Don't panic

Capital markets across the globe reacted panic stricken post US Fed’s announcement on QE withdrawal. Looks like market completely failed to take cognizance of the second half of Mr.Bernanke’s statement ie

‘fed’s action would depend on an improvement in the job scenario and economic recovery’

Indian stock indices corrected their biggest single day loss in 21 months and the rupee fell to a new historic low of Rs 60. As I write this, rupee has bounced back by 30 – 40 paise & Nifty up by 11 points. Slide in the rupee would adversely impact firms with foreign borrowings, especially those who import raw materials like automobile, capital goods, petroleum, power & telecom companies. I don’t foresee RBI to actively intervene in the FX market as it may not want to subsidise the exit of foreign investors.

The primary reason for the FIIs to pull out is they have been losing money in dollar terms both in the stock and Bond market. However, developed economies like US, Japan & Euro are not offering value as much as emerging markets. Lots of these funds will re trace India once the currency stabilizes. Our valuations are attractive and the economy is in the early stages of recovery.

Definitely, this is not the time to panic. Investors should stay put in equities and incrementally take the SIP route in diversified equity funds to take advantage of the current volatility. Since different asset classes behave differently due to domestic and global factors, it is indispensable to follow a disciplined asset allocation approach and not go overboard on any asset class. Equally important is to periodically re view and re balance the asset allocation mix recommended for you.

Happy investing!




  
 

Trade deficit

Our trade deficit for the period April 2012 – May 2013 has catapulted to a 7 month high of 20 billion USD. It is no secret that import of gold has been the major dampener.  Exports de grew by 1.1% despite depreciation of rupee. Widening trade deficit, weak IIP data, high retail inflation coupled with weak currency are making things complicated. Retail inflation as I see will remain a persistent problem due to government’s increase in MSP for farm products ahead of elections.

 

Given the heightened global uncertainty, the bigger concern for the central bank will be to fund the CAD. One of the options that are being widely speculated is to float dollar bonds similar to Resurgent India Bond 98 & India millennium deposits 2000. In the past, SBI had lent its balance sheet and this time they have almost said a categorical NO. Given the restriction for Banks in terms of CRR/SLR, government might consider taking up on its own as it would considerably reduce the cost of borrowing

Market is keenly awaiting the outcome of US Fed meeting on bond purchases by Wednesday. There’s a belief about a rate cut if US Fed were to pause further liquidity infusion. I beg to differ as we entirely stare at a different set of challenges.  Strictly speaking, the currency of a county should reflect its economic fundamentals. If one were to apply this principle, USD should have ideally weakened. The primary reason for its strength is most of the global trade happens in USD.

Last week, I happened to read some articles recommending US equity funds.  US was one of the countries that was badly hurt post 2008 – 09 economic crisis. US Fed has been pumping trillions of dollars through buy back of bonds which has largely helped the banks to re capitalize their balance sheet. However, this has not translated to a real growth in their economy. On the contrary, lot of these funds have moved to emerging economies like India for better returns. Investing in India is any day a prudent decision.
  Ramanathan Dwarakanathan

RBI Monetary Policy

RBI kept all the key rates & reserve ratios unchanged in today’s quarterly monetary policy.  This was in line with my view on 13^th June.  RBI has expressed its concern regarding retail inflation as measured by Consumer Price Index being at an elevated level of 9.3%

 

In its outlook, has subtly conveyed its intent of having a very little room to play on the monetary front given the macro economic challenges, while pointing towards the government to provide faster clearance of projects, creating conducive environment for private investment as the key ingredients to reinvigorate growth. With less than a year for general elections, Government will seldom take any major policy related decisions.

 

Given this backdrop, incrementally investors should avoid long duration funds and focus on short term funds. Equity markets will remain volatile in the near to medium term. It’s advisable to take the SIP route with a diversified equity fund as against bulk investment which will enable investors to ride on the market volatility.

 

 In the recent past, we have been witnessing plethora of companies luring investors with high interest rates on their fixed deposits. FD’s by their nature are un secured & investors should ideally consider companies that possess the highest credit rating (AAA).

 

Ramanathan dwarakanathan