Satyam gained 8.2 percent to 421.05 rupees at the close of trading on the Bombay Stock Exchange today. Bigger rival Infosys Technologies Ltd., the worst performer on India's Sensitive Index in 2007, gained 5.8 percent. Tata Consultancy Services Ltd., India's largest manager of computer networks and call centers, rose 6.2 percent.
``Valuations have become mouthwatering,'' Apurva Shah, head of research at Prabhudas Lilladher Pvt. in Mumbai, said in an interview today. ``Six-month, 12-month, three-month, one-month: every single time period, tech had been underperforming.''
Satyam is trading at 16.6 times its estimated earnings for the year starting April 1, according to Bloomberg data. That compares with a price-to-earnings ratio, one measure of how expensive a stock is, of 22 in March 2007.
``That's the lowest I have seen it in so many years of tech coverage,'' Shah said. He recommends investors buy Satyam shares.
The price-to-earnings ratio for Infosys, India's second- largest computer-services provider, is 20, compared with 29 at the beginning of the current financial year. Mumbai-based Tata Consultancy's is 18, down from 29 in March 2007.
Wipro Ltd., India's third-largest software-services exporter, gained 5.8 percent today on the Mumbai exchange, and is trading at 20 times estimated earnings, lower than March's 27.
``People just have to get snapped out of their slumber,'' Shah said. He rates Infosys, Tata Consultancy and Wipro as ``market-perform.''
NDTV has learnt that this might be the reason why RBI warned corporates on exposure to foreign exchange derivatives.
Sources have confirmed to NDTV that two Indian private banks and three foreign banks are sitting on massive open positions in foreign exchange derivative products and all these banks have been given a warning by RBI to unwind the positions.
NDTV is not revealing the names of these banks since it is yet to get their comments on the issue despite requesting them to clarify their position.
If the total amount which is stuck is calculated based on positions of other banks in the system, it could potentially pose a risk of over Rs 10,000 crores whereas some say it could be over $3 billion.
Call it India's own subprime problem but the systemic crisis which is now a huge talking point amongst the corporate and treasury circles is yet to unfold in the open.
NDTV has met and spoken to more than five treasury heads of leading banks who confirmed that the total amount could exceed over $3 billion and if this amount is not absorbed by the banks, it could mean a write off on their balance sheets.
Looking at the banks strength it may not wipe them out yet but the fear of write offs is now knocking on the door of these Indian banks. The question is why and how did this begin and is financial innovation and greed for profits once again the reason?
New private sector banks who have been aggressively pushing forex derivative products to corporate clients approach CFOs of companies to increase their exposure to book profits through trading.
But since the RBI only permits these banks to run books for certain forex derivative products they try and offer more complex products through other sources.
To meet corporate demands, these banks have been buying complex structured products from foreign banks.
Now that the dollar has turned so sharply not just against the rupee but also against other currencies, these structured products are resulting in losses so foreign banks are looking to square off positions.
But with corporate not willing to square off at their end, these domestic banks face the possibility of having to take a hit to their balance sheets and if one were to quote the policy, it clearly said: " Banks are also urged to carefully monitor corporate activity in terms of treasury/trading activity and sources of other income to the extent that embedded credit/market risks pose potential impairment to the quality of banks' assets."
Experts say that the problem is arising from the corporate sector where many large corporates are keeping derivative positions open and are avoiding booking forex losses in their quarterly reports.
But in the past they were happy dealing in complex forex derivatives since it gave them handsome treasury profits. Now company boards are not willing to take a hit on the bottomline and are hence refusing to square off the positions which in turn is putting banks at risk.| Securities and Exchange Board of India (Sebi) is mulling a proposal to reduce the time gap between the closure of an initial public offer and its listing, Chairman N Damodaran said on Thursday. |
| “The proposal has been forwarded to the sub-committee and the committee is likely to submit its report soon. Sebi will definitely look at reducing the gap between IPO close and listing date,” he said. |
| This is the first time Sebi has confirmed such a proposal is under consideration. Such a measure by the market regulator assumes significance in the light of the recent Reliance Power’s IPO. |
| The recent market fall, which also saw halt in trading on January 22, was according to market participants accentuated as huge money was blocked in IPOs of different companies. |
| Money was blocked in applications to Future Capital Holdings 6.4-million-share issue and Reliance Power Ltd’s 260-million-share issue. |
Realty company Omaxe announced that in the meeting of the executive committee of the board of directors of the company held on Jan. 31, 2008, the company has proposed to make investments of Rs 200,000 in order to acquire entire 10,000 equity shares of Rs 10 each of Ansh Builders and also the entire10,000 equity shares of Rs 10 each of Arman Builders.
The company posted a 5.46% jump in net profit at Rs 1,230.97 million for the quarter ended December 2007, as compared with Rs 1,167.27 million for the quarter ended September 2007.
Shares of the company gained Rs 6, or 2.11%, to trade at Rs 289.85. The total volume of shares traded was 173,317 at the BSE. (3.41 p.m., Friday)
MUMBAI: The persistent fall in the secondary market has affected the primary market badly. So much so that Emaar MGF Land and Wockhardt Hospitals have had to reduce the price band of their initial public offerings ahead of their opening. A day before the issue was to open Thursday, Wockhardt Hospitals lowered the price band to Rs 225-260 from the earlier Rs 280-310. Emaar MGF also cut the price band by 10 per cent to Rs 540-Rs 630 from the initial Rs 610-Rs 690, a day before the IPO opened Friday. “The price band has been refixed considering the prevailing market sentiments and the developments in the financial markets in India and globally,” Emaar MGF said in a statement. An analyst with a local brokerage said, “investors have turned cautious after the upheaval in the market and would prefer sitting on cash rather than taking a risk investing. This has resulted in fall in IPO grey market premium. Given the market condition, the grey market premium of Reliance Power has come down from Rs 450 to Rs 130. Emaar MGF is trading at a grey market premium of Rs 50-60. Right now, Wockhardt is not enjoying any premium in the grey market.” By reducing price-bands, the companies are trying to attract investors, who would otherwise avoid these IPOs due to "stretched valuations." “The way premium is dwindling in the grey market, it may fall further by the time of listing and investors may end up making losses. This is a cause of concern, which is why the price-bands are being lowered," the analyst said. |
Leading cable maker Cords Cable which was open for subscription between January 21 and 24 saw its QIB portion subscribed 6.8 times, non-institutional category 5.1 times and retail 2.6 times, as per NSE data. The issue had a price band of Rs 125-135. The issue of J Kumar Infraprojects — a civil engineering and infrastructure development company — that was open for subscription between January 18-24 saw its QIB portion subscribed 2.8 times, non-institutional category 1.4 times and retail 1.7 times. The price band was Rs. 110-120. KNR Construction which opened for subscription on January 24 and would close on January 29, saw its QIB portion subscribed by 0.4 times, HNI 0.5 times and retail 0.03 times as on Monday, 5 pm. The price band is fixed at Rs 170-180. The grey market premium for these issues are Rs 100-105 for OnMobile, Rs 20-21 for Cords Cable, Rs 15-16 for KNR and Rs 5-7 for J Kumar. “The amount of subscription is a function of market sentiment. However, the subscription is not a view on the fundamentals alone... There are issues which have been graded 1 or 2 but have been oversubscribed in a bull market,” said Arun Panicker, senior director of Crisil, which had graded the OnMobile IPO 4/5. Industry sources said some of the issuers who are yet to announce the price band may have to do some rethinking. “We are unlikely to see any large issue hit the market before the budget. In fact there are talks that some of the forthcoming issues may also see their price band revised, in line with current market sentiment,” said a source. Some of the forthcoming issues are Emaar MGF, Wockhardt Hospitals, IRB Infrastructure, Shriram EPC, UTI Asset Management, JSW Energy and Mahindra Holidays. The investment banking community, however, seems to be unruffled by the market turmoil. “We are seeing long only investors subscribing to the issue. The short term investor is staying away. Of course, retail sentiment has taken a hit given that they are waiting to see at what level the markets stabilise. Unless it is a quality company with a more than decent following, the attitude will be one of wait-and-watch,” said an investment banker. |
Technical analysts have suggested that day traders can purchase Mcleod Russel stock around Rs 70 with a strict stop loss of Rs 69. The day trading target for the day is Rs 73.
Analysts also said that the next target for the day is Rs 76, if the stock markets remain on positive track.
On Tuesday (29 Jan), the share closed at Rs 70 on BSE. The stock of the company has touched 52-week high of Rs 98.95 and low of Rs 46.45 on BSE.
The company, which has posted a net profit of Rs 89.17 crore for the three months period ended September 2007, has great expectations for the upcoming results for the Oct-Dec quarter.
Mcleod Russel India Ltd has informed that on an Application made by the Company, the Hon'ble High Court at Calcutta has issued directions to convene and hold separate Meetings of the shareholders of The Moran Tea Company (India) Ltd and McLeod Russel India Ltd on February 22, 2008 to consider and if thought fit to approve the Scheme of Amalgamation of The Moran Tea Company (India) Ltd with McLeod Russel India Ltd. Notices to the shareholders of the said Companies will be sent within the prescribed time.
The group’s main activity is to cultivate, manufacture and sell tea. The Group owns tea estates in Assam and Dooars.
The stocks of other companies from the same sector, which are looking good for medium-term trading, include Tata Tea and Bombay Burmah.
The company is in talks with various foreign players for an equity tie-up for the same. As per existing guidelines, foreign direct investment of up to 74% is allowed in telecom services.
The company will tie up with only one company and is yet to begin talks with telecom equipment manufacturers.
The company is revising its fund raising plans due to the meltdown in global markets. It earlier planned to raise USD 1 billion to fund its telecom operations.
Unitech, which had applied for 22 circles through seven different companies, is among the nine new entrants that acquired the licenses on January 10. There are 22 circles in the country, each of which requires a separate license.
Shares of the company closed down Rs 19.9, or 4.85%, at Rs 390.5. The total volume of shares traded at the BSE was 1,048,352. (Tuesday)
The 30-share Sensex, which had lost nearly 60 points in yesterday's trading, today lost further 333.30 points before settling at 17,758.64.
The index touched a high of 18,129.18 and a low of 17,683.51 points.
The National Stock Exchange index Nifty also fell by 113.20 points at 5167.60. It touched the day's low of 5,142.25 and a high of 5,314.30 points.
Marketmen said the selling pressure gathered momentum as the Reserve Bank of India yesterday decided to maintain status quo in key rates after its quarterly monetary policy review.
They said the market players, particularly the foreign institutional investors, were awaiting the outcome of the US Federal Reserve meet on interest rates and refrained from enlarging their positions even at such low levels.
The major pulled to the market were shares from banking, capital goods, refinery and realty segments.
Oil and gas sector index plunged the most by 497.21 points at 10,684.56 followed by capital goods index by 336.15 points at 16,625.91. Realty index fell by 252.88 points at 10,148.19 and bankex index by 220.56 points at 10,899.86.
MUMBAI (Reuters) - India should aim for a growth of at least 8.5 percent in its gross domestic product in 2009, Reserve Bank of India Governor Yaga Venugopal Reddy said on Tuesday.
Reddy, who was speaking at a news conference after the RBI left interest rates unchanged in its policy review, said inflation was not as comfortable as the numbers may indicate.
India's annual wholesale price index rose 3.83 percent in the week to Jan. 12, marginally higher than the previous week's 3.79 percent, but below the central bank's target of 5 percent for the fiscal year 2007/08.
| Reserve Bank of India (RBI) today left all the key rates - Bank Rate, reverse repo, repo and CRR - unchanged in its third quarter review of the annual statement on monetary policy. |
| While Bank Rate has been left unchanged at 6%, reverse repo and repo rates have been held steady at 6% and 7.75%, respectively. Cash Reserve Ratio (CRR) has been left unchanged at 7.5%. CLICK TO DOWLOAD STATEMENT OF RBI GOVERNOR Dr. Y Venugopal Reddy, Governor, Reserve Bank of India, today presented the Third Quarter Review of Annual Statement on Monetary Policy for the Year 2007-08. |
| Highlights Bank Rate, Reverse Repo Rate, Repo Rate and Cash Reserve Ratio (CRR) kept unchanged. The flexibility to conduct overnight or longer term repo including the right to accept or reject tenders under the liquidity adjustment facility (LAF), wholly or partially, is retained. Overall real GDP growth projection for 2007-08 at around 8.5 per cent is retained. The policy endeavour would be to contain inflation close to 5.0 per cent in 2007-08 while conditioning expectations in the range of 4.0-4.5 per cent. While non-food credit has decelerated, growth in money supply and aggregate deposits of scheduled commercial banks continue to expand well above indicative projections. High growth in reserve money is driven by large accretion to RBI’s net foreign exchange assets. Liquidity management will assume priority in the conduct of monetary policy through appropriate and timely action. Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for growth and inflation, the overall stance of monetary policy in the period ahead will broadly continue to be: To reinforce the emphasis on price stability and well-anchored inflation expectations while ensuring a monetary and interest rate environment conducive to continuation of the growth momentum and orderly conditions in financial markets. To emphasise credit quality as well as credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion. To monitor the evolving heightened global uncertainties and domestic situation impinging on inflation expectations, financial stability and growth momentum in order to respond swiftly with both conventional and unconventional measures, as appropriate. Details Dr. Y.Venugopal Reddy, Governor today presented the Third Quarter Review of Annual Statement on Monetary Policy for the year 2007-08. The Review consists of three sections: I. Assessment of Macroeconomic and Monetary Developments; II. Stance of Monetary Policy; and III. Monetary Measures. Domestic Developments Real GDP growth moderated to 9.1 per cent in the first half of 2007-08 from 9.9 per in the first half of 2006-07. Inflation, based on variations in the wholesale price index (WPI) on a year-on-year basis, eased to 3.8 per cent as on January 12, 2008 from its peak of 6.4 per cent at the beginning of the financial year and from 6.2 per cent a year ago. Prices of primary articles registered a year-on-year increase of 3.9 per cent as on January 12, 2008 as compared with 9.5 per cent a year ago. Manufacturing inflation eased to 3.9 per cent as on January 12, 2008 from 5.8 per cent a year ago. The price of the Indian basket of international crude has registered a sustained increase during 2007-08 from US $ 66.4 in April-June, US $ 72.7 in July-September, US $ 85.7 in October-December 2007 to US $ 88.9 per barrel as on January 25, 2008. Inflation based on the consumer price index (CPI) for industrial workers (IW) declined to 5.5 per cent on a year-on-year basis in November 2007 from 6.3 per cent a year ago. The CPI for urban non-manual employees (UNME), agricultural labourers (AL) and rural labourers (RL) also declined to 5.1 per cent, 5.9 per cent and 5.6 per cent, respectively, in December 2007 as compared with 6.9 per cent, 8.9 per cent and 8.3 per cent a year ago. As on January 4, 2008 money supply (M3) increased by 22.4 per cent on a year-on-year basis which was higher than 20.8 per cent a year ago and well above the projected trajectory of 17.0-17.5 per cent indicated in the Annual Policy Statement for 2007-08. Reserve money increased by 30.6 per cent on a year-on-year basis as on January 18, 2008 as compared with 20.0 per cent a year ago. In the current financial year, the growth in aggregate deposits of scheduled commercial banks (SCBs), on a year-on-year basis, at Rs.6,00,761 crore (25.2 per cent) was higher than that of Rs.4,44,241 crore (22.9 per cent) a year ago. On a year-on-year basis, non-food credit of SCBs expanded by Rs.3,82,155 crore (22.2 per cent) as on January 4, 2008 on top of the increase of Rs.4,16,418 crore (31.9 per cent) a year ago. The year-on-year growth in total resource flow from SCBs to the commercial sector decelerated to 21.7 per cent from 30.1 per cent a year ago. Banks’ holdings of Government and other approved securities at 29.1 per cent of their net demand and time liabilities (NDTL) as on January 4, 2008 was marginally higher than 28.6 per cent a year ago. The overhang of liquidity as reflected in the sum of LAF, MSS and the Central Government’s cash balances increased from Rs.85,770 crore at end-March 2007 to Rs.2,58,187 crore on January 17, 2008 before declining to Rs.2,32,809 crore on January 24, 2008. During the third quarter of 2007-08, money, debt and foreign exchange markets remained generally stable, despite large movements in liquidity conditions. Rapid growth in turnover in the foreign exchange market was sustained by large surplus conditions in the spot market as average daily turnover increased to US $ 50.1 billion for the quarter ended December 2007 from US $ 27.6 billion in the corresponding quarter of the previous year. During March 2007-January 2008, pubic sector banks (PSBs) that were earlier paying higher interest rates on longer term deposits, readjusted their interest rates downwards by 25-50 basis points, while those offering lower deposit rates for similar maturity earlier increased their deposit rates by 50-75 basis points. During March 2007-January 2008, the benchmark prime lending rates (BPLRs) of PSBs increased by 25-75 basis points from a range of 12.25-12.75 per cent to 12.50-13.50 per cent. The BSE Sensex increased from 13,072 at end-March 2007 to 18,362 on January 25, 2008 registering an increase of 40.5 per cent over end-March 2007. The gross market borrowings of the Central Government through dated securities at Rs.1,47,000 crore (Rs.1,30,000 crore a year ago) during 2007-08 so far (up to January 25, 2008) constituted 94.6 per cent of the budget estimates (BE) while net market borrowings at Rs.1,03,092 crore (Rs.91,432 crore a year ago) constituted 94.1 per cent of the BE. External Developments During April-November 2007, merchandise exports rose by 21.9 per cent in US dollar terms as compared with 26.2 per cent in the corresponding period of the previous year. Import growth was also lower at 26.9 per cent as compared with 27.4 per cent in the previous year. The merchandise trade deficit widened to US $ 52.8 billion from US $ 38.5 billion in the previous year. While oil imports recorded a lower growth of 9.8 per cent as compared with 42.0 per cent a year ago, non-oil imports increased by 35.3 per cent as compared with 21.3 per cent a year ago. Foreign exchange reserves increased by US $ 85.7 billion during the current financial year so far and stood at US $ 284.9 billion on January 18, 2008. Over the end-March 2007 level, the rupee appreciated by 9.61 per cent against the US dollar, by 8.85 per cent against the pound sterling and by 0.95 per cent against the Japanese yen, but remained unchanged against the euro as on January 25, 2008. Gobal Developments According to the World Economic Outlook (WEO) of the International Monetary Fund (IMF) released in October 2007, the forecast for global real GDP growth on a purchasing power parity basis is placed at 5.2 per cent for 2007 as compared with 5.4 per cent in 2006 and is expected to decelerate further to 4.8 per cent in 2008. In the US, real GDP growth is expected to slow down from the fourth quarter of 2007 onwards as the deepening housing market correction and ongoing financial market turmoil are expected to curb growth more severely, although exports could play a mitigating role. Globally, inflationary pressures have re-emerged as a key risk to global growth. Inflation pressures have raised concerns in the US, UK, the euro area and in some of the emerging market economies (EMEs) such as China, Malaysia, Indonesia and Chile. The persistence of high food prices, oil prices sustained at elevated levels and continued high prices of other commodities pose significant inflation risks for the global economy and challenges for monetary policy worldwide. The turbulence in the international financial markets since July 2007, triggered by defaults in the US subprime mortgage market, deepened in subsequent months. These unusual developments indicated heightened uncertainties and emerging challenges for the conduct of monetary policy, especially for EMEs. With the beginning of the turbulence, central banks of advanced economies undertook an increasingly expansive monetary policy course by cutting policy rates (US Federal Reserve) and also supplying financial markets with additional liquidity. Some central banks such as the US Federal Reserve, Bank of England and the Bank of Canada have cut policy rates during the third and fourth quarters of 2007 after financial markets were significantly affected by turbulence. Central banks of several countries, including the euro area, New Zealand, Japan, Korea, Malaysia, Thailand and Brazil have not changed their rates in the last quarter of 2007. The central banks that have tightened their policy rates in recent months include the Reserve Bank of Australia, the People’s Bank of China, the Banco Central de Chile and Banco de Mexico. Several central banks confronted with volatile and large capital flows have employed a variety of measures to manage and stabilise these flows with a view to reducing overheating, currency appreciation and the economy's vulnerability to sharp reversals of flows. A common feature among the policies adopted by most of them is monetary tightening involving either hikes in policy rates or hikes in reserve requirements or both. Measures directly aimed at managing capital flows are also in evidence in many EMEs. Overall Assessment Real GDP originating in agriculture and allied activities has accelerated in the first half of 2007-08 in comparison with April-September 2006 and subsequent developments seem to confirm the positive outlook for agriculture. Assuming that there are no exogenous shocks, either global or domestic, the prospects for the industrial sector over the rest of 2007-08 remain reasonably positive at this juncture. While the prospects for services continue to be favourable at this juncture, uncertainties surrounding the evolution of global developments could affect the outlook. Domestic activity continues to be investment driven, supported by external demand. Building up of supply capacities, both new and existing, is strongly underway as reflected in the sustained demand for domestic and imported capital goods. Key indicators point to the persistence of aggregate demand pressures, including into the near-term. Indications are getting stronger of upside inflationary risks in the period ahead. Domestic monetary and liquidity conditions continue to be more expansionary than before and are likely to be amplified by global factors. There was a large increase in the total overhang of liquidity over the third quarter of 2007-08, reflecting the sizeable expansion in primary liquidity generated by the large accretions to the Reserve Bank's net foreign assets. In the foreign exchange market, large inflows have imposed persistent upward pressures on the exchange rate of the rupee which have become accentuated in the wake of cuts in the US Federal Funds target rate. There has been some improvement in the finances of the Central Government as the gross fiscal deficit has declined indicating that adherence to the Fiscal Responsibility and Budget Management (FRBM) rules in the current financial year is on track. Consensus forecasts indicate a slowing of the global economy in 2007 and 2008 with the US subprime crisis, food and crude prices posing the gravest risks. While the dangers of global recession are relatively subdued at the current juncture and consensus expectations seem to support a soft landing, the upside pressures on inflation have become more potent and real than before. Headline inflation has trended up in the US, the euro area, Japan and China. Overall, inflationary pressures have firmed up with implications for the outlook for 2008. Developments in global financial markets present several issues that need to be monitored carefully in the context of the implications for EMEs. First, corporate credit spreads and those on mortgage-backed securities have widened since early October as concerns relating to the possibility of prolonged disruption to credit intermediation have deepened. Second, the impact of the recent financial market turmoil has been sizeable on banks, particularly internationally active banks on both sides of the Atlantic. Third, the responses of central banks to recent events have demonstrated that ensuring financial stability can, under certain circumstances, assume overriding importance relative to other more explicitly pursued goals. In view of the evolving global macroeconomic prospects in the near-to-medium term, EMEs face several challenges. First, they face risks from tightening of credit standards in advanced economies. Second, dependence on imports and higher energy intensity of output may make EMEs more exposed to inflation shocks. Third, in the wake of some macroeconomic and political developments, international financial markets respond differently to the EMEs. Fourth, the self-correcting mechanisms in financial markets happen to operate far less efficiently in the EMEs. Fifth, real sector flexibilities may be far less in EMEs. Finally, the distinction between flexibility and volatility in the context of financial markets in EMEs has to be based on the preparedness of the markets and the market participants. Stance of Monetary Policy The projection of overall real GDP growth in 2007-08 is maintained at around 8.5 per cent for policy purposes, assuming no further escalation in international crude prices and barring domestic or external shocks. The policy endeavour would be to contain inflation close to 5.0 per cent in 2007-08 while conditioning expectations in the range of 4.0-4.5 per cent so that an inflation rate of around 3.0 per cent becomes a medium-term objective. The rate of money supply has picked up coincident with a jump in the growth of reserve money, driven by the accretion to the Reserve Bank's foreign exchange assets. Moderating money supply in alignment with the indicative projections of 17.0-17.5 per cent set out in the Annual Policy Statement of April 2007 may warrant appropriate responses, given the considerations for ensuring macroeconomic and financial stability going forward. In view of the risks associated with international financial developments impacting balance sheets of corporates with sizeable external liabilities, banks are urged to review large foreign currency exposures and to put in place a system for monitoring such unhedged exposures on a regular basis so as to minimise risks of instability in the financial system under the current highly uncertain conditions. Banks are also urged to carefully monitor corporate activity in terms of treasury/trading activity and sources of other income to the extent that embedded credit/market risks pose potential impairment to the quality of banks' assets. In the context of a more open capital account and the size of inflows currently, public policy preference for a hierarchy of capital flows with a priority for more stable components could necessitate a more holistic approach, combining sectoral regulations with broader measures to enhance the quality of flows and make the source of flows transparent. In this context, it is critical for public policy to effectively, demonstrably and convincingly indicate commitment to managing capital flows consistent with macro fundamentals through appropriate and decisive policy actions. The setting of monetary policy in India has been rendered complex. On the one hand, the underlying fundamentals of the economy remain strong and resilient and the outlook continues to be positive. At the same time, while there is no visible or immediate threat to financial stability in India from global developments, the need for continued but heightened vigilance has increased with an emphasis on readiness to take timely, prompt and appropriate measures to mitigate the risks to the extent possible. A disaggregated analysis of supply and demand factors across select sectors would enable appropriate public policy responses keeping in view the employment intensity of some of these sectors. Monetary policy, per se, can essentially address issues relating to aggregate demand but the associated policies in the financial sector could, to the extent possible, take account of the evolving circumstances as reflected in the disaggregated analysis. In view of the prevailing liquidity conditions and the sustained profitability of banks as reflected in net interest margins, there is a need for banks to undertake institutional and procedural changes for enhancing credit delivery to sectors that are employment-intensive. Over the period ahead, liquidity management will continue to assume priority in the conduct of monetary policy and developments having implications for liquidity management would warrant appropriate and timely action. The Reserve Bank will continue with its policy of active demand management of liquidity through appropriate use of the CRR stipulations and open market operations (OMO) including the MSS and the LAF, using all the policy instruments at its disposal flexibly, as and when the situation warrants. Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for growth and inflation, the overall stance of monetary policy in the period ahead will broadly continue to be: To reinforce the emphasis on price stability and well-anchored inflation expectations while ensuring a monetary and interest rate environment conducive to continuation of the growth momentum and orderly conditions in financial markets. To emphasise credit quality as well as credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion. To monitor the evolving heightened global uncertainties and domestic situation impinging on inflation expectations, financial stability and growth momentum in order to respond swiftly with both conventional and unconventional measures, as appropriate. Monetary Measures Bank Rate kept unchanged at 6.0 per cent. The reverse repo rate and the repo rate under the LAF are kept unchanged at 6.0 per cent and 7.75 per cent, respectively. The Reserve Bank retains the option to conduct overnight or longer term repo/reverse repo under the LAF depending on market conditions and other relevant factors. The Reserve Bank will continue to use this flexibility including the right to accept or reject tender(s) under the LAF, wholly or partially, if deemed fit, so as to make efficient use of the LAF in daily liquidity management. CRR kept unchanged at 7.5 per cent. The Annual Policy Statement for the year 2008-09 will be announced on April 29, 2008. |
| Time and again, in the past four years, the markets have corrected and soon bounced back, only to confirm that India’s secular bull run continues. However, this time around, the market’s fall seems to be a bit different, for the fact that the fall is quite steep in absolute terms. In a matter of seven trading sessions, the S&P CNX Nifty fell 21 per cent or 1,388.55 points (from 6,200 on January 11 to 4,899.30 on January 22). During the same period, the BSE Sensex lost 4,097.51 points or 19.67 per cent. |
| Although it has recovered about 40 per cent of the losses, in hindsight, there aren’t many reasons that come as a surprise for the fall. For one, during October 15, 2007 to January 1, 2008, out of the 33 global indices (representing Americas, Europe and Asia), only 4 were up and, that too, marginally by under 5 per cent. Among losers, many reported double-digit losses (maximum was 16 per cent; China’s Shanghai composite was down 12.7 per cent). |
| On the other hand, the Indian markets were up – Nifty was up 6.52 per cent and Sensex by 8.36 per cent. The outperformance came at a time when the corporate earnings growth was apparently slowing down. The reason for global markets sliding was mainly due to the crisis in the US, including the sub-prime issue and a looming threat of a recession, which in turn is bad news for most global economies, as many of them are big exporters to US. |
| In India’s case, the market seemed to be believing that the country could withstand the storm as the domestic economy would be the least affected given its low trade exposure to the US (as a percentage of GDP growth) which meant little impact on corporate earnings, and thus, share prices. But, most experts don’t agree with this decoupling theory anymore. |
| Says Gul Teckchandani, investment advisor, “I don’t agree with the decoupling theory. It doesn’t work selectively. India is coupled with the world. As far as the sentiment angle is concerned we are coupled, but not much from the business angle.” |
| Ridham Desai, managing director, Morgan Stanley says, “If the world suffers a US recession-led sell off, we do not think Indian equities will be able to decouple, at least, in the short run. The good news is that as and when the valuations correct on the back of such a sell-off, Indian equities could outperform emerging markets helped by India’s long-term structural story, RBI’s comfortable liquidity position, a benign political environment, a successful soft landing in economic conditions and strong corporate balance sheets.” |
| Even if one assumes that India were to remain largely insulated from the business point of view, it is still vulnerable to the movement in global investment flows. The market appears to have forgotten that the rise in Indian markets so far has largely been driven by foreign flows, which have not come in so far, in 2008. In fact, FIIs have sold stocks worth Rs 12,093 crore in the cash segment, while they were net buyers of Rs 4,422 crore in the derivatives market between January 1 and January 24, 2008. Additionally, there were many pockets in the market that were overvalued. Adds Teckchandani, “The markets fell because of the excesses and speculation.” The highly leveraged positions of many market players were also among the crucial factors responsible for the crash. |
| R Rajagopal, chief investment officer, Cholamandalam AMC Limited adds: “It was all to do with the futures and options open interest in the market. The contagion effect of the unwinding in the global markets caused the Indian markets to slide as well. The way it fell was because of the squaring off of existing open interest, which is visible from the fact that the stocks in the F&O segment fell by a wider margin as compared with others.” |
| Lessons to learn |
| One of the obvious learnings for investors is to avoid leveraged positions viz. high exposure in the futures and options (F&O) segment. Explains Teckchandani, “Avoid leverage. I’ve been saying that people who do F&O trading have a pathetic future.” |
| Anoop Bhaskar, CIO, UTI Mutual Fund, adds, “Investors have to limit their expectations and cannot think of the markets as a 100-metre sprint. It is a marathon and you have to be patient.” In simpler words, look at a longer term of over a year. |
| The other one deals with risks and rewards. Said Vikas Khemani, co-head, institutional equities, Edelweiss Capital, “Markets are driven by greed and fear. Markets rise, greed grows. When reward per unit of risk is high as is the case now, investors do not take risk. Investors are not looking at risk but are focusing only on returns. Risk factor should be borne in mind before investing. In markets like these, it is equally important to remember how much you can lose and not just focus on how much you can make.” |
| Is the worst over? |
| With the markets down and many investors having lost money, the next obvious question is whether there is more downside from current levels or whether the worst is over. The answer to this one is not easy, considering that a lot of concerns still exist. For one, nobody knows whether the US will eventually manage a soft landing or whether it will experience a recession and the eventual impact on global economic growth. Says UTI’s Bhaskar, “With 50 per cent of world output headed towards the US, the world is affected by any slowdown in the US. India cannot be immune.” |
| Says A Balasubramanian, CIO, Birla Sun Life AMC, “Decoupling may work to the extent of economic activity as domestic consumption will remain high in spite of a global economic slowdown. However, from a corporate growth point of view, since industries are globally interconnected, those with higher global interdependence are bound to suffer. Add to this, local investors’ sentiment responds more to the global sentiment.” |
| Even assuming that India were to be largely insulated, the global growth slowdown would translate into a decline in global stock markets. Thus, in that sense, as valuations of other markets decline, on a relative basis, India would appear to be expensive -before the market crash, India was amongst the most expensive markets in terms of valuations trading at over 20 times estimated FY09 earnings. |
| On the positive side, some India-based investment experts seem to believe that the worst may be over and the 15,500 points that the BSE Sensex made on Tuesday, could be the deemed as bottom. On the other hand, a few others are still not so sure. That’s due to the lack of clarity on the possibility of a US recession and its impact on global economic growth. Domestic factors like interest rates, inflation and 2008-09 Budget among others, will also have some bearing on the market trend. Hence, they believe that these factors will determine the future course of the market. |
| For long-term investors though, this could be an opportune time to make money. Explains Tridib Pathak, chief investment officer, Lotus India AMC, “I think disciplined investors love the period of pain, because that is the time when you get serious long-term investment opportunities and attractive values.” Adds Vikas Khemani, “This is the time to take risk as the long term story is sound and intact. Even if there is short term pain, stick on.” |
| What next? |
| Assuming that there may still be some downside left, what should investors do now? A fall in the popular indices or share prices across the board may not necessarily mean that things have changed. It’s perhaps indicating that the fall has corrected the excesses that existed in various pockets. But, more importantly, what it also signals is that quality growth stocks can now be bought at reasonably fair valuations. Broadly speaking, the price-to-earnings (PE) ratio of the market has fallen from 22 times to 17-18 times estimated FY09 earnings. And, given that corporate earnings are likely to rise between 18-25 per cent a year, over the next two years, the PEG (PE to growth) ratio at under one time provides comfort. A ratio of under one, to an extent and largely applicable to non-commodity stocks, suggests that valuations are not exorbitant. |
| But before going to the sectors or stocks to invest in, it is important to note that the next three to six months or a bit more could be painful given that some uncertainties still exist. Hence, a long-term perspective of three to five years is most desirable. |
| Having said that and also considering the macro environment, it’s advisable to play safe by investing in companies with exposure to domestic consumption or investment plays. For instance, companies operating in the infrastructure and construction, banking and financial services, retail, telecom, entertainment, capital goods and engineering, and FMCG space, are better placed than sectors like information technology or textile exports, where companies derive a large chunk of their revenues from countries like the US. A firm rupee, uncertainty regarding IT budgets of US-based companies and cost pressures (rising wages) are among the factors that are weighing heavily on domestic IT stocks. The current environment suggests that good days are far from sight. |
| As a contrarian strategy, investing in companies from the automobile sector can prove to be beneficial and perhaps capable of providing a boost to overall returns. The reasons for the contrarian strategy hinges on the belief that sooner or later, given the rising interest rate differential between interest rates in India and abroad, the benign domestic inflation and subdued crude prices (under $90 a barrel), the RBI may be pushed to lower interest rates. Should that happen, it could lead to better growth for auto companies. |
| Overall, experts believe that the Indian markets can deliver decent returns ranging 15-20 per cent annually for the next two years. And prudent stock picking can help achieve even better returns. |
| So, be disciplined, don’t over leverage or take higher risks, maintain your asset allocation as per your long-term goals, be patient and be discreet in picking stocks. For a list of investment worthy stocks. |
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