The Report card is out - It's a twin failure! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The Report card is out - It's a twin failure! 

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In this issue:
» Domestic Institutional Investors sell more than what FIIs have bought
» Good times for pharma sector ahead?
» Will regulators be given more autonomy?
» Iron ore prices to go up?
» ...and more!

We are all well aware of the dilemma of Reserve Bank of India to balance growth with inflation while designing monetary policies and have often empathized with the Central Bank. The growth inflation trade off is a well known phenomenon. To recap, a hike in rates helps to over come inflationary pressure but hurts growth. On the other hand, a cut in rates promotes growth but also stokes inflation. Hence, the RBI often struggles to promote growth without fuelling inflation; a fine balancing act indeed.

However, if the recently released economic data is anything to go by, the policymakers seem to be failing on both the fronts. Already struggling with the harsh macro environment, the prospects of Indian economy have received fresh blows from the recent data on inflation and Industrial Production. So here is the bad news. The retail inflation rate has surged to an all time high of 11.24% for the month of November 2013. If this was not bad enough, the Index of Industrial Production (IIP), a measure of Industrial Output, has declined to a four month low of 1.8% in the month of October. This is worse than the consensus estimates and compares to a 2% growth in the preceding month of September. The fall is despite the festival related demand that marks the October month.

So what does this imply for Indian economy? Knowing the inflation sensitivity of the Central Bank, we will not be surprised to a see hike in repo rates at the policy review meet due next week. If a rate hike happens, it will be a third one in a period of four months. This will definitely give a jolt to the economy's chance to recover. But will it rein in the inflationary pressure? The chances are slim. And here is why.

Mr. Rajan is of the opinion that the inflation is demand driven. Hence, by raising rates and making funds costlier, inflation can be tamed. However, a rate hike is unlikely to help much with the inflation issue this time. It is important to note here that the main cuprit behind rise in inflation has been high food prices. Ironically, despite a record food grain production, the food inflation has crossed 14% mark. However, since food prices react little to monetary policy, a rate hike is unlikely to be of much help as far as impact on inflation levels is concerned. On the other hand, it could impact the investment plans and growth prospects adversely.

Currently, the Indian economy is in a serious mess. The dire state we are in is a result of faulty economic policies over the years. It will be unfair to expect RBI to undo the damage with limited tools it has and infuse life back in the economy. To come back to the growth path, there will be no short cuts this time. We will have to adopt reforms. They may take some time to yield results but will definitely make Indian economy more robust and stable in the longer term.

But given the track record, we wonder if reforms will be undertaken anytime soon. While the Government did surprise us with a few reforms during the year, it was a desperate reaction to the threat of a sovereign rating downgrade and not something well planned. Now that the election season is in full swing, it is unlikely that there will be much activity on the reform front. Hence, investors will be better off not expecting any positive surprises as far as macro factors are concerned and focus only on stocks that have strong fundamentals and are available at attractive valuations.

Do you think that monetary policy tool can make much difference to the fortunes of the Indian economy in current times? Let us know your comments or post them on our Facebook page / Google+ page.

01:45  Chart of the day
If you check out the shareholding pattern of a company, you will see two broad shareholder categories- promoters and public. Given that promoters do not actively engage in trading of their stakes, the public shareholding is the part that provides the free float to the stock markets. In other words, public shareholders are responsible for most of the trading activity in the markets. The public category is further sub-divided into institutional and non-institutional investors. The institutional category comprises of foreign institutional investors (FII) and domestic institutional investors (DII). These are important market movers. So we thought it would be interesting to see the investing activity of these two major shareholder categories.

Today's chart of shows the net equity investments of foreign institutional investors (FIIs) and DIIs since 2007. It is noteworthy that barring 2008 and 2011, FIIs have been net buyers of Indian equity. DIIs, on the other hand, have been net sellers in 2010, 2012 and 2013 so far. In fact, in the month of November 2013, the selling by DIIs stood at Rs 90 bn against FII buying worth about Rs 70 bn. This was the first time in the last seven years that DIIs have sold more than what FIIs have bought. It is noteworthy that DIIs such as mutual funds are dependent on retail investors. The selling activity by the mutual funds is largely an indication that retail investors have become wary of investing in stocks and are selling off their holdings to recover their capital costs during market rise.

FII buying outstripped domestic investors' selling
*Data till December 11, 2013

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Multinational pharma companies have had had some rough years recently. The product launches from their parent's portfolio have not been too many. But more importantly, the uncertainty with respect to the new pharma pricing policy had impacted the financial performance of most of the companies. This is now set to change. The drug pricing policy has finally been introduced thereby doing away with the element of uncertainty. But the impact of this policy will be different for different MNC players. The introduction of this policy was always considered more of a bane for MNC pharma than their domestic counterparts. This is because the former concentrates entirely on the domestic market, while the latter has exports to rebalance the revenue portfolio. Among the MNC players, GSK Pharma appears to have been the most impacted as the company's top 5 products accounting for around a quarter of revenues are under price control. This has led to a decline in prices of the products. While prices of drugs for MNC companies have dropped, it remains to be seen whether a proportionate increase in volumes follow.

To say that a lot of regulatory agencies in India fail to execute their responsibilities would be an understatement. There have been lot of cases where the interests of the consumers were sacrificed in order to fulfil vested interests. The result? Loss to the economy by way of delays as well as public wealth moving into private pockets. Thankfully, the Government is trying to do something about this. And the main aim is to not let other vested interests crush the interest of the common man. As per reports, the central Government has proposed to make infrastructure regulators like Telecom Regulatory Authority of India (TRAI) and Central Electricity Regulatory Commission (CERC) autonomous. It also plans to grant licensing powers to all regulators in the infrastructure sector, be it electricity, ports, airport or highways. What this does is it insulates the selection, appointment and removal of members of the regulators from any political or non-political interference. In other words, complete autonomy for the regulators. If implemented, this move is likely to give a huge leg up to regulators in their job of protecting the interests of all consumers.

Steel production is a key indicator of activity in global industry and iron ore, the key steelmaking ingredient, is the second most traded commodity around the world after crude oil. The price of iron ore has held up well despite record-setting exports from Australia and a looming flood of new supply through 2017. According to Financial Times, China's iron ore imports rose by 18% in November from a year ago, explaining why prices have risen despite the sluggish global economy. Iron ore prices have staged a remarkable recovery from a depressed level in July, having gained by 19.2% since then and up by 2.6% from a month ago. It is good news for miners because prices are climbing despite increased supply.

However, this does not bode well for Indian steelmakers because India's largest iron ore producer, NMDC Ltd, almost always benchmarks the price of iron ore with international rates. Which translates into this - if iron ore prices go up worldwide, they will also go up in India. Even though India sits on a pile of iron ore, because of a legal ban that's been in force for about two years, supply has dried up. From being a prominent exporter, India is almost on the verge of becoming an importer of iron ore in the short term. So increased steel capacity or greenfield steel projects next year will have to fully rely on sourcing ore from Australia or Brazil, and higher prices of course means steel producers will have to shell out more.

After the long wait, the issuance of licenses for new banks seems around the corner. There is a long list of contenders vying for the prized banking license. As per Business Standard, RBI chief Raghuram Rajan is hopeful of announcing the names in January 2014 itself. Currently both RBI and a committee formed under ex RBI governor Bimal Jalan are evaluating candidates suitable for awarding licenses. Given the reputation of other members in the committee like ex SEBI chief CB Bhave and RBI deputy governor Usha Thorat, one can certainly be hopeful of deserving candidates. However, only time will tell if the new applicants will be as enthused about winning the licenses as they are now. The fear of detrimental costs and stiff regulations has already caused entities like Mahindra Finance and Tata group exit the race. Foreign banks too are not too keen to take the subsidiary route. It is therefore entirely up to the RBI to ensure that the new licenses meet dual needs. They should not only go to deserving candidates but also meet the purpose of financial inclusion.

In the meanwhile, Indian equity markets started the day on a negative note and continued the trend throughout the day. Banking and capital goods stocks were leading the pack of losers. While the BSE Sensex closed lower by 210 points, the NSE-Nifty closed lower by 68 points. BSE Mid Cap and the BSE Small Cap closed on a negative note as well. The major Asian indices also closed in the red. However, European indices were trading in the green.

04:50  Today's investing mantra
"Pirce is what you pay. Value is what you get" - Warren Buffett
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2 Responses to "The Report card is out - It's a twin failure!"

Kirandeep Atwal

Dec 14, 2013

The minimum support price (MSP) is increasing every year. Therefore, farmers are more inclined for sowing food-grains than vegetables. Moreover, due to land ceiling act, it is impossible to own large portion of land in India. Therefore, it is impossible to modernism agriculture and employ economies of scale to reduce cost. Last, but not least, NREGA. It substantially increases rural wages without increasing the productivity of labor. If you really want to know the reason behind the increase in inflation then own farmhouse.

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Dec 13, 2013

Inflation due to agriprice hikes is totally man made in India. We saw onion, tomato prices being manipu;lated by vested interests. This will continue as long as the paralysed gov't occupies the seat. The vested interests are exploiting the weak gov't and making money at the cost of the farmer and the consumer, while the gov't is busy defending public anger against it. RBI and the gov't are well aware of this situation but are trying to fool the country by blaming other extraneous factors. RBI during Rao's time ignored the real reason and went about increasing the rates like mad for over a dozen times. Raghuram is no better since he too is obliged to cover up the gov't. If Raghuram can take the risk of reducing the rates he will be a hero.

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