Desperate Measures to Arrest the Rupee’s Slide

I read an article in The Financial Express of yesterday about the measues taken by the RBI and a couple of other agencies to halt the rupee’s decent and constructed the following infographic.

India Controls to Stem Rupee's Slide

Managed Floats

Jeffrey “King of Bonds” Gundlach was the former head of the $12 bn TCW Total Return Bond Fund. His presentations on the state of whats happening around the economic world are eagerly awaited and discussed. You can find his latest message here. I am showing two screens that caught my eye. These are the lines of movement of the Chinese Renminbi (RMB) and the Indian Rupee (INR).

The INR is on a “managed float” path. Successive administrations at the Reserve Bank of India (RBI) have managed to maintain and further this strategy of not pegging the INR to a particular foreign currency at a particular exchange rate. Earlier, the RBI used to intervene in the currency markets (it still tried its hand very recently), but the growth in recent trading volumes on the INR means that RBI’s intervention will lack any meaningful punch going forward. The INR has therefore moved a little bit closer to full float status. 

The RMB, on the other hand is undergoing a lot of makeovers. It was earlier pegged to the USD at a fixed rate and then in 2005 when the peg was lifted, all the pent up pressure got released and an immediate revaluation took place. However, the peg was unofficially brought back due to the onset of the financial crisis. Then, in Jun’10, China’s central bank said that it will increase RMB’s flexibility. Now it is moving to managed float status. HSBC had earlier predicted the RMB to become the 3rd major world reserve currency in 15 years. That’s a lot of time for a few more makeovers.

Risk Management and Inter Bank Dealings

This will be big news in today’s papers (posting around midnight AM) – RBI’s promulgation of capital controls to reign in the currency movement. There is a meeeting there in the RBI today for a review of its monetary, so some more interesting sound bytes should come out. What if they cut the CRR?

And Ajay Shah provides a contra view to RBI’s action. Boy! If I have to pick between the short term bounce up generated by a possible CRR cut and the medium term lower levels of NIFTY as mentioned in Ajay Shah’s post, I’d pick the latter.

BTW, at one point in time yesterday RBI’s legal tender was quoting at 54.29 times a USD! Can’t believe it. Sort term relief for exporters? Only if they prevent losing their margins to local inflation.

Repo Rate and Inflation

The Reserve Bank of India (RBI) has designated the weighted average overnight call money rate as the operating target of its monetary policy and the repo rate as the only independently varying policy rate in order to more accurately signal the monetary policy stance. So while cash reserve ratio (CRR), statutory liquidity ratio (SLR), market stabilization scheme (MSS) etc. are all important tools, the policy lever of RBI that is always in the spotlight is the repo rate. This is the rate at which banks borrow from the central bank blah blah…

A lot has been said about RBI’s role and its effectiveness in fighting inflation. Rate hikes are common knowledge to all in the country by now concerning that they affect people with loans in their lives. Interest rates have been rising in India (and all the emerging economies) and I had an investment thesis of catching banking stocks when the interest rate cycle turned. Interest rate senstive sectors like automobiles, real estate, banking etc. will get a breather if the rates turn. The sovereign debt crisis in Europe has however ensured that the hawks continue to circle above the Indian economic landscape. Fat chance that we may see a rate reversal. Indeed, the banking sector is badly mauled and it certainly does not look to be in a hurry to recover. I need to figure out what to do with my investment positions in Axis Bank and HDFC Bank – and towards that end I tried to read up and form an opinion on inflation, rates and their cycles. The below chart came out.

If you look at the period after mid-2008, there is a very perceptible negative correlation betweeen inflation measures and the repo rates set by RBI. I am saying correlation here. As you know, correlation does not automatically imply causality. I have shaded the three time periods of recent times where we can discern some sort of a clear monetary stand taken by the RBI. The light blue band is a period of declining repo rates. I have added a 12 period moving average of the monthly inflation rates (taken from ycharts) to show trending inflation information. As you can see, during this period, the inflation rate increased as the rate fell. Then the light yellow period (Nov’09 – May’10) shows the continuation of the trend started in the previous phase. The RBI further reduced the repo rate down to 4.75% towards the end of this phase – with inflation continuously rising while all this was taking place. Then finally, the green band, which we seem to be in today as well. Here, we all know the sequential repo rate increases affected by the RBI. The inflation rate did appear to have fallen from a high of 14%. But it is still high at 9.5% – 10.0%. So many experts (and some vested interests) have argued that the RBI should stop fiddling with the policy rates since these measures have not been successful in taming the beast. My point here is that inflation is whatever it is, but can you confidently say that the situation could not have been any worse than what it is today?

I guess, my view is that till this point successive repo rate increases have helped in “controlling” inflation. They may not have brought inflation back to the comfort zone of 5% – 6%, but they have definitely put some brakes on the juggernaut. Beyond this point, any further increases in the policy rates may actually be detrimental to the economy (from the inflation point of view)! Beyond a point, if rates continue to rise, they will do their bit to strangulate the supply side by making it uneconomical to produce. While you may smile when you read about farmers in Andhra Pradesh striking work, the fact of the matter is that very high rates do push out payback times, reduce rates of return on economic activity and shut down the cogs of industry. I would not be surprised if the increasing levels of cash balances with Indian companies is linked to them not finding any profitable incentive to produce/invent and invest. So, my hunch is that RBI will/should stop raising rates now. However, my holding in Axis Bank and HDFC Bank is still a millstone around my neck since a pause in raising rates does not mean that the central bank will start reducing them! It could be a good 6 months (if not more) before we start seeing a reversal of the current policy regime.

So what about inflation? Maybe we hope that foreign policymakers and governments are more adept than ours. FIIs run our stock markets by proxy anyways. If the cost of fuel starts falling and INR goes up (read as: USD depreciates since Americans would want Germans to continue buying American exports) then perhaps inflation will take care of itself. This will happen inspite of our Government which has done absolutely nothing to control the supply side pressure to inflation. In fact, people posture and talk as if the RBI is responsible for the supply side as well! We are in a hot air balloon now. Lets enjoy the expansive expensive view from the top. 🙂

The Price of Food

I stopped by at a local grocery store on my way back home to pick up something for breakfast. The idea was to wedge an  oregano infused, golden brown double omlette inside slices of whole wheat bread layered in garlic and chilly-garlic mayonnaise. The ensuing breakfast was bearable, but the previous evening commerce gave me something to write about: the escalating prices of food in India. The egg at INR 3 per egg is a lot of egg in the face and the whole wheat bread leavened me with its INR 22 tag. I would recommend heading to the nearest kirana store, especially if you haven’t personally shopped for a while. I am sure the prices will shock you. Any crescendo that escalates at c15% per annum would.

I am sure Humpty Dumpty would have an even mightier fall today than during the early 19th century when he/it was conceived as being perched on that wall. The reason is simple – eggs are dearer since poultry feed prices (corn, et al) are increasing fast both in local as well as international markets. And that may not bode well for companies like Godrej (Real Good chicken, sob sob) and Venky’s India Limited.

There was a lot of attention to the Reserve Bank of India’s (RBI) winging up of its repo rates in a bid to contain inflation. Whether this move has its desired effect or not remains to be seen (in media). Actually, such causality might be difficult nee impossible to establish. Since a section of the intelligentia remains convinced that monetary tricks do not influence food prices and therefore the hesitant intervention by the RBI may not really amount to anything. While you may have certainly caught the story of the repo rate hike, this sagacious comment by Montek Singh Ahluwalia may have escaped your notice:

Rural areas have benefitted from the economic prosperity seen in the country. Demand for foodgrain, milk, vegetable and protein have gone up. It is a good development

Of course it is! But our preparedness to tackle the implication of that (i.e. a higher price level) may not be. The Deputy Chairman’s (of the Planning Commission) comment reminds me of a similar observation by the President of the United States (was it Clinton?) that countries like India should eat less! Here are some facts: per capita income in India has increased from 24,095 in 2004/05 to 43,749 in 2009/10 – that’s a CAGR of 13%. Agricultural productivity has lagged this rapid growth in incomes – growing at only 2% per annum. The large transfer of purchasing power via the Rural Employment Guarantee scheme has indeed ushered in a new found prosperity in rural India. In my native village, I never used to see the local folk eat vegetables and fruits. It was always variations of millets and pulses. They now have started to add variety to their cuisine, and as Mr. Ahluwalia says, what’s wrong with that?

There is an expectation of rice prices coming down this year due to the copious amount of rainfall that we received this monsoon but that might be washed out too. For since 2005, there has been a continuous rise in prices regardless of the monsoon. So what gives? It has to be basic demand and supply. If demand goes up and supply remains constant then the prices have to increase, right? How I wish our planners get this right – the re-rating possibilities for the fertilizer industry (if it can get it’s gas supply worries sorted!), micro finance organizations, irrigation sector (Jain Irrigation, Yo!) would be significant.

Our production is focused largely on basic food grains which are certainly not income elastic – i.e. one does not start consuming more rice or chapattis if one’s income rises. However, things like eggs, butter, fruits, vegetables, milk, meat etc are most certainly in greater demand if income rises. This will be difficult for someone from the industrialized world to understand, but in India, these food articles are aspirational to many. There are 370 million people currently in India living below the poverty. Forget an apple a day, even if they have consumed an apple in a lifetime till today, they’d be lucky. But all that will change and is changing…slowly. We need good old Keynesian artifacts in Indian agriculture, not RBI’s intervention. The focus should be on the Agricultural Ministry and not the Ministry of Finance.

And while Shri Sharad Pawar remains overworked and occupied by the political flux in Maharashtra, I do not think he is the only one to blame. The reason for the rotting mountains of grain in the Food Corporation of India’s (FCI) godown is less a consequence of callous administration as much as it being a fallout of India’s federal structure of government. It’s a states of the Union vs. the Union issue. The center just cannot get the states to lift off the stocks – I do not know why but I can guess that it must be due to pricing issues. FCI’s hoards cannot be culled by a mere addition of storage capacity. That’s a long term process – the short term measure is getting trucks to line up at FCI’s godowns are carting the stuff away. At least Sonia Gandhi did admit that the responsibility of bringing down food prices is as much the responsibility of the center as it is of the states.

The other important aspect is the cost of farming. In my village, a daily wage woman labourer was paid INR 50 a day to plant onion seeds. This year she is getting paid Rs.100. Male labourers are demanding INR 150. Just like the BPO industry, cheap labour that gave Indian agriculture its competitive edge is blunting rapidly. Cotton is another crop that is sown by my cousins in their farms. They are paying farmhands Rs4.50 for picking cotton this year, again double from last year. They tell me that the total labour cost for cotton has touched INR 15 per kilo this year. I can only imagine the plight of the farmland owners in rich Punjab and Haryana! This again comes back to the point – if a business has to start paying more per unit of labour then it needs to extract greater productivity per unit of labour. The fracas over the modest brinjal shows how arduous the path to this goal will be. Our farms need more mechanization, drip irrigation (Jain Irrigation, yo!), better seeds, non-urea fertilizers and understanding politicians.

SEBI and other things

The Securities and Exchange Board of India has been in cracking form last week. Or so it seems. I like reading about C.B. Bhave and SEBI – the comment of one of my professors, “SEBI should be plucked and thrown into the Arabian Sea” notwithstanding. But that was in mid 1998 when D.R. Mehta was its Chairman. More on SEBI shenanigans later. Some of the things that caught my eye:

–          Increase of retail portion for application to IPOs to INR 2 lakh. Which is cool if we keep seeing more issues like Coal India Limited. I do not personally like to invest in IPOs but issues like CIL make one happy given the 5% discount to the retail rats. Moreover, in the case of CIL, the quality of paper was good as also the huge institutional interest. I have not done much snooping around on the internet to figure out what the allocation is likely to be but I am hoping for a 12% – 15% return in less than a month’s time! Let’s see. My means and expectations are modest.

 –          Crackdown on shady promoters who keeping issuing warrants to themselves at a steep discount during bull runs. Since most of the conversion money is to be paid during the warrant exercise date,  a sudden correction does not cut too deep for such warrant holding promoters. So this is a good proactive step in favour of minority shareholders. I was in the ‘minority’ report of Shakti Met Dor before I sold out on 07Oct’10 at a loss of 5%. The promoter credentials and their move to delist the company at what appears to be an artificially suppressed market value did not enthuse much confidence. FIIs have come in and done their bit in India but this stock has stuck to its price since the time I sold out. Good riddance.

–          IPOs for insurance companies. Nice! For once, the IRDA agreed! I am sure many more of those emotional HDFC Standard Life ads will start hitting the boob tube in a year or so. This is one good step towards the opening up of the insurance sector. Currently, there is a cap on how much Foreign Direct Investment (FDI) an Indian partner can bring in into its insurance venture. I do not know why Pranab Mukherjee cosies up so much with the IRDA but there was a recent soundbite where he observed that SEBI and IRDA were quarelling like petulant children. Was the ULIP bickering set up by New Delhi so that the Finance Ministry gets a firmer grip over SEBI?

– Options will now feature European exercises as well. As if they were not complicated enough! Europeans are cheaper than Americans so its good. The latter can be exercized at any time during the contract period while the former need to triggered only at the end. I don’t think I give a rats ass to European or American methods of exits. All I want is cheap long dated index options and I will be happy in my bermudas. I have such simple needs.

– The Mutual Fund industry squarely blames SEBI for rendering it comatose. There has been so much of bleeding with investors taking out money from fund houses’ coffers that the latter are now resembling leaky ketchup factories. Three blows fell really:

        Punch on the MF nose: Banning of the entry loads

        Ow! The stunner left hook: All strata of investors in MFs to have similar exit loads.

        Knock Out…the final uppercut: Mark your debt assets at the market.

These are good moves from the end (read small) investor point of view but if there is no sea then there’s no fish either, right?

–          And the clincher: SEBI will now be the sole regulator of all organized financial transactions. The IRDA, the Reserve Bank of India (RBI), the Forward Markets Commission (FMC) will all accede to it. RBI’s star seems to be in its descendent. You probably know that the Government of India is the bigger debtor of the nation and therefore the RBI. So what do you do if you cannot repay? If you a small, wretched villager in Andhra Pradesh distressed in some micro debt you’d commit suicide. But if you were the GoI you’d want to print more money and debase the value of your debt. Recalcitrant RBI guvs have always been a thorn in the flesh for the Finance Ministries at Delhi. Try noticing this – every time Pranab Mukherjee says something regarding exchange rates, inflation control, the FII ‘hot money’ pat comes the counter-view from the RBI guv. Also note that the FM’s view is part of a major front page story while the RBI piece typically appears one day later and its hidden somewhere in the inner pages. But that’s digressing.

To the more informed market participants, there appears to be a lot of dirty linen in SEBI closets and some of it has indeed been cut and pasted in the internet as banners of SEBI’s double standards and doule entendres: Current chairman being the common link between the securities scam at NSDL and the abrupt cessation of investigation from SEBI later on. SEBI’s spineless conduct during the Mehta and Parikh vaccum cleaning of the market. The super-fast-track exemption granted to Bharti desisting it from making an open offer during the MTN talks. etc.

C.B. Bhave may or may not have been guilty in the NSDL scam as alleged in some parts of the financial media. But it is a tough ask navigating the markets especially when his organisation has absolute powers and there is big money involved. I wonder if they teach Arthashashtra and Chess in the IAS.

The informed seem to detest this institution enjoying legislative, executive and judicial powers all together. In fact SEBI appears to have far more teeth that the US SEC. However, for the public at large, the instiution has earned a mix of a Robin Hood and Chulbul Pandey kind of reputation. While the capital markets’ cognoscenti will see more than what meets the common eye, the masses will always get a reassuring feel when blurbs like SEBIs ban on FIIs like Barclays’ & Societe Generale’s P-Notes,  individuals like Samir Arora, Shankar Sharma and various sundry brokers and promotor groups etc.

But does SEBI do things only when provoked and is it guilty of not touching the real issues? It is definitely newsworthy but is it worthy of news?

Buying a House – Tips and Paperwork

Rishab asked a few questions a couple of weeks ago regarding buying property and I will try my best to answer these as well as I can. I guess what I can safely say is to take as much advise as possible from friends, family, bankers, financial planners (if you have access to them) and of course, the internet. It is a great proud feeling to buy your pad (if buying for the first time) and it also involves us emotionally. Like hunting for jobs, this experience should be enjoyed and not feared or seen as a chore. We don’t hunt for jobs or houses every day, do we? Here are a few words of advise that I can suggest from my limited set of experiences so far. Caveat emptor.

1. Pre-Owned or Ready only – I would recommend that you purchase a house that is near complete or second hand only. There is too much economic uncertainty and too much of leverage on the books of real estate companies in India to share project risk with the developers. We have one life and most of us get one chance to pick up a house – we should be as risk averse as possible. With land prices in urban India being bid up higher and higher, property developers have to borrow to buy. If the interest rates rise in the future it will make the going quite though for the real estate companies. That is the reason why the business model of Godrej Properties (GPL) is so cool – they mostly lease property from owners, develop it and share the profits. And that’s one of the reasons why I consider my investment in Godrej Industries Ltd (part owner of GPL) to be a part of my core holdings. Inner core.

2. Documents to look for

The following documents are usually sought for when buying a second hand property:

– Agreement of sale between the builder and the first owners and all the subsequent agreements of sale thereupon.

– Papers that uniquely qualify a clear title to the land. Also known as the Conveyance Deed.

– Registration certificate of the housing society. It usually takes 1 – 2 years after posession is granted by the builder for society formation.

– No objection certificate from the society to transfer the flat in the prospective buyers’ name.

– Copy of share certificate of the society. Once the society formation is complete, it issues share certificates to its members. You should take a look at this.

– A draft agreement of purchase (between you and the seller)

– Copies of municipal tax paid by the society. This may be tough to get but you should try.

– Occupation certificate granted by the municipal corporation to the builder.

– No objection certificate from the society to mortgage the flat in the favour of the bank, along with a letter stating the lien (this is in case you want to avail a housing loan)

– Income tax clearance of the seller (for registration purposes only). Check that.

There are other sets of documents that would be required if A) buying a resale flat if the society is not formed or B) if you are buying a new flat from a builder. Let me know and I shall email these to you. It is prudent to ask for/be aware of these documents. Indeed some housing finance institutions may not ask for all of these (more on that later) and the builder/society might spin tales as to why some of these documents are really not required – if that happens just walk out of that meeting. When I was looking around for my first house, a particular builder just did not want to part with the architectural plans and other documents of a second hand, unlived flat that I had liked. Luckily for me, I did not have a penny on me (only a promise of future income) and therefore I did not have any option but to look to a bank for finance. Since the bank would not advance the loan if the architectural drawings were not made available I had called it quits.

3. Finance – I am really in no position to opine on which housing finance company you should take your loan from. This decision is not as straight forward as taking out term insurance – in that case you should simply head to the insurer that offers you the lowest premium. Most properties are on the ‘pre-approved’ list of many financers – which means that they have already completed most of the paperwork required. Buying property in such buildings from these banks reduces the risk of landing up with an unclear title as well as easing up the paper work. Public sector banks in India generally offer the most competitive rates but dealing with them may not be a smooth affair. They don’t give a rats ass whether you give them your business or not. On the other hand, private sector banks put stiff sales targets on their sales people and you really do not want an over zealous sales turk to finance what turns out to be a sand castle to you! Finally, interest rates may very well rise in the near future. Inflation is too big a monster for the Reserve Bank of India (RBI) not to do anything to the current rates. However, most banks offer only a 3 year fixed when they refer to fixed rates. I daresay that if someone is to buy a house next year, he/she should pick a floating rate – but it really depends on your view of the interest rates. 

4. CIBIL Credit Report – You should apply and procure your credit report from Credit Information Bureau India Limited (CIBIL). This is available for a nominal processing charge and is one of the things that banks look for when deciding on the grant of the loan. There are known instances where people have found errors in their CIBIL credit reports and while the RBI prescribes a time limit of 45 days for compliants to get resolved, you do not want to be running around clearing the errors in your credit report. Purchase opportunities do not last forever. In fact you should procure and check your credit report regardless of whether you intend to take a loan or not. Beware, if you are blacklisted or your credit score is very low, the chances are extremely high that your loan application will get bluntly rejected without a proper explanation. The onus will be on you to investigate and clear your name. Even if this is your first mortgage application, the fact that you might have had credit cards to your name – some of them you don’t even know if you own – will reflect in this report. Just get that report – home loan or not. My gut is that the public sector banks will be quite partisan to the credit report. At least the private banks might be inclined to help you work your way towards clearing your record (if tainted) since there are sales targets to meet.

4. Other considerations – Some other points that you might want to keep in mind (readers, please add on to this list if you can. I will keep adding as and when I get new insights):

– While the useful life of buildings is usually considered to be 70 – 80 years, do not buy a property that has had more than 2 past owners or is more than 15 years old. Maintenance expenses spike up around this point in the life of a building.

– Do not pay more than 1% as processing fees.

– Best to get a term insurance cover from the same institution to cover the quantum and tenure of the loan. Use this option to squeeze a better rate from the bank. Reveal this card only during the latter stage of rate negotiation.

– One trick that many want to play is to play one bank against another when trying to drive a bargain for the best rate. I don’t feel it’s worth it – India is a growing economy. The mortgage to GDP ratio for rapidly urbanising India is a paltry 7% which is way, way behind the developed economies (60% – 70%). So, banks are not under too much pressure to run after you.

– If the seller of the house also has a mortgage, it’s advisable for you to take your loan from the same institution.  The process gets simplified. Unless of course some other instituion is offering you a much lower rate.

– Bargain with the seller like your life depended on it. In some ways, it does. At least your financial life does. Rehearse your speech and plan your tactics, even if it means you appear like a penny pinching moron.

– If you are married, buy property in joint name. Makes things easy later on.

– Try to see the locality during the peak of the monsoon season. You’ll get an idea of water logging, seepage etc.

– refer to my other post on Buying Property for some more ideas.

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