Dr. Feelgood.... Raghu's Reality check

Hi All,

An interesting read from economist.com

http://www.economist.com/blogs/banyan/2013/09/india-raises-interest-rates

Raghu's reality check

ONE of my favourite Economist covers is “A Week on the Wild Side” from the Wall Street crash of 1987. A cartoon by Kal, it depicts a mob of frantic traders who in a few minutes shift from panic to wild euphoria. Time does not move quite that fast in India but the country’s financial markets have experienced a full cycle in the past three weeks, swinging from terror to joy. The surprise interest rate rise today, September 20th, by the Reserve Bank of India (RBI) should shift the mood back to realism and return attention to India’s inflation problem. Raghuram Rajan took over as the RBI’s boss on September 4th and was immediately christened “Dr Feelgood” by one newspaper. His medicine may not feel quite so good now but is in India’s long term interest. It is also a reminder that emerging economies’ battle to contain inflation and stabilise their currencies is not over.

First, a re-cap on that rollercoaster ride. At the end of August, India was in a state of despair and facing its worst economic spot since the crisis in 1991. The rupee was tumbling. Then on his first day on the job Mr Rajan made a bullish speech that calmed nerves. A favourable sequence of events then followed. The prospect of military action by America in Syria receded, sending the oil price down by about $5 a barrel, which makes life easier for India, a big energy importer. Two of India’s best known corporate chiefs, Deepak Parekh of HDFC, and Aditya Puri of HDFC Bank, a related lender, both predicted the worst was over. Mr Puri declared growth would return quickly to over 7%, from the present 4.4%.

And then in the greatest gift of all on September 18th the Federal Reserve blinked and said that it would not “taper” its vast purchases of bonds but instead keep policy ultra-loose. In an example of how the world has turned upside down that was greeted with a modest reaction on Wall Street but euphoria in emerging markets, particularly those such as Indonesia and India that had been hit hard by the sell-off since May, when the Fed said it might slow its bond purchases. All of this had a powerful effect, with India’s stock market up by 12% since the end of August and the rupee up by 11% from its all-time low of 68.8 per dollar, hit on August 28th.

Mr Rajan’s statement today may inject some realism back into the debate. First, he has reminded everyone that “the postponement of tapering is only that, a postponement”. Most economists think that by December the Fed will start to wind down its purchases­, just as India’s general election campaign begins to ramp up. That could mean another round of disruption in the foreign-exchange markets. Reflecting the bounce in the rupee Mr Rajan did ease some of the emergency liquidity tightening measures put in place in July to bolster the currency, boosting short-term market interest rates. But he has kept open the option of tightening again if the market has another wobble. He will also be watching closely the RBI’s efforts to persuade banks to raise more dollar deposits and swap them into rupees at a subsidised rate. This increases the flow of money into India. So far this programme has raised about $1.4 billion, a drop in the ocean compared with India’s total financing needs of $250 billion over the next year (including re-financing of short-term debt). But it is early days. 

The second dose of realism regards the economy. Mr Rajan has said that there are few signs of a recovery. As well as the slump in industry and infrastructure, the RBI notes that consumption “is starting to weaken even in rural areas”. At the same time inflation remains too high and may rise further. He again emphasised consumer prices, which are rising at about 10%, as opposed to the traditional wholesale price measure, which is running at a less alarming 6%, although it is on a rising trend. The impact of a weaker rupee has yet to fully feed through and may raise inflation higher still. Reflecting all this, he raised the policy interest rate by a quarter of a percentage point to 7.25%. As long as the emergency liquidity measures are in place the practical relevance of this policy rate is limited (the effective overnight interest rate in the market is now nearer to 9.5%, down from 10.25%). But if and when those emergency measures are withdrawn Mr Rajan wants to make sure that underlying policy is tighter.

The reaction in India’s markets has been negative, with both the stock market and rupee falling. Inside the government the response may be worse—hopes that Mr Rajan would stoke the economy ahead of the election have been dented. But he is doing the right thing by reminding India that the world is still an unpredictable place, that its economic troubles are not over, and that the battle against inflation is not yet won.

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Monetary Policy announcement simplified.... Courtesy ET

Marginal standing facility is a window for banks
to borrow from Reserve Bank of India in
emergency situation when inter-bank liquidity
dries up completely.
KOLKATA: Reserve Bank of India's new governor
Raghuram Rajan has announced his first monetary
policy on Friday. He has lowered the marginal
standing facility rate by 75 basis points to 9.5%
from 10.25% but raised the policy repo rate under
the liquidity adjustment facility by 25 basis points to
7.5% from 7.25%. Both the measures are effective
from today.
What is marginal standing facility?
Marginal standing facility is a window for banks to
borrow from Reserve Bank of India in emergency
situation when inter-bank liquidity dries up
completely. Banks borrow from the central bank by
pledging government securities at a rate higher than
the repo rate under liquidity adjustment facility or
LAF in short
What is liquidity adjustment facility?
Reserve Bank of India's liquidity adjustment facility
of LAF helps banks to adjust their daily liquidity
mismatches. LAF has two components -- repo
(repurchase agreement) and reverse repo. When
banks need liquidity to meet its daily requirement,
they borrow from RBI through repo. The rate at
which they borrow fund is called the repo rate.
When banks are flush with fund, they park with RBI
through the reverse repo mechanism at reverse repo
rate.
What is the policy rate?
Repo rate is considered as the policy rate as repo is
the widely used instrument between banks and RBI.
Earlier bank rate was considered as the benchmark
but it has lost its relevance as banks seldom take
refinance from RBI at bank rate. Any change in repo
rate signals RBI's interest rate stance.
Why RBI reduced marginal standing facility rate
while it raised repo rate?
RBI had raised the marginal standing facility rate to
10.25% as a liquidity tightening measure and to
prevent speculative use of rupee in buying dollar.
Now, a reduction in the MSF rate perhaps indicate
that RBI is now comfortable about the rupee-dollar
movement. The rupee has bounced back some 8%
from its record low of 68.80 in the last fortnight.
The rupee-outlook has also improved as the Federal
Reserve refrained from reducing the amount of its
bond purchases under quantitative easing
programme. Global investors were earlier
withdrawing their investment in emerging countries
to seek better returns in dollar-denominated
investment withdrawal of quantitative easing means
fall in liquidity and rise in bond prices in the US.
On the other hand, RBI increased the repo rate as it
wants to continue its fight against inflation, which is
still on the higher side above RBI's comfort level.
Rise in repo rate may push borrowing rates up for
both companies and individuals. Companies may
have to shell more interest rate for borrowing for
building new projects or expanding an existing one.

Interesting Read.... Mark Mobius on China and India.....

Investing read....

Given their heft in the emerging markets
world, China and India are among the
countries I get asked most often about,
particularly when they show market distress
signals like economic slowing. This past week,
the Templeton emerging markets team and I
have been in China as part of a large research
trip, doing further analysis on the market and
key company prospects. I thought it would
present a good opportunity to share a few of
my answers to recent questions on both China
and India.
CHINA
Do you expect the Chinese economy to
slow down further?
The Chinese economy grew 7.5% year-over-
year in the second quarter of 2013, in line
with the government’s growth target for the
year. Although the Chinese economy may be
growing at a slightly slower pace than in the
first quarter, when GDP grew 7.7% year-over-
year, China’s GDP growth remains stronger
than in many other major markets, which we
believe could remain the case for some time.
Moreover, on a positive note, China has been
slowly becoming less dependent on exports and
adjusting its structure for more sustainable
growth.
There are a few reasons why my team and I
believe China has the potential to maintain
strong long-term economic growth. For
instance, as disposable income increases for
China’s middle class—many consumers in
China have been benefitting from annual
increases in wages of 20% or more—more
personal assets could be funneled into savings
and investments.
In addition, urbanization is continuing apace,
with the government devoting more resources
to infrastructure and subsidized housing as
well as extending social security, education and
health benefits to migrants who have moved to
cities.
Also, we anticipate the authorities will continue
to reposition the Chinese economy to depend
less on export and investment spending and
more on domestic demand. Efforts to tilt
activity away from low value-added and labor-
intensive industries and toward higher-
technology activities will likely continue as
wage levels move up and as the labor force in
China becomes ever more educated.
What are your views on the weakness of
the A-share (domestic) market in June?
A-shares are those of local Chinese companies
denominated in Renminbi, traded primarily
between local investors on the Shanghai or
Shenzhen stock exchanges. We suspect the
recent weakness in Chinese A-share prices is an
overreaction to recent events. Indications that
US quantitative easing might be scaled back
can be seen as a sign of growing confidence in
the sustainability of a US economic recovery,
which would be positive for Chinese exporters.
Moreover, Japan’s measures of monetary and
fiscal stimulus that are due to increase in
coming quarters could help offset any potential
tapering of US liquidity. Similarly, the People’s
Bank of China’s actions to influence interbank
rates, by curbing some excessive “shadow
banking” activities, could create healthier and
more sustainable financial markets. We have
already seen a rebound, with the A-share
markets on an upward trend since the end of
June through mid-September. [1]
In a market of China’s size, the story isn’t all
good or all bad, thus it would be wrong to
generalize the market. Over the long term, we
believe there should be a rising trend in the
outlook of the A-share market since China’s
economic growth rate currently remains high
and market reforms appear to be on the right
track. According to our analysis, equity
valuations overall are currently not much
above their 2008 lows, and we believe that
many of China’s A-shares are attractively
priced at the moment.
INDIA
The Rupee reached record lows in August,
making it one of the worst performing
global currencies so far this year. What is
your view on the weakness?
It is true that the Rupee has weakened
recently. Some of the weakness is symptomatic
of the country’s poor policy and investment
environment. If that is rectified, we believe the
Rupee can once again be more stable. The
weakness in the currency can be good for
certain investments. For example, the weak
Rupee is excellent for India’s outsourcing
industry that has its costs in Rupees and
income in US Dollars. So our interests in such
companies have risen.
There have been fears of a downgrade in
India’s credit ratings. What do you think
the chances are of that happening?
Rating agencies generally look at a country’s
current environment and could take action
based on that country’s current prospects. It is
for the government to make its case that the
economy’s long-term fundamentals are intact.
Do you expect inflationary pressures to
increase in India amidst slowing economic
growth, a depreciating currency, rising
interest rates and higher commodity
prices?
My team and I believe the government must
counter inflation by improving productivity.
That is an ongoing task. There is no reason a
country that makes some of the cheapest and
highest quality medicines and is the software
and services factory to the world should not
be able to manufacture goods at a competitive
cost.
What can the Indian government do to
tackle the depreciation in the Indian Rupee
this year, high fiscal and current account
deficits and slowing economic growth?
We believe it is most important for the Indian
government to do all it can to harness the
significant potential that India has. The fact
remains that India is a net exporter, barring
its energy requirements. We should not be too
concerned about the current account deficit
and we should avoid any knee-jerk reactions.
In our view, what needs to be done is to
ensure that the many Indian and multinational
companies that truly want to make investments
and make a difference to India make the right
level of investments. We believe the
government must slowly reduce the extent of
public sector involvement in the economy and
allow private enterprise to make investments.
This could lead to an increase in productivity.
then growth rates should improve and the
currency should likewise strengthen, in our
view. It is heartening to note that the
government is finally taking steps to liberalize
investments; however, that should not be done
just to increase inflows, but also to enhance
efficiency and productivity.

There Is Now A Danger That “All Hell Is Going To Break Loose”....Interesting read!!!

Interesting read....

In the aftermath of today’s historic Fed decision, the man who correctly predicted last week, “as the fantasy dies,” panic will ensue and gold will soar, warned King World News that in the wake of this Fed disaster there is now a great danger that “all hell is going to break loose.”  Below is what Bill Fleckenstein, who is President of Fleckenstein Capital, had to say in this powerful interview.

Eric King:  “Bill, in the aftermath of the Fed decision gold has exploded on the news of no tapering.”

Fleckenstein:  “Well, I think there have been a lot of delusional people.  And nobody exemplifies this better than the Goldman Sachs policy, which they have articulated all year, that ‘The economy is going to be stronger and the Fed is going to be tough.’  They’ve been saying that for nine months now....

Continue reading the Bill Fleckenstein interview below...

“Over and over and over again we see people who do not understand how the economy really works.  They don’t understand these Fed policies only misallocate capital and create inflation.  These policies don’t create any sustained economic activity, and yet they keep making the same mistakes.

A lot of those people want to believe that everything is going to be OK because they want to believe in the silly concept of ‘Goldilocks.’  So all of these people were rooting for the Fed to tighten today because they believed it would have meant that they were right, when it doesn’t.  So, now there are a lot of people that were wrong.

The question is, how are the markets going to finally react?  We are going to get to see how high the bond market can rally in the wake of no tightening, but most importantly, where it fails.  That’s going to be the most interesting thing to see from a big, macro standpoint.  Obviously from a positioning standpoint, people who have not believed in the Fed, and who have metals, they ought to finally start getting rewarded.

Today is truly shocking to the people who have had it dead wrong.  This is shocking because the Fed had been laying the groundwork for tapering for so long.  But, remember, in 2009 the Fed was talking about ‘exit strategies.’  Now we are just talking about cutting back on a part of the stimulus and they can’t even do that.  So, one of these days people are going to realize that they are totally trapped.  I just can’t tell you when the crowd is going to change its mind. 

This should be a major turning point for gold because so many people have hated it for the wrong reasons.  Since gold peaked in the fall of 2011, the Fed has printed another $1 trillion.  So gold has a lot of catching up to do.  This ought to be gold’s moment, right here, right now.  Gold should start a huge leg higher.  Certainly the gold stocks have a pretty good setup from a risk/reward standpoint, from where they are today.  You certainly can’t find a more hated group on the planet.”

Eric King:  “Bill, you were saying to KWN recently that this was going to reveal that the Fed is in fact trapped.  Can you elaborate on that in the aftermath of this decision?”

Fleckenstein:  “Since April, the 10-Year has gone from about 1.6%, to as high as 3% recently.  Now we have to see when this rally in bonds stops.  The bond market will then roll over and then the Fed won’t have the tapering as an excuse.  It means the bond market has ceased to price in the scenario that the Fed wants, and the bond market is not responding to the Fed’s moves in the short-run.  In the old days we would call that ‘losing control of the bond market.’  And if that starts to happen, all hell is going to break loose.”

IMPORTANT - In the aftermath of this historic Fed decision, King World News will be releasing special interviews all day today.  Yesterday, Egon von Greyerz correctly predicted that the Fed would not taper and it would shock the market and gold would soar.  That’s exactly what we have seen today.  More interviews are on the way. 

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged. 

The audio interviews with Eric Sprott, Andrew Maguire, Grant Williams, Stephen Leeb, Bill Fleckenstein, Pierre Lassonde, Dr. Paul Craig Roberts, Art Cashin, Egon von Greyerz and Marc Faber are available now. Also, other outstanding recent KWN interviews include Jim Grant and Felix Zulauf to listen CLICKING HERE.

Eric King

KingWorldNews.com

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Ignore the Taper, Focus on Forecasts.... Good Advice!!!!

Today may mark the beginning of the end of the Federal Reserve’s bond-buying. That’s less of a big deal than you might think.

While announcements about asset purchases will be important insofar as they reveal the Fed’s evolving priorities and read on economic conditions, analysts will be better off focusing their attention on the Fed’s updated economic forecasts, as well as on any statements about the future path of short-term interest rates.

It was only a few months ago that concerned observers, including me, were worried that the Fed was attempting to revive the economy by inflating new bubbles in risky debt. Times have changed a lot since then. Interest rates are up, hot money has fled many emerging markets, and some are worrying that the feeble U.S. recovery has been endangered by higher mortgage rates.For one thing, interest rates have already moved tremendously in anticipation of “the taper,” so it isn’t clear why explicit confirmation of what everyone was expecting should have a big impact. One explanation for this shift is that the Fed started publicly expressing concerns about the negative side effects of its programs.

As Vince Foster noted at Minyanville, the Fed began experiencing “buyer’s remorse” as early as the end of January, when the minutes reveal that they asked the staff to study the possible costs of unlimited asset purchases. The gold/dollar exchange rate was the first victim of this “tightening” of Fed policy.

At the end of May, Ben Bernanke, the Fed’s chairman, testified on the possibility that the U.S. central bank would “taper” its bond-buying programs before the end of the year because he and his colleagues were concerned about “financial instability.” Then, at the June 19 news conference, Bernanke explained that the Fed expected asset purchases to have completely stopped by the time the unemployment rate had reached 7 percent. That’s well short of the Fed’s estimate of the “natural rate” of joblessness, which is between 5.2 and 6 percent.

People at the Fed and in academia don’t seem to see things this way. Their latest researchargues that asset purchases are relatively ineffective at stimulating the economy, especially when compared with “forward guidance” about the future path of short-term interest rates. This finding has been supported by top academics who presented at the Fed’s big retreat in Jackson, Wyoming, both this year and last year, although there is some disagreement about the extent to which purchases of mortgage bonds are qualitatively different from purchases of U.S. Treasury debt.

When I interviewed Columbia University’s Michael Woodford (one of the fathers of “forward guidance") last week, he explained that the Fed was rightly concerned that the benefits of bond buying were close to being outweighed by their costs. According to him, the Fed should stop asset purchases altogether and focus exclusively on articulating when and why it will raise short-term interest rates from their current low levels. The Fed started moving in this direction back in December, when it announced that it would not raise short rates as long as the unemployment rate was above 6.5 percent and the near-term forecast for inflation was slower than an annual rate of 2.5 percent.

This policy shift toward “forward guidance” makes the forecasts of economic activity all the more important for traders. One reason that interest rates spiked on June 19, especially in the three- to five-year range, was because the Fed’s forecasts for unemployment had become relatively more optimistic. Some analysts think that the Fed will attempt to offset the impact of any cutback in asset purchases by altering the thresholds for rate increases. The net effect could actually end up lowering borrowing costs, despite all the hoopla about “tapering”.

Wait is over.... FOMC meet announcement ....

For.detailed report.please visit....

hrishikeshprabhavalkar.blogspot.in.

Regards

Hrishi

Will Modi be a blessing for Indian stockmarkets.... ????

There has always been a connection between politics and the performance of the equity markets. The connection is strong. For politics decide the economic policies. This guides the economy. And this in turn drives the performance of the corporate. The performance of the corporate world decides how their share prices will move or in short where the stock markets would be headed. This is why investors, both domestic and foreign, have been keenly eyeing the developments related to the 2014 general elections in the country. Interestingly the corporate world and therefore the stock markets appear to be rooting actively for Gujarat Chief Minister, Narendra Modi.

Mr Modi's nomination by his political party as their Prime Ministerial candidate was well received by India Inc. In corporate polls and surveys, India Inc has been giving their preference for Mr Modi to be the next leader. And there are solid reasons behind this favour.

Let us not forget that the policy paralysis of the ruling government has seriously hurt the business prospects in the country. Therefore Mr Modi's 'pro-business' ideas are being welcomed. A few days back he held a meeting with CEOs where he stated that he plans to bring about flexible labor laws; a clear cut development agenda; governance and empowering the state governments. This would be music to the ears of the CEOs who have seen their business suffer due to the lack of action on all of these fronts. Luckily for Modi he has a track record to back up his claims of being pro-business and pro-growth. Anyone who questions that need only to look at the level of development and growth seen in Gujarat during his tenure as the Chief Minister. This is why investors both domestic as we ll as foreign have been cheering Mr Modi's candidature.

However, there is another side to the story. Modi has been touted by many to be a driver of earnings growth but not inclusive growth. On the social indicators' front, Gujarat has not really fared too well. He is not a major supporter of spending too much towards populist measures. Unfortunately for India, the UPA government has been doing just that. Only concentrating on populist measures and letting the economy take a back seat. The glaring deficit problems are testimony to this.

What we need today is a leadership that can combine both. Economic growth that is brought about by better earnings growth that is also socially inclusive. Who will eventually come into power is a question no one can answer for sure. Will it be the pro-business party or would it be the pro-masses party. The question now is what investors should do in a meantime. There are very few clues available for this. Even our founder, Ajit Dayal, has stated in a recent WebSummit he does not see any significant triggers for stocks till the next general elections. So should investors continue to buy stocks or shoul d they sit on the side and wait for electi ons to get over. We know it is questions like these that concern you these days. And your trusted source for views and opinions, The 5 Minute WrapUp, too has unfortunately not helped by staying silent on such questions. We understand that, in addition to stocks, you might be concerned about other asset classes like fixed deposits, gold and property as well. And that's why we are taking steps to make The 5 Minute WrapUp more relevant to you. Watch this space for more details in the coming weeks!