RBI may not cut rates unless inflation falls

RBI has become more mindful of growth risks and it is unlikely to shift from its anti-inflationary stance till inflation peaks out, says a Kotak Economic Research report

Despite slowing further to 5.3% in 2QFY13 from 5.5% the previous quarter, economic activity is stabilizing at current levels and is likely to see a saucer-shaped recovery going ahead, according to a Kotak Economic Research report on the Indian economy today. The Kotak report maintains its FY2013 GDP estimate at 5.6%, with slight improvement in FY2014 to 6.2%.


According to the Kotak report, even as the RBI (Reserve Bank of India) has possibly become more mindful of growth risks, it is unlikely to shift from its anti-inflationary stance till inflation peaks out. Hence, Kotak does not expect any policy action in the 18 December 2012 mid-quarter policy meeting.


The Kotak report observes that liquidity in December is likely to remain tight given:

(1) advance tax outflows,

(2) continued wedge between credit-deposit, and

(3) likely pick-up in currency in circulation due to state elections.


With the RBI resuming OMOs (open market operations) for liquidity management, the possibility of a CRR cut in the December meeting has significantly reduced but a final call can be taken closer to the policy meeting, says the Kotak analyst.


On the agriculture sector, the Kotak report says that the full impact of a likely sub-par kharif harvest would be felt in 3QFY12 with a contraction in agriculture growth acting as a drag on growth. It expects agriculture sector growth to fall sharply to 1% in FY2013 from 2.8% in FY2012 and pick up to 2.0% in FY2014, helped by low base effect and expectation of a normal monsoon.


The Kotak report does not expect much recovery in the capex cycle and consequently expects the industrial sector to register a muted growth of 1.7% in FY2013.


Lastly, the Kotak report observes that the drop in government spending in the current quarter may further impact the private consumption slowdown. Private consumption has been slowing (3.7% in 2QFY13 compared to 4.0% in 1QFY13) partly due to sustained high inflation. It does not expect dramatic downward correction as rural wages continue to remain strong, although slowing, keeping rural consumption relatively insulated. It expects the services sector growth to be at 7.6% in FY2013 against 8.5% in FY2012.


BSE Sensex, Nifty pause: Monday Closing Report

 For those long, watch out if Nifty closes below the previous day’s low

The Indian market, after witnessing a 4.5% gain in November, started the new month on a subdued note as it snapped its four-day winning streak as cautiousness prevailed ahead of the crucial vote in Parliament on the government’s recent reforms. On Friday we had mentioned that we continue to see the uptrend remaining firm, however, for those long, watch out if Nifty closes below the previous day’s low for a reversal in trend. The National Stock Exchange (NSE) saw a volume of 82.74 crore shares and an advance-decline ratio of 905:549.


The market opened flat as investors preferred to wait and watch as the political events unfold this week which will have a bearing on the reforms programme of the UPA government. The Nifty opened two points down at 5,878 while the Sensex started off the day at 19,343, up three points over its previous close.


The HSBC India Manufacturing Purchasing Managers’ Index (PMI)—a measure of factory production—stood at 53.7 in November, up from 52.9 in October. The November data marks the fastest pace in five months, driven by a strong pick up in new orders and improved purchasing activity.


The manufacturing data lifted the market to the day’s high in early trade with the Nifty rising to 5,899 and the Sensex going up to 19,416. However, profit taking after the recent four-day rally saw the benchmarks dipping into the negative in the first hour.


The indices were range-bound in morning trade in the absence of any triggers. The market made a feeble attempt to emerge into the green in noon trade, but the move was shot down by sellers.


The benchmarks remained in the negative in the post-noon session as cautiousness prevailed ahead of the vote in Parliament on the FDI issue. The market touched its lows around 2.45pm with the Nifty falling to 5,855 and the Sensex going down to 19,257.


The market ended its four-day winning streak and closed in the red, but off the lows on the back of a minor recovery in late trade. The Nifty settled nine points lower at 5,871 and the Sensex finished the day at 19,305, down 35 points from its previous close.


While the Sensex closed marginally lower, the broader indices closed with good gains. The BSE Mid-cap index surged 1.21% and the BSE Small-cap index climbed 0.86%.


The top sectoral gainers were BSE Realty (up 1.35%); BSE Metal (up 0.80%); BSE Power (0.65%); BSE Consumer Durables (up 0.55%) and BSE Oil & Gas (up 0.47%). The losers were BSE Bankex (down 0.40%); BSE Fast Moving Consumer Goods (down 0.34%) and BSE TECk (down 0.14%).


Thirteen of the 30 stocks on the Sensex closed in the positive. The main gainers were BHEL (up 1.59%); State Bank of India (up 1.53%); Tata Steel (up 1.36%); Reliance Industries (up 1.23%) and Mahindra & Mahindra (up 1.15%). The top losers were HDFC Bank (down 2.37%); Bharti Airtel (down 1.76%); GAIL India (down 1.06%); ONGC and NTPC (down 0.89% each).


The top two A Group gainers on the BSE were—Videocon Industries (up 12.22%) and CRISIL (up 10.39%).

The top two A Group losers on the BSE were—Tata Communications (down 3.69%) and HDFC Bank (down 2.37%).


The top two B Group gainers on the BSE were—Punjab Communications (up 19.98%) and Syncom Healthcare (up 19.79%).

The top two B Group losers on the BSE were—MIC Electronics (down 12%) and Aarya Global Shares & Securities (down 11.80%).


Out of the 50 stocks listed on the Nifty, 23 stocks settled in the positive. The major gainers were ACC (up 3.87%); UltraTech Cement (up 3.01%); SBI (up 1.83%); RIL (up 1.68%) and Jaiprakash Associates (up 1.51%). The key losers on the index were HDFC Bank (down 2.44%); IDFC (down 2.28%); Bharti Airtel (down 1.82%); GAIL (down 1.49%) and ONGC (down 1.28%).


Markets in Asia closed mixed as positive manufacturing data from China boosted some indices while concerns about the US fiscal woes pressurised others. The HSBC China manufacturing Purchasing Managers’ Index (PMI) rose to 50.5 in November from 49.5 in October. This is the first time since October 2011 the headline number has topped the 50-point line that differentiates growth and contraction. Meanwhile, US lawmakers are discussing the budget to help avert the “fiscal cliff”. Failure to come up with a budget deal would trigger more than $600 billion of automatic tax increases and spending cuts next year.


The Shanghai Composite dropped 1.035; the Hang Seng tanked 1.19%; the KLSE Composite declined 0.22% and the Straits Times fell 0.14%. Among the gainers, the Jakarta Composite advanced 0.62%; the Nikkei 225 rose 0.13%; the Seoul Composite gained 0.37% and the Taiwan Weighted settled 0.26% higher.


At the time of writing, the key European indices were trading with gains and the US stock futures were marginally in the positive.


Back home, foreign institutional investors were net buyers of shares totalling Rs1,611.43 crore on Friday whereas domestic institutional investors were net sellers of equities amounting to Rs798.63 crore.


Media firm Jagran Prakashan (JPL) today said its board has approved to raise up to Rs150 crore through issue of securities to augment its resources as well as to retire debt. The company plans to use the proceeds to augment its long-term resources and retire its high interest bearing short-term debt. The stock gained 2.01% to settle at Rs104 on the NSE.


United Bank of India today said it proposes to raise Rs 300 crore from bonds to fund its business growth. The bank has finalised the issue of unsecured, non-convertible, perpetual debt instrument of Rs1 lakh each at par for an amount of Rs200 crore with a green shoe option of another Rs100 crore on private placement basis, United Bank of India said in a filing on the BSE. The stock closed 1.41% higher at Rs75.60 on the NSE.


Private carrier Jet Airways today said it has expanded its code-share arrangement with Japan’s All Nippon Airways. The code-share with Nippon offers travellers enhanced network connectivity between Japan and India, a Jet Airways release said, adding that the arrangement will enable both Jet Airways and All Nippon passengers to fly between Tokyo and Osaka to various points across India on connecting flights operated by both carriers. The stock jumped 5.36% to close at Rs555.30 on the NSE.


Investing abroad? Consult the locals

If your capital is considering a bit of international travel in search of sunnier returns, be sure to ask the locals. They always know the best places to invest

Investors and economists have various ways to determine the economic growth potential of a given country. They look at population growth, natural resources, levels of urbanization, infrastructure, export growth, manufacturing, the local stock market and other aspects. In deciphering a mountain of statistics, they often forget to ask the real experts: the locals. I have already written another column about flight capital, but there is an even stronger indicator: when the locals vote with their feet. For long-term growth this is perhaps the more important number, because although a local investor may seek other investment opportunities on a temporary basis, an emigrant is facing a major and very uncomfortable change in his life which is never undertaken without very serious consideration of his prospects at home. This is especially true for the best educated and most highly motivated.


Although wars and ethnic or religious persecution certainly create a fair share of refugees, most of the emigrants leave for economic reasons. A recent example is Greece. Greece has been sending its people in large numbers to various parts of the world for the past two hundred years. This emigration recently slowed until the crisis. Now with the economy in free fall, many skilled Greeks including successful academics and bankers have already left. Students are opting for study in other countries. Professionals are opting for advanced training abroad. Like most emigrants, they prefer countries with a strong diaspora like the US and Canada or Australia.


The Mexican emigration to the United States is another example. One in ten Mexican citizens lives in the US. Together with their US born children, they make up a population of 33 million. Prior to the year 2000, Mexico had little economic growth and less opportunity. Between 1995 and 2000 some 3 million Mexicans moved to the United States and only 700,000 returned. But that began to change in 2005, when the emigrants to the US started to equal the ones who went home. With slow growth in the US, and much more vibrant economy in emerging Mexico, the brain drain has moved into reverse toward Mexico. Migrants decided there was a much better economic future south of the border than in the north.


Most of the investment community sees the BRIC countries (Brazil, Russia, India and China) as hot beds of sustainable growth. This appears to be true if you look at many of the usual metrics. But the locals don’t see it that way. The citizens of Russia and China want out. Brazilians and Indians are far more interested in staying home.


A poll taken last year showed that 22% of the adult population of Russia would like to leave. Four years ago it was only 7%. The most recent number is even higher than the 18% who wanted to leave the mess left after the collapse of the Soviet Union. As usual the most motivated are often the most talented entrepreneurs and students. Almost a third of people aged 25 to 39 living in large cities earning five to ten times the average income want to emigrate. The best students try to get educations in the US. Once there 77% of the Russian science and engineering students stay back. The very rich have left as well. A study of 19 Russian businessmen with more than $50 million showed that 88% had moved their personal wealth abroad along with their families. The joke in Russia is that the Soviet government used to punish dissidents by expelling them, now they punish them by keeping them in.


The wildly optimistic view of Chinese growth prospects that seems to inhabit most investors’ imaginations is definitely not shared by those closest to it. This is true of all levels of society. A survey of Chinese merchants with personal wealth over $16 million showed that 27% had already emigrated and another 47% were considering doing so. They did not only take their talent, between 1997 and 2010 it is estimated that $2.7 trillion left China as well. The skilled professionals are also leaving. In 2010, the last year for which data is available, 500,000 left for OECD countries.


In contrast, the according to the locals, the prospects of India and Brazil are quite bright. Although there are 22 million Indians living all over the world the net migration over the past decade has been falling and there has been a sharp increase of people of Indian descent returning home. Like India, Brazil also has a large diaspora of 3.1 million people and 1.2 Brazilians go to the US every year, but as tourists not as immigrants. 


So if your capital is considering a bit of international travel in search of sunnier returns. Be sure to ask the locals. They always know the best places to invest.

Read other articles from William Gamble by clicking here.


(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)


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