Sunday, 20 April 2014

RBI Intervention in Forex Markets-VRK100-20Apr2014



RBI Net Intervention In Forex Markets



Reserve Bank of India intervenes in the foreign exchange markets with the explicit view of controlling what it calls ‘excess volatility’ of the Indian rupee’s exchange rate. As can be seen from the above table, RBI intervened heavily in the market between June 2013 and January 2014. During the financial year 2013-14 (data is available only up to February 2014), it bought $18 billion and sold $16.80 billion, with net purchases amounting to about $1.2 billion.

RBI’s Intervention: The action in FY 2013-14 is divided into three periods:

Period
Sale/Purchase (net)
Remarks (in hindsight)
USD-INR
Jan.2014-Feb.2014
Sold $2.4 billion
Since Jan.14, INR continued to gain vs USD though in a limited way.
17.04.14: 60.29
31.03.14: 59.95
31.12.13: 61.80
Oct.2013-Dec.2013
Bought $17.50 billion
INR started gaining from an historic low of 68.80 (on 28.08.13) & ended at 62.58 by 30.9.13. It further gained to end at 61.80 on 31.12.13.

In order to arrest steep gain of INR, RBI bought USD. ^
31.12.13: 61.80
30.09.13: 62.58

Jun.2013-Sep.2013
Sold $14.24 billion
During the 1st week of May 2013, INR was hovering around 54. US Fed hinted at Fed tapering on 22.05.13. From 54 in the middle of May.13, INR fell heavily to 68.80 by 28.08.13.

RBI sold US dollar to prevent INR falling heavily against USD.
30.09.13: 62.58
28.08.13: 68.80
31.07.13: 60.86
30.06.13: 59.39
31.05.13: 56.58
22.05.13: 55.66
30.04.13: 53.69
31.03.13: 54.29

^ RBI in September 2013 created two swap windows for FCNR(B) funds and Banks' Overseas Borrowings. Through them, it collected USD 34 billion till 30 November 2013—part of this foreign exchange was added to India’s foreign exchange reserves.

Movement of Forex Reserves in FY 2013-14:

Accretion or depletion of India’s forex reserves depends on rupee exchange rate, capital inflows to India and RBI’s net intervention in the markets. India’s latest foreign exchange reserves, as on 11 April 2014, stood at $309.44 billion (out of which gold accounts for $21.57 billion).

From a level of $292.65 billion at end-March 2013, forex reserves came down by $17 billion to $275.50 billion by the end of August 2013—as rupee fell sharply against the dollar and RBI was selling dollars to prop up rupee (see above table).

As rupee started appreciating since the end of August 2013, RBI started adding reserves. Between September 2013 and December 2013, reserves rose by $20 billion to close at $295.71 billion (end-Dec.2013). At the end of March 2014, India’s reserves stood at $303.67 billion, with further addition of $8 billion.

To Sum Up:

Compared to the period of May.2013-Dec.2013, Indian rupee’s volatility has come down to a great extent providing some cheer to the financial markets. The drastic reduction, engineered by the Indian government, of current account deficit in FY 2013-14 has also contributed to the rupee appreciation and to the relative stability of the exchange rate.

India’s national elections are underway right now and the future movement of exchange rate will much depend on the structural policies that the next government will bring to the Indian economy.

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Disclaimer: The author is an investment analyst with a vested interest in the Indian stock markets. This is for information purposes only. This should not be construed as investment advice. Investors should consult their own financial advisers before taking any investment decisions. The author blogs at:


Tweets at @vrk100








Risk versus Reward-Malkiel-VRK100-19Apr2014


Tuesday, 8 April 2014

Compare GDP, Exports & Population-VRK100-08Apr2014


Compare GDP, Exports and Population


Monday, 31 March 2014

How BSE Indices Fared-VRK100-31Mar14



How the BSE Indices Fared



As can be seen from the above table, while the S&P BSE Sensex has given a return of about 10 percent in the 25 quarters, Midcap and Smallcap indices have fared badly with a negative return of 28 and 47 percent respectively.

The rally in the Indian stock markets is led by large cap stocks--that too from stocks in FMCG, auto, healthcare and Information Technology stocks. The worst performing sectors are real estate, power, metal, PSU and capital goods sectors.

However, in the last few months, stocks in the capital goods and banking sectors are doing well while IT and healthcare stocks are lagging behind. The sector rotation is quite common in the markets. For the average investor, holding a portfolio of well-diversified stocks pays superior results in the long term of more than four to five years.




Friday, 28 March 2014

Basel III Norms Postponed to Suit Government-VRK100-28March2014




In a notification to commercial banks, Reserve Bank of India on 27 March 2014 has directed them to postpone full implementation of Basel III norms by one year to 31 March 2019, instead of the earlier timeline of 31 March 2018. This is a big relief for Indian banks who have been going through a phase of bad loans threatening their capital and profits. It is not a mere coincidence that this deferment is beneficial especially to public sector banks. There is a design behind it.

Who is the biggest beneficiary of RBI’s move?

The biggest beneficiary of the RBI’s decision to defer full implementation of Basel III norms will be Government of India (GOI). As a majority owner of public sector banks (PSBs), GOI is obligated to recapitalize PSBs in the next few years in accordance with the Basel III norms, which are much tougher than Basel II norms. PSBs have a market share of around 70 percent in Indian banking.

But, GOI has been facing a lot of problems on the fiscal front. India’s GDP growth rate has slowed down considerably in the last two to three years. Tax collections have come down, while subsidies have gone up substantially, with fiscal deficit worsening.

However, for the current financial year 2013-14, GOI has barely managed to rein in fiscal deficit within 4.8 percent of GDP, with some temporary measures such as extracting higher dividends from public sector understandings (PSUs), burdening LIC of India with stakes in PSUs and forcing some PSUs to buy shares in other PSUs.

GOI is likely to face severe resource crunch in the next few years until GDP growth rate picks up again. India is over-dependent on all sorts of subsidies. And there is this overhand of providing food security to two-thirds of India’s population. Burden of repayment of government bonds (both principal and interest) is very heavy in the next three years—which is a result of heavy government borrowing since 2008-09 till now.

RBI is in the habit of rescuing public sector banks, whenever they face headwinds either from global or domestic forces. Postponing the full implementation of Basel III norms is another clever decision by RBI to rescue GOI and public sector banks.

Whether Basel III Norms are Good for India?

Basel III norms will force Indian banks to set aside more capital as a percentage of their assets. The result is that banks’ ability to lend to needy sections will come down. India is a developing country and credit penetration is low compared to developed nations.

It is an irony that Indian banks have to set aside more capital, as part of international banking prudence, as a buffer to prevent any possibility of banking meltdown that happened in the wake of 2008/2009 global financial crisis triggered by Lehman Brothers collapse.

India is hungry for capital. Even though our savings are high, they are not enough to sustain lending activities in the economy. Due to statutory requirement (CRR and SLR), banks have to park a large part of their resources in government securities—it means a large part of banks’ funds are lent to GOI. Moreover, Indians invest more in physical capital—gold and real estate, rather than financial capital—to that extent banks’ ability to raise deposits or other forms of capital from public is crimped.

Developed nations are already developed. What I mean is that their economies are flat, with no expectations of higher growth and they require less capital. On the contrary, we have high expectations of GDP growth rates of above 8 percent.

As part of the international coordination, India is obligated to implement Basel III norms. However, Basel III norms allow considerable leeway to the implementing nations, because any norms need to be tweaked to suit local issues.

One hopes that RBI is wise enough to balance between India’s need for more loans and following international norms, without giving any impression of dilution of the spirit of Basel III norms.

Market Reaction:

Anyway, shares of all listed banks, especially those of PSBs, will react positively to the RBI’s move after stock markets open today.


References:

RBI’s notification dated 27 March 2014 deferring full implementation of Basel III norms:


Notes:

CRR – cash reserve ratio
GDP – Gross domestic product or a measure of national income
SLR – statutory liquidity ratio

Disclaimer: The author is an investment analyst with a vested interest in the Indian stock markets. This is for information purposes only. This should not be construed as investment advice. Investors should consult their own financial advisers before taking any investment decisions. The author blogs at:


Tweets at @vrk100


Wednesday, 19 March 2014

CPSE ETF-Avoid Investing-VRK100-19Mar2014




Investment Case Against CPSE ETF:

If you invest in this ETF, your money will be vulnerable to concentration risk. This ETF invests in stocks of only 10 companies. Tracking the CPSE index, about 60% of your money will be deployed in only four stocks, namely, ONGC, Gail India, Oil India and Indian Oil Corporation. All these four stocks belong to oil & gas sector. The first three companies have been bearing subsidy burden of government’s oil marketing companies (OMCs)—BPCL, HPCL and IOC for several years. 

All these companies are owned by Government of India (GOI). The ETF performance will depend on the whims and fancies of ruling politicians and bureaucrats.

With only 10 stocks, we cannot call this ETF a diversified fund. Having only 10 stocks, that too all from the public sector, in an ETF is completely against the principles of diversification. An ETF is basically an investment vehicle that pools money, invests in a basket of securities and trades like a stock on a stock exchange.

When it comes to corporate governance rules, GOI has got a poor track record. Quite often, government’s actions are not guided by the interests of minority shareholders. In the past they have used public sector companies to meet their own political interests.

Recently, GOI has been encouraging cross holdings among public sector companies. A few days back, ONGC and Oil India picked up 10% stake in IOC. LIC of India has been buying stakes in BHEL, ONGC and others at the behest of GOI. Such arm-twisting on the part of GOI is not good for LIC policyholders also. This will complicate the valuation of public sector entities and it is not in the interests of minority shareholders of PSUs.

In the last few months, GOI has forced Coal India (about Rs 16,500 crore), NMDC and public sector banks to declare large dividends to fill up its coffers, instead of allowing the companies to invest in profitable avenues.  

This ETF will bear a lot of political risk. Government is very weak in setting policies and implementing them effectively. Though some form of autonomy is given to PSUs, overall control is done by respective ministries. The overall management of these companies continues to remain weak despite the companies having some inherent strengths.

Most of the companies in the CPSE index are from natural resources sector. This sector has been imperiled by lack of environmental clearances and regulatory risks. Even though Coal India is a monopoly, it is bedeviled with fuel supply agreements, imposed by the Government.  

Features:

The Composition of CPSE Index:

Company Name
Sector
Weight %

Company Name
Sector
Weight %
Oil & Natural Gas Corp 
Energy
26.72

Indian Oil Corp
Energy
6.82
GAIL (India) Ltd 
Energy
18.48

Power Finance Corp
Financial Servcs
6.49
Coal India Ltd
Metals
17.75

Container Corp of India
Services
6.40
Rural Electrification Corp
Financial Servcs
7.16

Bharat Electronics
Manufacturing
2.00
Oil India Ltd
Energy
7.04

Engineers India
Construction
1.13

Source: GSAM

The CPSE ETF is managed by Goldman Sachs Asset Management (GSAM). This is an open-ended exchange traded fund. The new fund offer (NFO) for retail investors opened on 19 March 2014 and closes on 21 March 2014. The scheme will be listed on the BSE/NSE next month. After listing on BSE/NSE, investors can buy and sell these units throughout the market hours through their trading account with a broker, just like they trade any listed stock. The ETF will track the CPSE index. Entry and exit load are nil. Minimum amount of subscription is Rs 5,000 per application for retail investors.  

The GOI wants to raise a maximum of Rs 3,000 crore through this ETF from retail and other investors. The GOI proposes to allot units at a 5% discount during the NFO. Moreover, it proposes to give, after one year, bonus units for those who invested in the NFO and stayed with their units for at least one year. The scheme is in compliance with the Rajiv Gandhi Equity Savings Scheme (RGESS), which has tax deductions subject to certain conditions.  

As the ETF units are traded like stocks on exchanges, adequate liquidity is available for retail investors having demat accounts. The expense ratio of the fund is 0.49%, which is very low compared to other ETFs available in India.

Return Expectations:

How much return can one expect from this ETF? As you are aware, stocks do not offer any guaranteed return. Returns are a function of company’s business prospects, investor sentiment and liquidity in stock markets.

Foreign institutional investors (FIIs) are big investors in Indian equities. Of late, they have been showing preference to invest more in private sector companies rather than PSUs. At present, investor sentiment is generally upbeat about Indian equities.

Given that public sector companies are good in paying dividends, PSUs enjoy dividend yields of up to 4%, much higher than their private sector counterparts. The PSUs may not go bankrupt given the government’s implicit sovereign guarantee, but the GOI may allow certain companies (e.g., Air India, BSNL) to bleed as long as possible. Even with schemes like US-64 that was run by the then state-owned and unregeulated Unit Trust, investors lost heavily.

However, as happened in 2008 and 2009, PSUs with good balance sheets typically do well when stock markets are afflicted with global crises.

There is this narrative going round that one can buy these units in NFO and sell them after one year to earn a return of about 11 percent without any risk. My question is if everybody wants to sell these units after one year, who will buy from you? Remember Reliance Power IPO during the 2008 stock market peak when investors and speculators lost heavily in the IPO because everybody wanted to sell and there were no buyers?  



Why an ETF with only 10 stocks?

It’s strange that the capital markets regulator SEBI allowed an ETF to be floated with just 10 stocks. Is it because as an arm of the GOI, they cannot say no to the all-powerful state? I’ve a rhetorical question, will SEBI allow an ETF to be launched with just 10 stocks in the private sector? Even insurance regulator IRDA allowed insurers to invest in this highly concentrated ETF. It’s very strange that the regulators want to be a party to the government’s efforts to raise money for their fiscal profligacy.

Why cannot the GOI introduce an ETF that consists of 30 or 60 PSU stocks from a variety of industries and sectors?

Final Words:

Reports suggest that anchor investors invested about Rs 850 crore in this ETF fund yesterday. Institutional investors have sophistication and they are supposed to be masters in risk mitigation. What is suitable for them may not be suitable for retail investors.

The CPSE ETF has completely failed as an investment case when you consider the principles of risk mitigation and diversification. The fund is not adequately diversified to provide any cushion during market meltdowns. The concentration risk is very high and non-sophisticated investors may find the fund too risky for their equity portfolios.

But I would like to add that I’m not telling you not to consider the stocks of PSUs individually. Depending on your risk appetite and portfolio management perspective, you can definitely consider individual PSU stocks provided you’ve done your own research on these companies and they’re suitable for your investment objectives and goals. While evaluating, please take into account all your investments—direct equities, equity mutual funds and ULIPs—as a total package.  

My sincere view is that investors should allocate money towards equities as per their long-term financial plan, asset allocation and risk profile. Making individual investments ignoring the fundamental principles of personal finance will not help you.

You should not be solely guided by tax benefits or sops (like 5% discount and bonus units in this case) while making serious investments.  

While making investments, first see if you have any surplus money, whether the investment offers any return, convenience, liquidity and downside protection. The bottom line is that the CPSE ETF does not offer any diversification, nor does it offer any downside protection.

Unsophisticated retail investors are better off with time-tested index funds, tracking Nifty 50, Junior Nifty or BSE 200 index or some large-cap well-diversified mutual funds with long-term track record that are available in the market.
  
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Notes:

CPSE ETF – Central public sector enterprises’ exchange traded fund
GOI – Government of India
GSAM – Goldman Sachs Asset Management
NSE – National Stock Exchange
SEBI – Securities and Exchange Board of India, the capital market regulator
PSU – Public sector undertakings or public sector enterprises or state-owned enterprises
ULIPs – Unit-linked insurance plans that typically invest in stocks

Disclosure: Don’t own any shares in the above stocks. But I own a few shares in a few PSUs.
Disclaimer: The information provided is only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is an investment analyst with a vested interests. He blogs at:




Thursday, 13 March 2014

India Forex Reserves-Abysmal Returns-VRK100-13Mar14




Abysmal Rate of Return on India’s Forex Reserves:

India’s foreign exchange reserves do not earn much returns for the Reserve Bank of India, that is, for the Government of India. They are abysmally low. During the period July 2007 to June 2008, the returns were 4.82 percent. But since then earnings rate of our foreign exchange reserves has come down drastically.

As per the latest data from Reserve Bank of India, the earnings rate on India’s foreign currency assets and gold has come down to a meager 1.45 percent for the period starting from July 2012 to June 2013.  It may be noted that lower rate of earnings reflects generally low global interest rate scenario, that has been prevalent across most of the developed markets since the 2007-2008 global financial crisis.

Accretion to foreign exchange reserves is highly expensive. When RBI buys foreign exchange (mostly US dollars) to add to its reserves, it releases money (rupees) into the banking system. To neutralize the impact of excess money, RBI issues government securities and takes away that money from the banking system. This process is called sterilization, which entails huge cost to the Government. 

RBI resorted to massive accretion of foreign exchange reserves in 2006 and 2007 to arrest steep appreciation of rupee’s external value against the US dollar. The excess money created in the banking system was simultaneously absorbed through normal open market operations (OMOs) and Market Stabilisation Scheme (MSS).

RBI deploys these foreign exchange reserves in several instruments, mainly in the US Treasury securities and earns some return on them. Of course, there are various objectives of holding these reserves. Earnings are just incidental to the larger objectives of macroeconomic policies. 

India’s Import Cover is Declining:



India’s import cover is on the decline for the past six years. From a recent peak of 12.4 months at the end of September 2009, it has nosedived to 6.6 months for September 2013, as per the latest data from RBI.

Indian rupee witnessed steep depreciation against the dollar in the past few years, due to a variety of local and global factors. RBI intervened heavily in the markets and sold foreign exchange to shore up the rupee’s external value, resulting in erosion of reserves. (Of course, reserves are now increasing and the latest figure is $ 294.36 billion. Rupee is now gaining against the US dollar in the past few months).

India’s import cover fell to a low of three weeks of imports as at end of December 1990; reached a peak of 16.9 months of imports as at end of March2004. Import cover is the number of months of imports foreign exchange reserves could pay for.

Related Articles:

Spectacular Rise of Rupee Amidst Weak Leadership

Indian Rupee Continues to Fall


Date source: RBI website. Note: RBI’s financial year starts from July and ends with June.

Disclaimer: The author is an investment analyst. He blogs at:


Tuesday, 4 March 2014

Small Savings Interest Rates-VRK100-04Mar2014



The Government of India had today announced revision of interest rates for small savings schemes for the financial year 2014-15. These revised interest rates, as given in the above table, are effective from April 1st, 2014. As part of the Shyamala Gopinath Committee recommendations, the Government has been revising these interest rates every year.

As can be seen above, the interest rates are revised upwards by up to 0.2 percent (or 20 basis points) for time deposits. These term deposits for periods of 1-year and up to 5-year and recurring deposits for 5-year period are offered at post offices available across the country.

But in the case of SCSS, MIS, NSC and PPF, the government has not changed the rates.

The relevant government announcement can be accessed at:



Friday, 3 January 2014

What is GDP?-VRK100-03Jan2014




GDP is one of the great inventions of the 20th century. It is the single most important number that is used by all economic agents to compare the economic strengths of nations. It is exactly 80 years since the term ‘GDP’ was coined by Nobel laureate Simon Kuznets, who was a Russian-American economist.

GDP stands for Gross Domestic Product. It is the total value of all goods produced and services provided within a country. As a single number, GDP reflects the overall economic activity in a country. The GDP numbers are expressed in real (after inflation) terms. The GDP figures are revealed every quarter by the government authorities after compiling the national accounts.

Of course, there are skeptics who question the validity of using GDP to measure the well-being of a nation. Let us talk about that in a later post. For the time being, let us be ‘happy’ with this GDP figure!

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Disclaimer: The author is an investment analyst, equity investor and freelance writer. This write-up is for information purposes only and should not be taken as investment advice. He blogs at:



Connect with him on twitter @vrk100