Number crunching at RBI

Too much money in the market has forced RBI to curb the demand in form of CRR and repo rate hike. According to RBI report, external inflow of money stood at $18.6 billion between January 2007 and March 23rd 2007 and RBI has already absorbed Rs 23,894 crore between February 1st, 2007 and March 30th, 2007.

A two step CRR hike would take the rate to 6.25 on April 14th and to 6.50 by April 28th. The fixed repo rate has been hiked to 7.75% wth effect from March 30, 2007.

Clearly India looks to be an example of overheating, supply has not been able to keep pace with the demand.

Slowing of US economy ?

First it was decline in Housing demand, which had its own impact on the subprime lending, where the some of the lenders had to either put themselves for sale or go bankrupt, now Federal reserve has decided against raising interest rates raising the concerns of slowing economy. Fed has even hinted at lowering interest rates if the economy slows down further. The over night loan rate remains at 5.25%.

Slowing US economy is not good sign of emerging markets like India and China which exports bulk of products from services and manufacturing sectors respectively. Much of the Indian GDP constitutes services sector. Indian IT sector which depends on US for its revenue has a bigger share to Indian economy. Any slowdown in US economy could impact IT spending.

On the other hand slowing economy means less returns for investors so can those investors look at emerging markets for more investment ?

Carry trade

Stock markets around the globe have been hit with the fear of Carry trade and yen unwinding. Indian stock market has felt the shock too.

What exactly is carry trade ?
Carry trade or currency carry trade is simply buying money in low interest currency and investing the same in a high interest currency to gain profits. The difference in interest rates is the arbitrage. Japan has maintained low interest rates for a while, so the cost of yen is relatively low when compared to other currencies. Yen bought at low interest rates are invested in markets with better interest rates like US bonds (no risk). The earnings are converted back to yen to book profits.

Why is Japan maintaining low interest rate ?
Japan has been maintaining low interest rates to keep the liquidity at higher level and to increase investment and production to fuel the economy. However increased production has not increased Yen value. Many believe the Japanese yen is undervalued to a greater extent. The undervalued currency provides a good investment option for the foreign investment since any raise is currency would deem expensive Japanese goods. Automakers like Honda and Toyota whose cars sell like hot cakes in US markets will loose their shine.

How good is carry trade for Japanese Investors ?
Carry trade is a better investment option as long as the Yen is undervalued. Appreciating Yen can nullify the profits made in the other markets.

How is India affected ?
India being one of the major developing country clocking around 9% of growth and with regulated stock market, forms a better investment avenue for FIIs from countries like Japan. FIIs from Japan investing these short term money in Indian stock market could erode the Indian market incase Japan interest rates raises or if Yen appreciates.

Agriculture, Budget or Reforms too ?

The finance minister will be out with his budget report on 28th, February 2007. The mood about the India growth is optimistic. Is it just the budget allocation which can do the trick to sustain, if not overcome the current growth ?

Looking at the RBI's GDP data and contribution from various sectors to the GDP's growth, clearly, Agriculture sector stands out as laggard contributing just 5.8% even though it employs close to 60% of the population. The Banking reforms have been in constant effort to ensure the credit availibility(even though the farmers comes under bad credit quality). Inspite of efforts ensuring credit, the sector lacks momentum. Growth of services sector has increased employment in its allied industries, which has increased the movement of rural population to urban areas in the urge for better life style.

What should Government do to ensure more agriculture productivity ?
1. Better utilization of money in terms of technology and machineries available to the farmers. Productivity increases with better utilization of resources. Machineries, technology and its automation improves the productivity and allows the people to better utilize and allocate the work hours. Technology like food processing ensures the farming produce to reach consumers rather than the garbage.

2. Educating farmers about the reforms and rights. Most of the reforms made inside the Government office doesn't reach to the illiterate farmers. The government must ensure the information about reforms and money reaches the intended audience before people can make full use of it.

What are your expectations from the budget ?

Inflation and another CRR

With inflation for Jan 27 coming at 6.58%, more than the estimate, the CRR hike or measure of such kind was expected. RBI lived upto the expectation increasing the Cash Reserve Ratio (CRR) for Banks by another 50bps.

This was the second CRR hike by RBI in less than 2 months. This time the hike is expected to extract another Rs 14000 crore from the market decreasing the money available for credit growth. Also RBI has recently increased its repo rates. It the same old phenomenon of too much money in the market chasing less goods causing this inflation. Major Lenders like ICICI Bank have already increased their interest rates and other banks are soon to follow. Banks are certain to be under pressure to keep their margin guidelines and real estate sector and the realty stocks has already shown weakness in the past two days.

Watch out if you are planning for a loan or a real estate investment. Such kind of RBI actions are required to make sure inflation doesnt hit the growing economy.

Market buzz

After the TATA-CORUS deal, all eyes are on Hutch bid. Growing telecom sector in India is opening new avenues for the global telcos to increase their margin. News sources say the deal is marked at a whopping $18 billion, creating excitement in the market. As Hutch deal gets closer, another telecom backed by Birla group, Idea cellular, comes out with an IPO. Certainly telecom is creating waves in the market.

Due to increased supply of money in the economy, RBI has increased its repo rate to suck some more money, thereby decreasing the liquidity. This move has forced ICICI bank to increase its lending rate. Does this move just brings down the liquidity and in turn the inflation or does it affect the other sectors along with the real estate sector ? Question to be answered soon.

Change is constant

Its been lot of changes on personal front. I had to move back to India, so I was busy with my movement all these days. Now that I am more closer to the real happenings, it should more easier for me to focus on its growth and keep this blog updated with my views.