Rupee will have more takers with policy changes

Apart from 50 bps rate cut, RBI made few more changes to monetary policy. All of that will lead to multiple benefits such as improvement in liquidity situation, lower interest rates for both Govt. and retail segments, lower SLR for banks and increase in the demand for Rupee in international financial markets. Let us look at them in detail.

Foreign money in Govt. bonds

Foreign institutional players (FPI) have already exhausted their limits in holding the Govt. bonds indicating there was unmet demand. As RBI increased those limits (Link: http://www.dnaindia.com/money/report-allowing-higher-fpi-in-g-sec-cross-currency-trade-positive-steps-2130183), more foreign money will flow into Govt. securities in the coming months. Deposit rates are close to zero in many developed economies so it is natural for the fixed investment funds there to find way into India. But it was only restricted by the policy set by our central bank, which it revised now and has also committed to review or increase this limit every six months in the future. As the demand for Govt. securities increase, bond yields reduce so capital cost for Govt. will decrease marginally. Any savings will help. It also leads to reducing SLR (Statutory Liquidity Ratio) which is mandatory investment imposed on local banks, currently set at 21.5%, which will come down gradually. At least by 25 bps or so every six months in the near future. This will release huge amount of funds into banking system which it can lend freely to retail segment at slightly higher rates. That helps banks to improve profitability. As this freed up capital chases the same consumer base in India, competition among banks will intensify and the interest rates reduce. Banks profits will not come down as the lending rates to retail will still be higher even after reducing the rates (at 8% to 9%) than Govt. bond yields (less than 8%).

Rupee bonds in foreign currency

IFC toyed with this idea last year and it was fully subscribed. Encouraged by the enthusiasm, RBI is allowing more corporate to issue Rupee denominated bonds in foreign markets. Indian companies can borrow and settle in Rupee terms. They do not have to worry about forex fluctuations as that risk or reward wil be transferred to hedging companies. The companies which borrowed in Dollar terms in the past when Rupee was trading at 50 a dollar are in trouble in paying back their debt as they need 65 Rupees to get a Dollar now. With Rupee denominated bonds, Indian companies will not suffer the same risk as settlement is in Rupee terms. Idle money in the foreign markets will get into these bonds and hedging Rupee against other currencies will become a big business too. It helps coprporate to get funds at lower rate which is a feature of the developed market. The benefit for Indian consumer is, rush to borrow from banking system in India from the corporate will reduce. That helps interest rates to reduce.

How rates reduce?

Money in the banking system has three kinds of borrowers - Govt., corporate and the retail consumers. As the borrowing demand from Govt. and Corporate reduces due to policy changes in bond market, banks will be left with surplus funds (higher liquidity) and dependency on retail segment will increase. As all the banks compete for the same customer segment, they will drive down the rates to attract or retain their market share.

Rupee to become more stable

Interest rate coming down further next year is good news for us, the consumers. There is also another benefit. Foreign money coming into Govt. bonds will increase the demand for Rupee. Similarly Rupee denominated bonds too will see the conversion of foreign currency into Rupee. This broadens the holding base for Rupee in foreign markets. It will have many takers in the developed world, in which there is no demand to mention now. While I do not expect this to make Rupee gain against Dollar significantly, at least the downside will be protected. And volatility reduces as Rupee will have many takers in the international capital market. Is this a way for Rupee to get into Top 10 currencies of this world? Probably so, but Rupee has to become fully convertible which will take few years to reach there.

Summary

Essence of this story is, there will be more foreign debt, lower rates and a stronger currency in the times to come. These are clear signs of an economy transforming into a more global, mature economy. We may not beat the toppers anytime soon. But on PPP (Purchasing Power Parity) terms, we would have reduced the gap by a wide margin in the coming decade. Hopefully this translates India into a better society too.

Book Review: The Folded Earth by Anuradha Roy

If a novel written in a refined language and style appeals to you, this book is the next one you must read. It also has a nice background setting of a Himalayan village too.

Maya, a young widow, leaves her town of Hyderabad to Ranikhet, a sleeping village in the foothills of Himalaya. Her husband, Michael, a trekking fanatic, had died during his expedition to Roopkund and is cremated at Ranikhet. She had married against the wishes of her loving parents, so she does not go back to her former home.

She finds a job as a teacher in a Christian missionary run school in Ranikhet and a cottage on rent to live in. Course of life completely changes for her as she is drawn to beautiful setting of Ranikhet and many eccentric personalities it houses. Her landlord, Diwan Sahib, is a grand old man. He has an unaccomplished task of writing the biography of the famous hunter of the mountains - Jim Corbett. Helping Diwan Sahib in that task becomes part of daily routine of Maya’s life. There are rumors that Diwan Sahib has in possession of the letters written by Nehru to Edwina. So he is much sought after person for many journalists.

In the courtyard of the crumbling mansion there are mud huts and there lives Charu, a village girl along with her grandmother and uncle. The school where Maya teaches is headed by Miss Wilson. Mr. Chauhan is a newcomer in the town who is determined to turn Ranikhet into a tourist spot to boost the business for Aspen Lodge, a hotel chain for which he is the manager. In his hotel, there is a cook Kundan Singh, who becomes the lover of Charu.

It is Veer, a relative of Diwan Sahib, who was a visitor to the mansion, shifts his base to the house. He too is a mountaineer, a professional one and runs an organization to guide the trekkers. A relationship develops between him and Maya.

In the course of events, Kundan Singh leaves to Delhi and Charu leaves Ranikhet to join him. Diwan Sahib dies of old age and ill health. He leaves behind a will. Maya discovers a strange truth that Veer did know about her husband’s death. The novel ends with her response to stark realizations.

Though the whole story is told through Maya’s eyes, all the characters find equal opportunities to express themselves. With a nice blend of wildlife, changing political scenario in the hills, conflicts in religions do find mention in the novel.

This is the second novel of Anuradha Roy. All three of her works have been well received by the readers and critics. Her latest book ‘Sleeping on Jupiter’ was shortlisted for this year’s Booker Prize.

She is a publisher turned Author, knows the importance of a finely written novel. She rewrites her work to almost perfection, so it leaves fine taste in the readers and lasts long. 

She lives with her publisher husband at Ranikhet where this novel is set.

Inflation is low so rate cut was due

Rajan stormed the media again today. When the most surveys expected a 25 bps cut, he unleashed the market spirits with a 50 bps cut. They say it is a pleasant surprise and term it as ‘Diwali Gift’. My opinion is different.

I have been writing on this blog that rate cut was due. Negative WPI and persistently coming down CPI were calling for rate cuts for few months in a row. But the cautious stance held by RBI was preventing the rate cut. Today Rajan let it a go. But still RBI says Inflation can come back to 5%. They are inflation hawks; controlling inflation is their first job. But what one has to note that is, it is not because RBI is cautious inflation is down. To get your facts right, please look around and take note. Inflation is down everywhere. Forget inflation, many developed countries are fighting deflation. Paul Krugman wrote a column on why inflation is good for his country. Many emerging countries and our Asian neighbors all have a lower inflation. Our rival China’s inflation is lower than 2%. When this is the situation and the trend, why India would behave entirely different? Global economic growth is down, so is inflation and interest rate. A normal course which India also catching up. So a 50 bps cut is not any gift and it was rather a delay in the roll out.

Now that RBI is again cautious in saying that inflation (CPI) can come back to 5%, they are most likely to be surprised with what the future holds. India is not overspending like Greece or over investing like China. We have our own issues but inflation situation is likely to ease further than flare up. This rate cut will help in improving the profitability at banks and much of their NPA which were on the edge are set to come back in green when the benefit is passed on to ailing debt laden corporate. Reducing capital costs will ease the pricing pressure across the board. Some of the inventory in housing can reduce with reduction in the EMI as fence sitters finally make their decision. When new houses are occupied, it will stall the rents from soaring which is a big component in CPI. E-commerce companies are giving away so many offers, all your household stuff can be bought at discount, forget the inflated prices. If you drive your own vehicle, you fuel bills are slightly lower than last year so they are not contributing to inflation. Food is a tricky part but monsoon was not bad. Onion prices calmed down as the hype did not last long. Supply situation has improved a lot in agriculture commodities. There is lot of physical infrastructure which has come up in the recent past and has to find utilization. So Schools and Hospitals can’t ask for moon like before as they are likely to lose their customers to their competitors as there are many new entrants. Food will be the only biggest component in CPI pack driving inflation up. Transportation is seeing a deflationary trend. All other components are staying where they are, neither inflation nor deflation. All in all, inflation is likely to remain at 4% and may go down below 4% too.

As inflation surprises the central bank of India, it will reduce the rates further. I will not be surprised if SBI offers a home loan at around 8% next year. It is not because of Rajan or Modi. I am not against them, but you cannot ignore the fact that luck is favoring them.

Interest rates are closer to zero in US. Though they are set to rise, it will go up very slowly. When savers there get nothing, why the borrowers in India will have to pay interest rates (bank rates) of above 10%? Will it not be fair to expect to have a real rate of 1%, (inflation at 4% and RBI rate at 5%) so that an efficient bank would lend it to retailers at 6% to 7% for long term borrowers like in the housing sector or to clean corporate? That will drive investments and infrastructure growth and turns India into an economic power house. There are so many households aspiring for a solid roof over their head. Why interest outgo has to be more than the principal in their loan period of 20 years? Many infra projects will become viable at lower capital costs.

I suppose though there is a delay, India’s destiny towards economic prosperity is not denied and today’s rate cut was a witness that we have not lost the way.

Do you think all Indians are equal (economically)?

How well do we know India? Let us check ourselves and begin with the economic growth and distribution across India. You will know that prosperity has not reached middle lands of India soon.

Here is a chart to look at which lists the states in a order by their GDP per capita. Goa is on one end and Bihar is on the other end. A person in Goa (on average) contributes little more than Rs.18,500 a month to economic output of India but an average resident in Bihar does contribute Rs.2,500 approx. a month. The gap is an astonishing difference of 8x!

True, but the toppers in the list Goa, Delhi and Sikkim could be outliers due to small geography, finite population and may have some favorable factors to manage and distribute growth. So keeping them aside, Maharashtra seems to be the ideal topper but still it is almost double of whole of India’s average. And with the bottom of the pack, the gap is a wide 4x. Do you still think all Indians are equal?

Start looking at which all states are doing better which have higher than national average. Maharashtra, Gujarat, Tamil Nadu, Kerala who are doing good have one thing in common. Sea line helps them in having higher trade. Except Odisha, those states on the geographical periphery are doing well. Does not it look similar to US, where economic activity is concentrated in East Coast and West Coast but not in the middle lands? Yes, but yet the gap is not 4x there.

India’s national average is lower than most of its states as UP, Bihar seem to be pulling it down as they have higher population concentration. You know it well, until growth picks up in these middle lands of Madhya Pradesh and surrounding geography, India’s total figures will suffer. But there is a potential too. As wages in these states tend to be lower, they can host labor intensive industries to start with. It is a matter of time before entrepreneurs figure this out and the residents in those states too realize. If Govt. does act and locals cooperate, these states will offer a higher return on investments. And the gap will shrink over a period of time. These states are already wild cards in election results but will gradually catch up with other states on the economical front in the coming decades. Expanding the base at the bottom, increasing the per capita income in UP from Rs. 19k a year to Rs.25k a year would benefit India more than few toppers doing exceptionally well.

What every household needs? Housing, Education, Health care, Transportation, Entertainment etc. all these sectors will see growth in the states at the bottom of the list at a different rate than those at the top. Income inequality is here to stay but it will not be at 4x gap across states, but much lower, probably at 2x. Then you will see a lot more homogeneous India. Until then, all Indians may not be equal, not in spiritual terms, but going by the money in their pockets and their spending power.

Misplaced hopes in a lip service Govt.

In 2014, majority of India (including me) had voted for one person who looked very promising. But the hopes seem to be misplaced. My reasons are here. Currently the person in focus is in US, for the second time and he has been visiting many countries in a row, claiming to bring in investments.

Americans are businessmen by nature, when they see profits, they come-in, and they do not need pampering. Jack Welch came to India and partnered with Azim Premji because it worked well for the business he was running. Similarly, when they see risks, they just walk out creating a stampede in the capital markets. Look what they did to Rupee valuation in the recent past. Govt. before, now or in the future plays the role of facilitator. They cannot make or break the economy. Given the situation, does this call for head of our Govt. (Prime Minister) to go calling Americans?

Building 'Smart Cities' was on the agenda before the elections for his party. In that case, why did they take more than a year to announce the list itself, this is when they claim to know India too well than anyone else? How much more time is required to align with State Govt., get the required approvals, get the funding in place, call for tenders to begin the actual work? If it is going to take couple more years, we will have the next election coming. So will it become the agenda for the next election too?

Let us come to ‘Make in India’, ‘Digital India’. Will they just remain slogans? Where are the detailed execution plans and the road maps? Look at the power cut situation in Karnataka. How do you 'Make' when there is insufficient energy supply? Who will have the courage to set-up a new factory? (My employer in Bangalore runs huge Diesel Gensets to power the building burning hundreds of liters of fuel everyday when the Govt. talks of reducing import burden).

Few good visible works by this Govt. are keeping the deficit down and having tough talks with neighbors. But they need to work on all fronts to change the image of India. Change it in such a way that American businessmen line-up to meet PM at Delhi. For that to happen, our PM need to go around India first to make things happen than outside India. Indians who voted for him need him more than Indian diaspora who lives all over the world.

Those who left India can look after themselves better than those staying here in India. The poor Indian living in India cannot afford to get a visa to meet our PM as he is out on frequent trips.

After all who’s PM he is, of those staying in India or not?