Sublime Consulting

Over the last one week the ‘hot topic’ was the ‘P-Notes’ aross the length and the breadth of the country.
While there has been heated debates on the merits and de-merits of SEBI draft guidelines[which would become a directive with possibly few minor changes by tomorrow] on the regulation of P-Notes into the country, most of us have failed to see the bigger picture.

One of the first reports on the impact of unabated capital inflows into emerging markets[ post fed rate cut] was filed by Andy Mukherjee of Bloomberg, where he talks about how central bankers in emerging markets are grappling with the sudden rush of money, while the currency traders are raking it all..
Another follow up report on the topic by the author on the Hedge Fund’s love for India takes it further. He has taken a balanced view on the issue.

Interestingly, according to the latest IMF report on emerging market data , one third of the net surge of capital inflows into country leads to sudden stop or a currency crisis.
Some more interesting observations could be seen on Niranjan Rajadhyaksha’s column. More so in the context of a country like ours which has current account deficits and relies a lot on portfolio flows versus the FDI. Of course, the skew towards capital flows have reduced over a period of years with the increase in FDI investments.

With the rupee appreciating to double digits, its a cause for concern not just for exports but for the overall economy. The surge of capital inflows increases the prices across all asset classes. The impact would sooner or later put pressure on decreasing interest rates in the country , while the inflationary pressure would not allow it to do so.
Consumer Price Inflation Index for Urban Non Manual is hovering around 6.8%.
The RBI has been issuing Market Stabilisation Bonds to ease the situation but that does not help either.
Because the Government has to pay 7.5% interest on these bonds, whereas the forex reserves parked by the RBI hardly earns around 4%.
This again adds up to the fiscal deficit.While the revenue deficit gap has been to some extent addressed with increasing growth in tax collections, the increasing expenditure on various programs initiated by the current regime could widen the gap further. The latest is the recommendations by the pay commission to increase the salaries for government workers which is going to burn a hole in the state government exchequer.
If sudden reversal of capital flows happens in the near to medium term, that could lead to dampening the economy’s growth.

While all this may sound a little alarming, there is plenty of positives to cheer up that markets to be bullish..
1.Domestic institutions would soon be stepping in to shore up the market.
After all, they have been waiting on the sidelines since the surge of capital flows that have rushed in since the last month and pushed the valuations of a number of stocks to stratospheric levels..
To recap from the earlier post, the Life Insurers in India had invested $35 billion for the period April 2006-March 2007 whereas the FIIs had invested $ 8 billion at the end of the calendar year 2006!
2.According to a latest United Nations agency, there has been huge growth of inward remittances by millions of unknown Indians. The guys who sweat it out there in the Middle East and Africa, London and of course the techie workers from Sillicon Valley.The faceless Indians have sent back $25.5 billion in 2006!!
Making India the biggest market for inward remittances.
I am sure at the end of the year this group will better, if not equal the inflows of all the FIIs put together..
We will know the figures soon..
3.Finally, Globally trends in U.S. and Europe indicates that they are still reeling under the impact of sub prime crisis with major banks results coming out with their huge write downs/losses for the quarter. They expect it to continue for few more quarters till the clean up is complete.
Some more economic indicators [in the coming week] on the housing starts in the U.S., consumer spend patterns, increasing oil prices and profit warnings/missing the consensus estimates results by some large firms are leading us to believe that the FED would cut rates by another 25 to 50 basis points [on October 31,2007]to ward off the possible downturn in the economy.

Well..all this portends to more capital inflows into our country!
Its raining wealth..raining wealth..again??!!