Life the Sahir way

"Main zindagi ka saath nibhata chala gaya,

Har fikr ko dhuye mein udata chala gaya.

Barbadiyon ka sog manana fizool tha,

Barbadiyon ka jashn manata chala gaya.

Jo mil gaya usi ko muqaddar samajh liya,

Jo kho gaya main usko bhulata chala gaya.

Gham aur khushi mein fark na mehsoos ho jahaan,

Main dil ko uss makaam pe lata chala gaya."

- Sahir Ludhiyanvi

Story of global meltdown, Capital Inflows & Liquidity

News wires have been glut with news related to weak US economy data; newer sub prime delinquencies and unwinding of carry trades and among all increasing Indian stock market index

No wonder there has been excesses perpetrated by US market. At the time when the US Federal bank should have tightened the economy, allowed those free money and result was subprime balloon to burst today. Today the same central bank is resorting to allow further free money to manage a crisis. (Note: US Fed cut the benchmark rates twice to 4.50%)

No wonder, tightness in liquidity and slow down in economy is visible in fall of asset prices. US, UK and Japan stock markets are trading below their 14 months low levels. Once a poster currency, USD has been battered against all major currencies and woes doesn’t seem to fade away. USD is currently trading at all time lows against Sterling, Euro and Swiss Franc

Ensuing weak data and tight liquidity bolster the expectation of further cut in US rates. Rate cuts increased the flow to emerging markets resulting in higher volatility and surge in asset prices. Cut in interest rates have also fueled the commodity prices to higher levels. As a hedge against slowdown and weaker USD precious metals have touched all time highs. Gold is trading above USD 800 per ounce

In the wake of higher crude oil prices and tight liquidity there are clear worrying signals for global economy

While Indian diaspora continues to be in growth trajectory, regulator faces the conundrum of balancing capital inflows, exchange rate and price stability. Recent measures including CRR hike, regulation of capital flows, ban on participatory notes and routine forex interventions have left market groping in dark about the future policy action

Indian capital market attracted nearly USD 16 bn during Apr'07-Nov'07. Foreign Exchange reserves as of Nov 02’2007 increased to USD 266.5 bn as against USD 199.17 bn as on March 31’ 2007. During the same period Indian INR appreciated nearly 10% against USD

Inflation (WPI) has shown a decreasing trend over the period of last five months and is largely due to higher base effect of previous year. Inflation for the week ended Oct 27th stood at 2.97%. The base effect appears fading in coming months and inflation appears to be in the vicinity of more than 4% by March’07

Globally crude oil prices have risen by more than 30% over the period of five months. Further to it, the fuel as a component in WPI has shown a negative inflation as against overall WPI number. This is noticeable in the context of not passing of fuel price hike to the consumer. It is estimated that increase in fuel prices alone would push inflation up by nearly 1%. Considering this inflation is expected to be in the range of 5% by March 2007

As a cost free tool RBI resorted to repetitive increases in Cash reserve requirements. RBI raised CRR for the third time during the year and increased by 1.25% so far to 7.5%

In a surprise move most of the banks have reduced deposit rates across maturities and this has been mostly aimed to counter increased pool cost on account of increased CRR requirement. In spite of festival season and slew of measures to boost retail demand, slow down in credit off take has not shown any sign of reversal. The YOY credit growth for the fortnight ending Oct 26th slipped to 22.47% as against near 28% at the beginning of FY’07


Further corrections in global asset prices can not be ruled out. However, emerging markets would continue to see higher valuations on account of further rate cuts in developed economies and better return on investments.

Slower credit off-take would provide ground for lower interest rate regime but this moderation seems unlikely till the clarity on capital inflows emerges. Given huge inflows and higher prices, RBI would be right to maintain a tough stance. The direction of near term interest rates would be critically dependent on RBI policy targeting the liquidity conditions

Indian equity market story remains intact and any developed country loss is India's gain. Its right the global turmoil would be contagious but in near term India stays insulated. Any investor requires greener pastures and india and other emerging markets provide the same. As long as cheaper money trade off available India money would keep flowing into emerging markets. However, while we wallow in this borrowed pleasure, caution cant be unwarranted