Will the end of easy money be negative for India? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will the end of easy money be negative for India? 

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In this issue:
»  2013 was a mixed year for global stock markets
» What makes Jim Rogers a successful investor?
» Dr Rajan clarifies his stance on the monetary policy
» Mr Murthy's views on training India's politicians
» ...and more!

Will it, won't it? That was the question that was on everyone's minds when it came to the US Fed's decision to taper its massive bond buying program. And the Fed has finally chosen to taper QE. As reported on Moneynews, the central bank announced that it would reduce its monthly asset purchases by US$10 bn, bringing them down to US$75 bn. However, that does not mean that the Fed has entirely done away with its loose monetary policies. It has stated that the key interest rate would stay low even longer than previously promised.

That the Fed has finally bit the bullet has been cheered by stock markets across the world. This move has been perceived as a sign that the US economy has begun recovering. It is a view that has also been endorsed by the US Fed. The US Fed had to stop this massive QE program at some time. Simply because it was a dangerous exercise that was only fuelling asset bubbles across the globe. But the notion that the US economy is recovering remains questionable. And the so called positive jobs report on which the US recovery seems to have been based is indeed quite suspect.

Marc Faber, publisher of the Gloom, Boom & Doom report has questioned whether the US Fed will ever stop its QE program. On CNBC, he states, "The economic recovery, or so-called recovery, by June of next year, will be in the fifth year of the recovery. So at some stage the economy will weaken again, and at that point, the Fed will argue, 'Well, we haven't done enough, we have to do more.'" Thus, he believes that even if the Fed chooses to taper now, the moment the economy weakens once again, there is a high chance that the central bank would reverse its decision.

What will the easing of QE mean for India? When the US Fed first announced its intentions of doing so, markets reacted badly. Indian stock markets have always been dominated by fund flows and the moment the Fed suggested QE taper, there was a huge outflow of money from the country. Naturally, the rupee, which was as it is volatile, bore the brunt of this and put the RBI and the government on tenterhooks.

So far the response has been negative because at the time of writing this, the BSE-Sensex was down by around 100 points. But we believe that India has much larger issues at hand. What it needs is an economic recovery and a very proactive, results oriented government. Not much is bound to happen till the general elections take place next year. But once the new government sets the ball rolling and begins to focus more on India's growth and development, there should be no reason why India will not attract investments and inflows, whatever the US Fed chooses to do.

Do you think that the US Fed's decision to reduce its bond purchase program will have an adverse impact on Indian stock markets? Let us know your comments or post them on our Facebook page / Google+ page.

01:36  Chart of the day
How has 2013 been for the global stock markets? Quite mixed, as the chart of the day shows. Ironically, stock markets in the developed world have fared much better than their emerging counterparts. Indeed, Japan and the US have seen their markets gaining considerably. But this has hardly been the product of an economic recovery. With the governments of both the Japan and the US showing commitment towards more money printing, the excess money found its way into equities. Emerging markets, on the other hand, have been at the receiving end due to two reasons. One, is that the economic growth in these countries has slowed down. The other is that talks of Fed's QE taper saw considerable outflow of funds from these markets.

Stock markets* in emerging nations take a beating
*From 31 Dec 2012 to 17 Dec 2013

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Never count on making a good sale opined Buffett once. He then followed it up by saying that have the purchase price to be so attractive that even a mediocre sale gives good results. We all know that this is secret sauce that was largely responsible for making Warren Buffett what he is, one of the richest men in the world. You would be glad to further know that this seems to be an investment truism of sorts. And it has been put to excellent use by not just Buffett and Graham alone. Even the other legendary investor Jim Rogers swears by it. In a recent interview put up on zerohedge.com, Jim Rogers spilled the beans on what makes him such a successful investor after all. Well, his answer was quite similar to the quote by Warren Buffett above.

He argued that as an investor, nearly always if you buy during panic and you know what you are doing, and then hold on for a number of years, you are going to make a lot of money. Indeed. If you try and remember Jim Rogers' landmark investments, you will instantly realize that most of them were one of the most hated asset classes the time he became bullish on them. Of course, who can forget his recommendations on commodities right before the start of the commodity super cycle? Or the huge bet on China much before it became the cynosure of all eyes? Then there are his investments in dubious countries like Iran and North Korea that had trouble written all over them. Jim very well knows that it is such troubles that produce the prices he likes and then if one is patient enough, he can really reap a goldmine.

The Reserve Bank of India is the only government institution in India with the track record of being truly independent. Hence, one has to be wary. The central bank's latest surprise move to maintain status quo on key policy rates disappointed many. There were questions raised on whether the RBI governor was trying to toe in line with the FM's dictate. However, as per an article in Economic Times, Dr Rajan has sought to clarify that the latest policy action was not conclusive. No rate hike on December 18, was in no way indicative of an easy monetary policy stance. On the contrary, the RBI was keen to read the numbers carefully before acting. The central bank desires to have a more calibrated approach to rate hikes. This is particularly taking into account the historically low growth period the economy is passing through. Further the central bank cannot be blamed to be worried about the quality of assets in Indian banks. Hence a temporary wait and watch approach is understandable. As long as the RBI does not sacrifice long term economic stability for short term growth, we respect its decisions.

If you were to fly an airplane, what would you need to do? You would have to first pass through some basic eligibility criteria. Then you would have to go through rigorous training hours. And only after you're through the necessary mandates, you would become a certified pilot. But this is not unique to just becoming a pilot. Most professions do demand some necessary skill set. But there is one important field wherein you can thrive even without having any important skills. If you are super rich, well-connected or belong to an influential family, you path is clear. We're sure you must have guessed that the field we are referring to is none other than politics.

Interestingly, Infosys Chairman N R Narayana Murthy has made some pertinent suggestions to remedy this problem. As per an article in Business Line, Murthy has emphasised on the need to create institutions that can train India's political class. There is very strong need to educate the political class in specific areas such as economics and technology. This would go a long way in improving public governance as well as policy making in the country. We couldn't agree more with these suggestions. One reason why the Indian economy is in such a mess is because of the weak political leadership. We believe Mr Murthy's recommendations must be acted upon urgently.

The value of Chinese Yuan is tightly controlled by the People's Bank of China (PBoC). In fact, China has been at centre of criticism many times for artificially keeping its currency undervalued. Nonetheless, slowly PBoC seems to be willing to loosen its control on the currency. And this has led the currency to appreciate by 3% so far this year. Measures like relaxing foreign investment restrictions have led to appreciation. We believe this is a welcome step towards making Yuan convertible. Most currency values are subject to vagaries of market forces. However, China artificially pegged its currency value to boost its export competitiveness. Through market intervention it has indulged in currency manipulation of sorts. And this has upset the global trade balance. It has also created volatility in currency markets. China's move to slowly reduce its interference in currency market is a step in the right direction. It will make Yuan a freely tradable currency. Further, de-control will also make Yuan a strong contender to replace US dollar as world reserve currency.

After opening in the red, the Indian stock markets have slipped further below the dotted line. At the time of writing, the BSE-Sensex was down by about 100 points or 0.5%. Most of the sectoral indices were trading in the red with stocks in the banking and capital goods spaces leading the pack of losers. However, BSE Mid Cap and BSE Small Cap were trading firm with their respective indices up by 0.1% each. Barring HongKong, the stock markets in other parts of Asia were trading in the green with Japan leading the gains (up 1.7%)

04:56  Today's investing mantra
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4 Responses to "Will the end of easy money be negative for India?"

B Y K Rao

Dec 19, 2013

The 5 min wrap is interesting & very useful, educating how various developments influence stock movements,Investing is not only an art,but involves systematic & scientific approach.Thanks for the insights.byk


Sunil Doshi

Dec 19, 2013

You say :"The Reserve Bank of India is the only government institution in India with the track record of being truly independent."

I will like to add Election Commission of India , to that category.Since Shri T.N Seshan - Dec 1990; each EC has improved the system. ECI is the base for active democracy of India.


Shyam Sachdev

Dec 19, 2013

QE has not solved the problems of America, instead it has created major problems for developing countries. Cheap money generated through the quantitative programs has created bubbles in all asset classes in developing countries. Be it Gold, real estate or equities.Speculation and greed causes asset bubbles to form and bringing them into an over hyped situation in which the underlying strength/reason is completely missing. Real estate prices in India have gone up by nearly 600 - 700%, Equity markets have given a return of nearly 30 - 35% since the year 2000, Gold prices have touched the sky. All these things have happened in absence of a genuine underlying reason. The end result is that prices in all asset classes have become un-affordable for the common man. All thanks to the cheap money sloshing around in the system. With an end to easy money the excesses created in all asset classes will be given up.


Ganesh Sastri

Dec 19, 2013

We don't worry whether Nigeria or New Zealand or Namibia will taper or paper. Why are we bothered about US of A? We need to keep our house in order. We need to LIVE WITHIN MEANS. GOI is living well beyond means. For every one rupee it earns, it spends three rupees. That is the major reason we have been having MASSIVE INFLATION during the last five years. Why take solace in DEFICIT divided by GDP being less than 4.8%? GOI cannot repay its deficit by country's GDP. It is an ABSURD FRACTION.
Second country is also LIVING BEYOND MEANS. Trade deficit continues to increase year after year. In 1991 when India was brought to its knees, TD was $ 6 B. Now it is well over USD 150B and is simply not sustainable. The twin deficits are the main reason why we have to worry about the impact of tapering by another country. If only we could keep our house in order.

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