Other Asian indices were trading mixed while markets in Europe were trading in green.

    04:50  Today's investing mantra
    "Individuals who cannot master their emotions are ill-suited to profit from the investment process."- Benjamin Graham
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    22 Responses to "Is India's FM trying to manage stock markets?"


    May 31, 2013

    FM is interested in only two things now: to keep stock markets high and Indian rupee low



    May 26, 2013

    Absolutely spot on but no one talks about the conflict of interest his son has in the markets. The whole game is for funding the elections. No fundamental guy has been able to explain the rally since before Pranab was made President & the multiple announcements of that Friday to please FII's after that. Also market players had already built positions remember the Ambit report. Retail investors be smart don't get on the bus because those who have invested before 2003 urge you to. If gold can crash on hot money exit be sure equities will have worse falls. In a global recession a 4200 Nifty is a good fundamental entry point, isn't it?

    Like (2)


    May 26, 2013

    He is not only trying to manage stock market, but he is trying to manage many things like exchange rate, Vodafone, TV channel, cement prices, gold import, post retirement job offers to senior govt. officials etc. list is very long.

    Like (2)

    sunilkumar tejwani

    May 26, 2013

    very apt, Mr. P C has been acting more like a Share broker than a Finance Minister of the Country. Frequent tours to Japan and the U.S, meetings with Fund Managers give such impression, he is more interested in managing stock markets, rather than managing country's finances. Obviously "vested interest". The ministry of Finance should change it's name to "MINISTRY OF STOCK MARKETS"

    Like (2)

    ganesh adiga

    May 26, 2013

    Bcci chief is more interested in "fixings"than cricket
    our FM MORE INTERESTED sensex than manging economy

    Like (2)

    dinesh chordia

    May 25, 2013

    The present FM's concern for stock market is known to all. But to manage the dollar flows depending on the FII through stock market is dangerous.
    The stock market itself is unpredictable, after all every one in the market is there because of
    greed and that amounts to speculation, an economy cannot run on speculation.
    Only if exports are increased or NRI repatriate their money , these type of dollars only will improve the CAD . The billions of dollars parked in tax heaven, some policy should be made to get them in our country. Even an dollar VDS scheme should be Introduced immediatly. Depending on FII flow to tackle CAD is like a child wanting the moon.
    Rather than brokering for FII's ,lets reap the benefit of our own people's dollars parked away.
    The illegal money can be put to use for our own country's good.

    Atleast that illegal money can be put to good use of our own country. Secondly banks should be stopped to sell gold, the money can be used to finance exports. Atleast that much dollars can be saved by which banks buy dollars to purchase gold, which is sold to the customers at price higher than the bullion market price.

    Like (2)

    Nandkishor Desai

    May 25, 2013

    Yes I agree.Even earlier when he was FM he was managing SM & hence FM job given to current president of India

    Like (2)


    May 25, 2013

    Whatever he is doing is right. Otherwise there will be a panic selling and small investors, who are living with stock market, loose heavily. He is assuring people(investors) and advising to understand the meaning of what Federal Bank Chairman said.

    Stock Markets performance shows how the country's economy and where we stand although stock market is on news and speculation.

    Like (2)


    May 25, 2013

    To some extent I like to differ with this message. He(F.M) tried his best to avoid a crash in the market because of Japann's downward which affected not only Asia also the entire Europe. Yes it is very good work on his part at that time. The Indian way of economy is fully depends on its market and it should be at steady move and any nose dive of the market will affect CAD and the whole economy of India and just did what he can. The slow down trend is a welcome to the economy also because the FII will get out of this market which even though in the begging affect us but which will also help our economy in the long run. thanks, gskumar

    Like (2)

    Ramesh Vaswani

    May 25, 2013

    No, sir, Chidu is only afraid of his chair, as elections are approaching, and if the market collapse, the funding of elections will be in jeopardy and so his chair. Almost all political hotshots are banking on markets. At the same time, as you rightly said that he is afraid of FI flow and connected falling rupee, which may cost him his chair. Sub kissa kursi ka hai.

    Like (1)
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