Reforms on fast track? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Reforms on fast track? 

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In this issue:
» India's financial sector reforms
» Crude oil's continued slide
» Rupee's next move
» Pakistan's warning to India
» ...and more!

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 00:00    Government's finally on a reform path?
The UPA government, fresh from surviving a confidence vote this week, is expected to push ahead with lifting restrictions on overseas investors controlling privately-run banks. The fact that the government seems to have acquired the political space to take the reform process forward is amply seen from this proposal. However, given the fact that the government has limited time in its hands before the next general elections, reforms are by no means certain.

The bill to remove a 10% cap on the voting rights of foreign investors in private sector banks is pending in the parliament even as another bill to open the pensions business to overseas investors is being considered. Also, the government is already debating on raising the foreign investment ceiling for insurers to 49% from 26% currently.

The passage of these bills would give global financial institutions like ING (banking), AIG, New York Life and Prudential Plc (insurance) a greater pie of the booming Indian financial services space.

 00:31    Oil's continued slide
Oil prices continued their slide yesterday as a barrel's cost declined by US$ 3. Crude oil traded on the Nymex (New York Mercantile Exchange) currently stands at US$ 124 a barrel (approx. 159 litres), and is down almost 16% over the past eight days. A Federal Reserve's report of a weakening US economy (consumer spending remains sluggish while house prices continue to weaken in the US) and stronger than expected inventory report has led to this decline in oil over the past few days. As reported in international media, high oil prices have already started pinching American households, who have altered their habits to decrease the amount of fuel they use.

 00:54    FM blames speculation for crude spike
"Speculators have played a greater role in the market than either buyers or sellers," says India's finance minister, P. Chidambaram, and quotes the New York Times. He has in fact hinted at the inflow of US$ 250 bn to commodities indices as an indication that speculators have had a big role in the run-up in oil prices over the past few months.

Consumers in the US and Europe are already facing the pinch of rising oil and gas prices. However, the consequences have been more drastic in many developing countries where protests and riots have taken centerstage after governments raised fuel prices to pass on the crude price hike. While India has not seen protests on a nationwide basis, there have been riots in certain pockets of the country against the government's inability to contain inflation fueled by crude and food price rise. While politicians remain powerless in containing the rising price of oil, the FM has recently proposed concrete changes in the way the world's crude markets work.

One of his suggestions is to create a 'buyers' group' that would represent nations that rely on petroleum imports, in lines of the OPEC, which represents producers. This group could then sit across the table from OPEC and set an acceptable price band that would take into account future production and demand estimates. The suggestion is in the right direction. Whether it is acceptable to energy ministers from the OPC nations is another question.

  • Also read - End of the crude bubble?

     01:51    In the meanwhile...
    Stocks in key Asian markets with exception of India and Hong Kong closed in the positive today, possibly taking cues from the positive closing seen in the US and European markets yesterday. While shares in Hong Kong closed marginally in the red, the Indian markets recorded an almost 2% decline. European stocks are also treading weak currently on the back of disappointing economic data and decline in energy stocks (following the slide in crude oil price).

    As crude oil prices decline on the back of slowdown in demand in the US and strong inventory, gold is also feeling the pinch. The yellow metal is currently at its two week low - from a high of US$ 986 per ounce it touched on July 14th, gold prices have declined by almost 7% to the current levels of US$ 918. And the prices are expected to fall further if the current situation of sliding crude prices and rising stock prices continue.

     02:27    Where is the rupee headed?

    The Indian rupee rallied by around 1.5% yesterday against a backdrop of falling oil prices and expectations that the after surviving the confidence motion, the government would encourage more foreign investments in India. The latter especially may not necessarily happen on a large scale. Given India's widening current account deficit, rising inflation and the yet to end global subprime crisis, foreign investors may still be vary of pouring in money into the country.

    As far as inflation is concerned, Bloomberg has reported that Standard Chartered Plc expects the RBI to raise interest rates twice this year to curb inflation. The report further states that the current account deficit may widen to 2.6% of India's GDP this fiscal as compared to 1.9% in the previous fiscal. Thus even if the oil prices softening has led to a rally in the rupee, as long as the current account deficit continues to expand and the foreign inflows continue to dwindle, a depreciation in the India currency will be imminent.

  • Also read - Rupee loses sheen?

     03.04    Pakistan takes over from the Leftists!
    As if the Left parties were not enough as adversaries of the Indo-US nuclear deal, neighbour Pakistan has warned the Indian government that any such deal could accelerate the atomic arms race between the rivals. As a matter of fact, Pakistan is vehemently opposed to the Nuclear Suppliers Group doing business with India and may vote against approval of the draft at the forthcoming IAEA board meeting on August 1.

    In order to finalise the deal, India needs to strike separate agreements with the International Atomic Energy Agency (IAEA) as well as the 45 nation Nuclear Suppliers Group that exports nuclear material. The US Congress will then need to approve the accord. As reported by the IHT, the deal would end more than three decades of nuclear isolation for India. It will pave a way for opening the country's civilian reactors to international inspections in exchange for the nuclear fuel and technology it has been denied because of its refusal to sign the Nuclear Nonproliferation Treaty and its testing of atomic weapons.

     03.43    US taxpayers bail out again
    In what has become a ritual for the US governing bodies to bail out subprime hit financial behemoths, the US tax payers continue to lose their money to institutions that have been lackadaisical during the boom years. After the Bear Stearns' saga, it is now the turn of two companies synonymous with US housing - Freddie Mac and Fannie Mae (US government owned mortgage finance companies).

    Stocks of these companies had plunged nearly 75% in the past few months as the subprime crisis related foreclosure led to the mortgage behemoths choking for want of capital. Washington-based Fannie Mae and Virginia-based Freddie Mac own or guarantee about half of the US$ 12 trillion of outstanding US home loans.

    However, the US Senate has finally come to their rescue. It is expected to pass a bill that would enable the Treasury Secretary to inject capital into Fannie Mae and Freddie Mac and provide for a federal agency to insure refinanced home loans. Not a way to go to clean up the mess that American capitalism has created for itself, and the entire global economy.

     04.12    European carmakers spring a surprise
    With fuel prices soaring and income levels heading the other way in the developed world, it is natural for auto industry analysts to assume that carmakers will have trouble selling cars and recording higher profitability. They however seemed to have underestimated the rising purchasing power of consumers in developing markets like Asia and Latin America and hence were surprised when Europe's largest car maker Volkswagen joined France's Peugeot and Italy's Fiat in reporting better than expected performance during the second quarter of the current calendar year.

    Furthermore, with these companies having enough small cars in their portfolio, they were able to avoid the pain that is being faced by their US counterparts, whose gas guzzling SUVs and mini trucks are finding few takers in the face of record rise in crude prices. What is more, this has also led to GM's position of staying the world's number one in terms of sales come under a serious threat. It should be noted that the US carmaker has ruled the industry for an incredible 76 years but Toyota is fast closing the gap as its fuel efficient cars come out of the assembly line in ever larger numbers in the current environment of high crude prices.

     04.43    Today's investing mantra
    "Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results." - Warren Buffett
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