GDP growth of 8.9% in 2QFY11 is a resounding validation of the India growth story. India has effectively endured a global crisis and the worst drought in 30 years. It continues to be one of the fastest growing economies – its GDP is likely to grow at ~9% in FY11 and well into FY12. Growth should rise to double digits, on track with the higher growth trajectory of the last decade. In short, India is well on its way to the next trillion dollars of GDP.

We published our first note on the concept of NTD (next trillion dollars of India's GDP) in 2007. The core NTD thesis is this: It took India about 60 years post independence to clock the first trillion dollars of GDP. With nominal GDP growth of 14-15%, at constant exchange rates, India's next trillion dollars (NTD) will come in just 5-7 years. We juxtapose the NTD idea with the GDP growth experience of China to arrive at India's GDP of almost US$5 trillion by 2020.

The addition of the next trillion dollars to India’s GDP has exponential growth implications for several businesses. Consider this: India's current gross domestic saving is at 34% of GDP. In line with long-term trend, we expect this to rise steadily to 40% by 2020. This translates to cumulative decadal saving of over US$10 trillion, compared to US$2.7 trillion during the decade to 2010. The large savings pool presents a huge opportunity for many businesses. Applying a trended growth rate correlated to GDP, in the decade to 2020, business opportunity will be five times and profits six times the previous decade.

India enjoys a special demographic advantage. With over 200 million households, India is not only a huge consumer market but also an attractive investment destination. Its consumer market is projected to become the fifth largest by 2025, worth more than US$1,500 billion. India’s total commerce, which was estimated at US$2.3 trillion in 2007, is expected to triple by 2025, making it larger than the current size of the UK market in terms of purchasing power parity. India might well be at the helm of a radical realignment of the global economy!

However, the journey is unlikely to be smooth – a number of speed-breakers and roadblocks will be encountered along the way. The fallout of the lack of radical reforms has shown up in high consumer inflation, which though trending down, continues to persist. Rising global commodity ( including oil )prices are adding further fuel to the fire. Interest rates are headed up. The speed with which India’s reforms process is progressing is less than desirable. Adapting to changes in global economic trends and their impact – wild gyrations in exchange rates, fight of capital, for instance – is becoming more challenging. Macroeconomic and business headwinds apart, markets have reason to be concerned about the serious and relentless issues of corporate and political governance, which India is currently embroiled in.

A serious challenge that faces India is ensuring that the fruits of progress are not restricted to just a few. The bottom one-third of India’s 1-billion-plus population still lives below a contentiously-defined "poverty line". It is this section of the population that is most impacted by inflation. Even basic healthcare and education is not available to a large section of the population. The prevailing economic and social inequality is already fuelling social unrest and insurgencies in various pockets of the country. If there is further increase in the rich-poor divide, it could fuel further discontentment and prove to be disruptive. Besides the threat of internal conflicts, it is equally important for India to be adequately prepared for possible external aggression. Relations with neighboring countries, especially Pakistan and China, need to be effectively managed.

The government’s attempts to reach out to the poor are proving to be ineffective. Subsidies do not reach the people they are targeted at. For instance, kerosene is under-priced because it is supposed to be used by the poor for cooking and lighting and also aimed at discouraging the use of wood for burning. However, it is illegally diverted to adulterate diesel and petrol because of price differentials and is smuggled out of the country. Similarly, diesel prices have still not been fully deregulated due to the direct impact of higher diesel prices on inflation. Diesel is used to power generator sets used in irrigation and to fuel trucks that carry agricultural products, raw material and finished products. However, the unintended beneficiaries are owners of luxury cars and SUVs, who can do without the fuel subsidy.

India levies high taxes on petroleum products – half of the selling price of petrol and nearly a third of the price paid by consumers of diesel goes towards various imposts levied by the state and central governments. However, instead of paring taxes on petroleum products, the government has chosen to shift the burden on to consumers. I am not saying that I am opposed to fuel price deregulation or that I would like auto fuel subsidies to continue. High petro-product subsidies have a negative impact on India’s fiscal health, which too eventually culminates in higher inflation. I am merely implying that a more holistic approach to fuel pricing – including the possibility of lower imposts on petro products – is necessary in India’s context.

It is necessary that the government’s thrust on infrastructure development continues. While projects such as the Golden Quadrilateral and the North-South and East-West corridors are laudable, sustenance of India’s growth story will depend to a large extent on continued investment in infrastructure. Also, several regional biases have crept up in the years following India’s independence. There are pockets that have not flourished as much as the rest of the country – the North-East states and the BIMARU states, for instance.

Even in the more progressive states, development expenditure has been concentrated in a few urban centers. This is evident in the stark difference between the city of Mumbai and the rest of Maharashtra. Lop-sided development comes with its own set of social issues – one that makes regular news is the issue of migrant labor. Looking at human resources in general, while India’s educated population is sizeable, the industry often complains about acute skill shortage. Education and training is an area where much needs to be done.

Food security is another issue that India needs to wake up to. While India is agriculturally well-endowed, 60% of its total cropped area is not irrigated and dependent on a four month-long monsoon during which period 80% of the year's total precipitation takes place. In the years when the monsoon is abundant and regular, there is good crop output. But when the monsoon plays truant or is inadequate, the crop output is poor. There is a need to develop extensive irrigation infrastructure throughout the country. Policies relating to agricultural produce – fertilizer subsidy, administered pricing mechanism, public distribution system – need to be re-examined.

One roadblock that India needs to demolish quickly is rampant corruption. Serious and relentless issues of corporate and political governance have been coming to light. Such brazen acts of corruption are a big deterrent to national prosperity and can damage the brand India story. However, there appear to be no serious deterrents to corruption, which often goes unpunished. While India needs a total overhaul of its anti-corruption delivery system, it is even more important to revamp the education system. Without a holistic education system, India’s greatest strength – its army of young people – could turn out to be its greatest weakness!

The Indian economy is no longer at the crossroads; rather, it is on the right path to sustainable growth. GDP growth of 8.9% in 2QFY11 is a resounding validation of the India growth story – it has effectively endured a global crisis and the worst drought in 30 years. India continues to be one of the fastest growing economies in the world – its GDP is likely to grow at ~9% in FY11 and well into FY12. Growth should rise to double digits, on track with the higher growth trajectory of the last decade. However, the journey is unlikely to be smooth.

The fallout of the lack of radical reforms has shown up in high consumer inflation, which though trending down, continues to persist. Rising global commodity prices are adding further fuel to the fire. Interest rates are headed up. The speed with which India’s reforms process is progressing is less than desirable. Macroeconomic and business headwinds apart, markets have reason to be concerned about the serious and relentless issues of corporate and political governance, which India is currently embroiled in. While it will continue to encounter speed-breakers and roadblocks, India is well on its way to the next trillion dollars of GDP.

We published our first note on the concept of NTD (next trillion dollars of India's GDP) in 2007. The core NTD thesis is this: It took India about 60 years post independence to clock the first trillion dollars of GDP. With nominal GDP growth of 14-15%, at constant exchange rates, India's next trillion dollars (NTD) will come in just 5-7 years. We juxtapose the NTD idea with the GDP growth experience of China to arrive at India's GDP of almost US$5 trillion by 2020.

As we have pointed out time and again, the addition of the next trillion dollars to India’s GDP has exponential growth implications for several businesses. Evidence of this is already springing up. Consider this: the number of passenger cars sold in October 2010 was 182,992, the highest ever in a calendar month in India’s history. The Society of Indian Automobile Manufacturers (SIAM) forecasts that passenger car sales for the year ending March 2011 should grow by at least 25%. The Indian passenger car market is likely to triple over the next decade to six million cars a year. It is no surprise, therefore, that India has turned into a major battleground for global vehicle manufacturers such as Ford, Renault-Nissan, General Motors and Volkswagen.

India enjoys a special demographic advantage. With over 200 million households, India is not only a huge consumer market but also an attractive investment destination. Its consumer market is projected to become the fifth largest by 2025, worth more than US$1,500 billion. India’s total commerce, which was estimated at US$2.3 trillion in 2007, is expected to triple by 2025, making it larger than the current size of the UK market in terms of purchasing power parity. India might well be at the helm of a radical realignment of the global economy!

Growth broad-based, expect FY11 GDP growth of 9%



India's 2QFY11 GDP growth at 8.9% (MOSL 9%, Consensus 8.2%) signifies (1) economy operating close to potential, and (2) resounding validation of the India growth story. While agriculture and services expectedly turned up, industry also performed well. Most importantly private consumption is back and the government is only gradually withdrawing its fiscal support. We expect GDP to grow at ~9% in FY11 and well into FY12.



Cyclical upturn drives GDP growth to ~9%, as expected

- 2QFY11 GDP growth was 8.9% (MOSL 9%, consensus 8.2%), which was in line with expectations.

- Simultaneously 1QFY11 GDP was revised to 8.9% from 8.8%. Thus 1HFY11 growth was a healthy 8.9%.

- The cyclical upturn has taken GDP close to the potential 9% and seems to have stabilized at that level.



All sectors and components of GDP do well

- Notably all three sectors of the GDP performed well.

- Agriculture (4.4%) turned up due to bumper Kharif harvest on the back of a good monsoon.

- Notwithstanding the sharp fluctuations in monthly IIP figures, industry posted a healthy 8.9% growth. This was driven by IIP growth of 15% in July, but it subsequently decelerated.

- Service sector grew by 9.8%, remaining close to double-digit level. The sub-group of trade, hotels, transport and communication, which constitutes nearly equivalent weight in the overall GDP as that of the industrial sector (including construction), registered 12.1% growth, perhaps receiving a boost from the Commonwealth Games. This is the only notable sub-sector that bucked the seasonal 2QFY11 downturn by a wide margin, pulling up overall GDP.

- The expenditure side of GDP revealed a noticeable turnaround for private consumption expenditure, even on a QoQ basis, which augurs well for future growth.

- The government has continued to support the economy, indicating it will spend the excess amount received from one-time 3G/BWA revenue and collections due to higher tax buoyancy.

- Investments slowed down, perhaps due to the monsoons delaying a few construction and project-related activities.



Expected growth close to 9% despite near-term setbacks

- We have revised our FY11 growth projections to 9% from 9.1%, led by a recent slowdown in IIP, which we hold is not yet conclusive due to data issues related to the indicator.

- Buoyancy in the agriculture and services sectors will continue, as indicated by the outlook for the Rabi crop and most lead indicators of service sector.

- The recent spate of governance issues (that have yet to significantly dent actual projects on ground) could dampen sentiment in the near term. However, the sheer volume of ongoing projects (~US$2.6t) could keep the investment story going for a long time. Some setback in the mining and electricity sectors notwithstanding, the industrial sector can still pull off high single-digit growth due to the revival of exports.

- A turnaround of private final consumption indicates the durables and FMCG sectors will do well. Moderation in inflation would help these industries to grow.

- Supplementary demands put up by the government to Parliament in two phases demonstrate that the government will not withdraw its fiscal support though it will contain it to pre-announced levels. This augurs well for consumption demand, as there has been a bulge in welfare payments, and for attracting private investment in the PPP format.

The start of the internet age redefined ways of conducting financial transactions including broking. The last few years have seen online trading in India develop and grow into a mature business with products being developed continuously and volumes stabilize.

Internet penetration is low in India with 45 mn internet users, while there are 127 mn mobile users capable of accessing data services through their handset, implying a 3x high-end mobile penetration. Once mobile trading is available, new investors who are deprived of internet connections as well as existing investors who can’t trade through wired internet will enter the market. Though most users of mobile trading may initially attempt to use it to have information at their finger tips increasingly customers would start conducting business through this medium.

Increasing smart phone penetration and availability of internet browser as a basic feature in entry-level phones is increasing the base of subscribers who can access internet. As of 2QFY10, ~127m subscribers were capable of accessing data services through mobile handsets. Non-voice revenue mix of Indian wireless operators remains low at 10-11% v/s 25-30% for mature markets due to non-availability of 3G services. Thus as these services become operational, we assume data mix to increase to 20 to 25% by 2015. Apart from mobile applications, 3G services will also allow GSM operators to offer mobile broadband services, which is a fast-growing market and has significant potential given negligible fixed-broadband penetration in India. 3G spectrum will provide telcos the opportunity to offer real time trading as well as interactive & real time equity research based services thus leading to increased revenues through subscription based research services as well as increased data usage

For a customer who wishes to avail the facility it is recommended to carry out few pre-checks. User should ensure that the GPRS is enabled by the service provider and that the handset supports the application/ portal. It would be key to note that the strength of the net connection plays an important role in user experience especially during travel, though most mobile sites/application take due consideration of this aspect in design.

The variety of mobile phone devices and the technology associated in terms of operating system, browsers and even screen sizes are the challenges faced by brokers and their software development partners. Technologies are now progressing to obtaining the handset information and then proactively provide the user best view. Mobile trading is an extension of traditional online trading and works either by use of a browser or an application provided by the broker. The internet speed on mobiles is far less as compared to computers thus limiting the design and features as compared to a web version of online trading.

Security of transactions executed pose complicated challenges which are addressed by the guidelines laid down by the regulators. Use of encryption, secure socket level security and time based password expiry are some of key technological initiative to secure the end users information and transactions.

At MOSL we have launched our browser based mobile trading system. We are gearing up to manage increased customer activity in the mobile space. All key trading activity such as viewing market watch, reports (orders, trades, net position, margin etc), placing and modification of orders, access to live advice are available on mobile for MOSL online customers. Alongside our launch we are collecting customer feedback and expectations which we will roll into our product development cycle.

Our continuous efforts will ensure our customers get the right experience and enjoy their trading journey with us.

There is a lot that independent India has achieved. From 1951 to date; our economy has grown from 21 billion dollars to 1.2 trillion dollars. That’s over 60 times in 60 years. From the 3-4% Hindu rate of growth in the pre-90s, India has transformed into one of the fastest growing economies in the world. What’s more; in the next 6-7 years this GDP will further double.

The opportunity today is ripe to achieve a different kind of freedom. Freedom that will help secure the future of ourselves and our loved ones. I call it FINANCIAL FREEDOM.

When it comes to achieving freedom there are no short cuts. Just as our country’s freedom was achieved through a concerted effort; so is financial freedom. It won’t happen in a day; but it will happen. What we need to do is follow some basic principles.

The first is to have a systematic and long term approach to investing. We need to review our risk profile and allocate our savings across different asset classes. As a country we save over 35 % of our GDP. But are we investing it judiciously? Most of the people are risk averse and hence put their full money in bank fixed deposits. While that may be safe but may not give your adequate returns which may not even cover the base inflation. Investing some portion of your money into equity as an asset class is very important. Since the inception of the Sensex in 1979; Indian stock markets have given around 17% annualized returns. `Rs 1 lac invested in the stock markets in 1979 would today be worth ` 1.3 crores. At a 12% rate of return; if you invest `11000 every month in a equity mutual fund through an SIP mode, it will be over ` 1 crore in just 20 years. That’s the power of compounding. If we take a long term perspective there is enough money to be made to achieve financial freedom. The trick lies in diversifying our investments, investing systematically; and over a period of time.

The second is the use of knowledge and expertise. We spend most of our time and effort earning money. And hardly any managing and growing it. The key to growing wealth lies in knowledge. Lack of knowledge means lack of understanding. And lack of understanding makes us oblivious to the myriad opportunities around us. Many of us are fearful of the complexity managing money brings .Managing money is not to be feared; but to be understood. It is only when we know more that we will fear less. And if we do not have the time or resources to understand how to manage money; do not feel shy to engage the services of a knowledgeable expert. Besides losing money; the biggest detriment to financial freedom is to let our wealth stagnate.

And lastly is the challenge of managing our emotions. A task easier said than done. From Dalal Street to Wall Street; ‘Greed’ and ‘Fear’ are two most powerful words which can make you lose a fortune. But as someone said “Be greedy when others are fearful; be fearful when others are greedy”. If you find yourself in market frenzy; go for a walk and cool down! Be rational in your approach - research before you invest; not after. And once you have done so; have the conviction to stick to your game plan.

We live today in exciting times. The Next Trillion Dollars of India’s GDP growth presents us a once in a lifetime opportunity for creating and growing wealth. 63 years ago; the founders of our nation helped us achieve freedom. Today; it’s time for us to achieve a different kind of freedom – FINANCIAL FREEDOM.

1. INDIAN ECONOMY: RBI RAISES POLICY RATES TO CONTROL INFLATION; WILL REVIEW POLICY TWICE A QUARTER

THE MEASURES
- Increase in the Repo rate by 25bps to 5.75% as per expectations.
- Increase in the Reverse Repo rate by 50 bps to 4.50% vs expectations of a 25bps hike.
- CRR has been left unchanged as expected.
- The FY11 GDP growth estimate has been enhanced by 50 bps to 8.5% (from 8% with an upward bias as per April Policy) as per expectations.
- Similarly the March 2011 inflation estimate has been enhanced by 50 bps to 6.0% (from 5.5% as per April Policy) as per expectations.
- No extension granted to the daily second LAF facility as per expectations.
- Monetary stance is substantially altered to give ascendancy of inflation control in policy priority as per expectations.
- Although RBI has taken mid-course corrective actions in the past and retains the right to do so even now, somewhat unexpectedly, the RBI has increased the frequency of review of its policy to one and half months from a quarter at present.
RBI RAISED SHORT TERM LIQUIDITY MANAGEMENT RATES - BROADLY IN LINE WITH EXPECTATIONS – MILD SURPRISE ON REVERSE REPO
RBI NOTED THAT THE MARKET MOVING IN THE REPO MODE ACTED AS ANAUTONOMOUS TIGHTENING OF MONETARY CONDITIONS BY 150 BASIS POINTS


RBI’S ASSESSMENT AND EXPLANATION
- Global growth and inflation has been multi speed. Visible soft spots in Europe and the US contrasts with relatively rapid recovery in EMEs accompanied by faster growth in prices. Global growth in the second half of 2010 will be lower than that in the first half. Global inflationary pressures are expected to be subdued over the next few months.
- On the domestic front, the recovery has consolidated and is becoming increasingly broad-based. The strength of the recovery is also reflected in the sales and profitability growth of the corporate sector. Besides replenishment of inventories, investment intentions are being translated into action across sectors, particularly in power, telecom and metals. However, if the global recovery slows down, it will affect all EMEs, including India, through the usual exports, financing and confidence channels.
- The recent partial deregulation and increase in administered prices of petroleum products is welcome from long-term fiscal consolidation and energy conservation perspective. Nevertheless, it will have an inflationary impact in the short term of 1% immediate impact followed by second round impacts in coming months.
- Food price inflation has remained at an elevated level for over a year now, reflecting structural bottlenecks in certain commodities such as pulses, milk and vegetables. The Reserve Bank’s quarterly inflation expectation survey conducted during the first fortnight of June 2010 indicates that short-term inflationary expectations have increased marginally.
- Notwithstanding the current inflation scenario, it is important to recognise that in the last decade (2000-01 to 2009-10), the average inflation rate, measured both in terms of WPI and CPI, moderated to around 5 per cent from the historical trend rate of about 7.5%. Against this backdrop, the conduct of monetary policy will continue to condition and contain perception of inflation in the range of 4.0-4.5%. This will be in line with the medium-term objective of 3.0% inflation consistent with India’s broader integration into the global economy.
- The main risk of RBI’s assessment emanates from the global scenario and has two key dimensions. First if the global recovery falters, the risk of which has increased since the April 2010 policy announcement, the performance of EMEs is likely to be adversely affected. The more significant risk, though, is from a potential slowdown in capital inflows. India’s rapid recovery has resulted in a widening of the current account deficit, as imports have grown faster than exports. Apart from narrowing the comfortable buffer between the current account deficit and net capital inflows, this may constrain domestic investment, which is critical to achieving and sustaining high growth rates.
- Current market conditions indicate that while liquidity pressures will ease, the system is likely to remain in deficit mode for now.
- There is no unique way to determine the appropriate width of the policy interest rate corridor. But the guiding principles are: (i) it should be broad enough not to unduly incentivise market participants to place their surplus funds with the central bank; (ii) it should not be so broad that it gives scope for greater interest rate volatility to distort the policy signal.
- Rough estimates show an improvement in the total flow of financial resources from banks, non-banks and external sources to the commercial sector during 1QFY11 (to Rs2,500 bn as against Rs610 bn during 1QFY10). Disaggregated data suggest that credit growth to all major sectors such as agriculture, industry, services and personal loans had begun to improve from November 2009 onwards.
- The 10-year benchmark government security fell to 7.59% in June 2010 from 8.01 per cent in April 2010 in the expectation that the Government will reduce market borrowing because of higher realisations from spectrum auctions. Subsequently, the yield moved up to 7.73% by the third week of July 2010. Of the budgeted net market borrowing of the Central Government for FY11 at Rs.3,450 bn, about 38.5% (Rs.1,329 bn) of the borrowing was completed by mid-July 2010.
- The foreign exchange market saw volatility increase relative to the previous quarter, with the rupee showing two-way movements in the range of Rs.44.33-Rs.47.57 per US dollar. During 1QFY11, both the nominal and real effective exchange rates (NEER and REER) have appreciated.


TAKEAWAYS FROM THE POLICY MEASURE AND RBI’S ASSESSMENT
- With the policy rate hikes, change in stance and the outline of liquidity conditions, the RBI has done its bit for inflation control. Importantly, RBI has reiterated its resolve to contain inflation perception in the range of 4.0-4.5% and the medium-term objective of 3% inflation set out earlier conducive to India’s integration with the global economy. The strong stance is important in view of the July inflation quoted (press reports) at 11% (as against our estimate of 10.2%) by India’s Chief Statistician Mr. T.C.A. Anant. RBI’s move is therefore imperative and is expected to anchor inflationary expectations at the margin.
- The reduction of the LAF corridor from 150 bps to 125 bps is attempted as an additional measure to contain volatility of short term rates and push the minimum rates up. The market being in repo mode and expected to be so for some time makes the measure more of a signal of anti inflationary resolve of RBI. The instrument, however, would become functional when the system returns to excess liquidity again or for those institutions that turns liquid faster than others.

RBI’s MEASURE IS TIMELY IN VIEW OF EXPECTED DOUBLE DIGIT INFLATION IN JULY


- The change in monetary stance of RBI is instructive. While interest rate regime has gained ascendancy in policy priority in lieu of liquidity management, short-term liquidity management would be in focus in place of ensuring adequate provision of liquidity for credit growth. In our view this is indicative of the shift in focus from short-term liquidity situation (which would continue to be actively managed) to long-term liquidity situation which might become stressful going forward.
CHANGES IN POLICY STANCE OF RBI – INTEREST RATE REGIME AND LIQUIDITY MANAGEMENT ALTERS POSITION, LIQUIDITY OBJECTIVE CHANGED MATERIALLY

Stance as per July 27 Policy	Stance as per April 20 Policy
Contain inflation and anchor inflationary expectations, while being prepared to respond to any further build-up of inflationary pressures.	Anchor inflation expectations, while being prepared to respond appropriately, swiftly and effectively to further build-up of inflationary pressures.
Maintain an interest rate regime consistent with price, output and financial stability.	Actively manage liquidity to ensure that the growth in demand for credit by both the private and public sectors is satisfied in a non-disruptive way.
Actively manage liquidity to ensure that it remains broadly in balance so that excess liquidity does not dilute the effectiveness of policy rate actions.	Maintain an interest rate regime consistent with price, output and financial stability.

- The combined impact on liquidity is therefore, much complicated. Short term rates have remained elevated for longer time than expected as the Government spending is being more staggered than expected. Although there has been some softening of money market rates in the past couple of days coupled with a lower recourse to RBI’s repo window (~Rs400bn against Rs600-700bn), this is yet to establish as a trend. Moreover, Central Government’s cash balances with RBI that has come down to Rs550bn from Rs700-800bn at end-June/early July matches with the recourse to repo window of RBI. Thus while liquidity situation may improve by August (possibly prompting RBI not to extend the second LAF facility), it is clear the system as a whole is not operating with any liquidity buffer.

THE FOCUS ON SHORT TERM LIQUIDTY MANAGEMENT TO CONTINUE


THERE HAS BEEN SOME MODERATION IN SHORT-TERM RATES RECENTLY ALTHOUGH YET TO ESTABLISH ITSELF AS A TREND


- It is likely that with the introduction of base rate, there would be greater competition among banks to lend acting as a barrier to push deposit rates down, lest it affects banks’ margin. A more likely scenario, however, is that the rapid expansion of credit market leaves banks’ with pricing power that can be used to increase deposit rates, albeit with a lag. The parallel initiative of financial inclusion (very significantly, RBI has allowed mobile banking now) may alleviate the banks’ liability constraints in the medium term.
- While capital flows so far has held up and the promise of near zero policy rates abroad for extended period of time indeed makes relative attractiveness of Indian growth a compelling proposition for capital inflow – evidently this would be volatile and partly would go to fund the higher current account deficit, itself a result of strong growth and import of capital goods.
- However, if none of the above holds, RBI would need to inject enduring liquidity through open market operation (OMO) to fund private credit growth – similar in the nature of liquidity infusion to fund heavy Government borrowing of FY10.
- Evidently, the contradiction of raising rates with continued liquidity support which may transform from repo balance to OMO for RBI provides a challenging outlook to monetary policy management till inflation abates on brighter prospect of monsoon, agriculture, international oil and metal prices, etc.

THE LIQUIDITY SITUATION TO EVEN OUT BETWEEN SURPLUS RISING CREDIT GROWTH CALLS FOR HIGHER DEPOSIT GROWTH GOVERNMENT AND DEFICIT BANKS AND PRIVATE SECTOR

RISING CREDIT GROWTH CALLS FOR HIGHER DEPOSIT GROWTH OR OMO FROM RBI OR HIGHER CAPITAL FLOWS FROM ABROAD                          


- Other things remaining same we expect continued rate hike upto 50 bps more during FY11 (raised from our earlier expectation of only 25 bps more) in view of the indication of further firming up of inflation in July.
- We continue to hold that softening of inflationary outlook in H2FY11 and reduced Government borrowing programme for H2FY11 would mitigate the market determined short term rates as the Government vacates the credit market for private sector growth. However, if capital flows aren’t adequate, the pressure on liquidity may permeate from longer term and would continue to ebb policy rates higher apart from RBI’s own push to control inflation. We still do not foresee policy rates meaningfully leading market rates to signal anti-inflationary stance. To that extent RBI has not forsaken the growth supportive stance altogether.
2. MONSOON UPDATE: Cumulative rainfall deficiency improves again to 5% on July 27: Outlook positive
- Overall rainfall deficiency in the country as a whole improved to 5% for the period June 1 to July 27.
- While temporal pattern of rainfall is improving rapidly, the spatial pattern shows that except the East & North-East, all other regions have recorded sharp improvement in rainfall recently.
- According to forecast by IMD, heavy rainfall activity would continue various parts of the country but concentrated on the west coast, western region and the northern-Himalayan region. The extended forecast up to August 1 predicts increased rainfall activity over central and north Peninsular India.
- The International Research Institute (IRI) for Climate and Society saw the possibility of heavy to very heavy rains in West and Northwest India. Thus more rains are expected for Gujarat, Rajasthan and Konkan even as south interior peninsula appears to have entered a phase of relative calm.
- According to the Japanese researchers (Japan Agency for Marine-Earth Science and Technology - Jamstec) a monsoon-friendly La Nina condition has been established rather quickly in the east equatorial Pacific Ocean in June itself.

RAINFALL UPTO JULY 27, 2010 (CUMULATIVE SINCE JUNE 1, 2010)
	Actual rainfall (mm)	% Departure from LPA
Country as a whole	396.2	-5%
North-West India	248.7	-3%
Central India	448.7	-1%
South Peninsula	391.7	11%
East and North-East India	575.3	-22%
Category	No. of Subdivisions	Range (% Dep from LPA)
Excess	8	21% to 80%
Normal	20	19% to -18%
Deficient	8	-20% to -45%
Scanty	0	-
Total Subdivisions	36	80% to -45%

PROGRESS OF MONSOON IN RECENT PERIOD (CUMULATIVE SINCE JUNE 1, 2010)
Category	18-Jul	19-Jul	20-Jul	21-Jul	22-Jul	23-Jul	24-Jul	25-Jul	26-Jul	27-Jul
Excess	5	4	4	5	7	9	10	9	8	8
Normal	18	18	20	21	19	17	16	18	21	20
Deficient	13	14	12	10	10	10	10	9	7	8
Scanty	0	0	0	0	0	0	0	0	0	0
Departure from LPA	-16%	-16%	-15%	-14%	-12%	-11%	-11%	-9%	-7%	-5%
Dispersion in LPA	83% to -56%	81% to -50%	82% to -50%	79% to -51%	80% to -51%	77% to -52%	71% to -51%	67% to -51%	64% to -47%	80% to -45%

HEAVY RAINFALL OFF LATE IS REDUCING THE CUMULATIVE DEFICIT OF THE SEASON

SHARP IMPROVEMENT IN RAINFALL IN NORTH-WEST AND CENTRAL REGIONS IS PULLING THE ALL-INDIA AVERAGE UP

The idea of a minimum level of public shareholding in listed companies is not new. Until the early 1990s, promoters of listed companies were not allowed to hold more than 40% of the paid-up capital. This was relaxed to allow up to 90% promoter holding. The latest amendment requires a minimum public float of 25% in listed companies, irrespective of what requirements applied to them at the time of their initial listing. Listed companies where promoter holding exceeds 75% have to sell down to the public, diluting 5% per year until the stipulated minimum public float of 25% is achieved.

At a conceptual level, such a requirement is laudable. Among the long-term advantages of a higher public float are increased market depth, enhanced liquidity, better price discovery, and improvement in corporate governance. When companies sell down to meet the enhanced minimum public float, it should result in a more dispersed shareholding, lowering opportunities for collusive market action. The resultant increase in liquidity would enable small investors to buy or sell shares at prices that are discovered in a fair manner. Reduced ownership concentration also encourages good governance.

At a more pragmatic level too, there would be significant long-term benefits. A higher public holding would increase the free float market capitalization of the Indian market. As a result, India’s weightage in the globally tracked free-float-based emerging market indices would increase. This, in turn, should lead to a rise in the quantum of foreign inflows allocated to India. Many global funds mirror the index weightages while deciding on their country allocations. With India’s free float market capitalization increasing, the India allocations of several FIIs would go up.

With higher public float in large entities such as MMTC and NMDC, the composition of the Indian/regional market indices could undergo a change. One of the eligibility conditions for a stock to be included into the Nifty (or the MSCI) is that it should have a minimum free float of 10%. Higher public float would not only raise the free-float-based market capitalization of the indices themselves, but would also make them more representative through the inclusion of new stocks.

Government-owned companies would account for bulk of the issuances to comply with the new minimum public float norm. If the government chooses to bring down its shareholding in 29 listed companies where it owns over 75% through stake sale, it could raise more than Rs 120,000 crore over the next five years. This would help the government to consolidate its fiscal position further after raising over Rs 100,000 crore from the auctions of 3G and BWA spectrum. Stake sale in MMTC (government holding: 99.3%), NMDC (government holding: 90%) and NTPC (government holding: 84.5%) alone would help raise over Rs 70,000 crore.

However, the requirement of higher public float is not trouble-free. There would be a glut of issuances to meet the new guidelines. In the near term, the incremental equity issuance is likely to create an overhang in the secondary market. To comply with the new norm, companies would have to raise over Rs 150,000 crore. This is three times the average of Rs 50,000 crore raised annually through equity issues including IPOs. Not only will companies/promoters seeking to comply with the new guidelines find it difficult to do so, companies with genuine need for capital too might find it difficult to raise resources.

Given the ongoing global financial crisis, this is not the best time to have introduced this norm. It might have been more sensible to wait for the global crisis to subside for good. But then, there always are some not-so-desirable fallouts and some pain associated with any change. Promoters do not need to bring down their holdings at one go. Staggered dilution would help take away some of the pain, though the valuations realized may still not be in line with promoters’ expectations. The guideline of 5% dilution per year gives most companies three years and some government-owned companies five years to comply. If this were revised to 2-3% dilution per year, it could make things easier.

Another fallout might be that some companies with low public float would choose to buy back the small portion of shares in public hands and go private. However, in my view, there would be very few such instances. If some companies do choose to go private because a larger public float exposes them to greater public scrutiny, shareholders are better-off not owning shares in such companies. The Indian capital markets have come of age. A listing on Indian bourses is not just about raising money but perhaps more significantly for enhancing brand value – the recent ADR issue of Standard Chartered Bank is a case in point.

The exact gravity of the European debt crisis is difficult to understand by an ordinary person sitting in India. However, when an expert like Nassim Taleb has to say something in this regard, one should sit up and take notice. This is what he had to say to CNBC Europe yesterday

The economic situation today is drastically worse than a couple years ago, and the Euro is doomed as a concept

"We had less debt cumulatively (two years ago), and more people employed. Today, we have more risk in the system, and a smaller tax base.

Banks balance sheets are just as bad as they were two years ago when the crisis began and "the quality of the risks hasn't improved

The root of the crisis over the past couple of years wasn't recession, but debt, which has spread "like a cancer,"

The world needs to prepare itself for austerity. We need to slash debt.Unfortunately, that's the only solution.

Obama administration's efforts to pull the US out of recession haven't succeeded.It's not that they make mistakes; it's that they almost get nothing right. Moreover, a second major stimulus package may be futile

Obama promised us 8 percent unemployment through stimulus. It hasn't worked. There are significantly more liabilities in the US than in other countries around the world.Don't give a junkie more drugs, don't give a debt junkie more debt."

The key message from the above is that according to Taleb, who is now signaling that public attention has shifted to debt, instead of growth. This implies that even if growth comes on the back of high debt, capital markets around the world may not respond accordingly and may refuse to go up in a sustained manner. The other implication is that Inflation will hit the world hard if something is not done to slash the amount of money circulating around in the world.

For India, if the world slows sure there would some slowdown here too . How much? Only time will tell. We can predict only the earnings growth. Pre expansion or contraction is a function of the market not under our control and depending on risk , capital flows , perception etc. One lesson, which the Lehman crisis has taught me is that one should not ignore any possibility no matter how low the probability of that event happening might be . Further we all know that Murphy’s Law does hold some truth in “Whatever can go wrong will go wrong”

Inflation is a worry in India, we all know that . Apart from primary inflation even the non food inflation is not coming down. If Kirit Parekh’s recommendations are incorporated , it would only make matters worse on inflation

All these factors warrant some caution in the short term . I would look to lighten trading positions for the least . I remain extremely positive about the long term and one should not panic if he is a long term investor . For, the short term nonetheless, there may be some pain.

To my mind, European situation is not that precarious as it was in the US during the Lehman crisis. I know that there would be many economists who would vehemently disagree with this but I think US. Relevance of EU to world GDP growth, cross country trade and as a reserve currency is far lesser than that of the US. When there was question mark over US economic growth, the world panicked. However, the same situation may not happen when some European countries (PIIGS) default.

There could be a possible scenarios coming out of this. The trillion dollar rescue package for PIIGS comes with certain conditions to improve the fiscal situation. These countries will have to raise taxes, cut expenditure and go for a prolonged period of fiscal consolidation. If that were to happen, world might see low growth, benign interest rates and subdued commodity prices for a long time. This can also lead to reiteration of importance of the US. Capital is expected to flow back to enabling US treasuries and dollar to appreciate. Improved capital flows will lead to better reserve situation and stronger currency. Till some time back, there was apprehension as to how US will fund its growing fiscal deficit as the ability of the rest of the world to buy US treasuries was falling. That situation has suddenly got completely reversed.

For the world equity markets, one form of leverage might get replaced by another form. The dollar carry trade shall get replaced by Pound and Euro carry trade. In between, huge volatility is expected in the market.

The implication for India are that subdued commodity prices might result in earnings downgrade of some large cap index companies. However, as US becomes stronger and the contagion effect of EU is restricted, India might emerge as the favoured destination

In these circumstances, the following sectors could be winners ;

Financial Sector: Lower commodity prices, higher tax collections, PSU divestments and increased revenue from telecom industry shall result in lower than estimated fiscal deficit situation. Owing to low interest rates in most parts of the world, RBI too is expected to keep interest rates stable. These shall result in ample liquidity and stable interest rates in the domestic economy. Banks would therefore stand to gain from high credit growth and stable margin. The bond yields remaining low would add to treasury income. As domestic economy continues to grow, financial companies would emerge as the best play on India’s domestic consumption theme.Big banks like SBI or small banks like Dena Bank should outperperform

Auto: Market is cautious on the operating margin for auto sector this year. If commodity prices were to correct and stay subdued, auto companies may see earnings upgrades due to better than estimated margin assumption. Secondly, a normal monsoon, stable interest rates and liquidity in the banking system shall be beneficial for overall volume growth in tractors, two wheelers and passenger cars. We may therefore see earnings upgrades in auto sector and the sector shall out-perform.

Maruti should outperform the market. The margins can come under some sort of pressure as euro and pound sees some depreciation but higher volumes should keep profitability high

Cement: Twin concerns of Supply augmentation and drop in realizations is already factored in prices. What is positive for the industry is the higher demand. Cement demand in India has moved up from 8%-9% range to 11%-13% range. I expect demand to further accelerate due to increase infrastructure spending and private consumption on housing. Barring the monsoon period weakness, I don’t expect prices to correct further. My view is that cement companies will continue to make 25% EBITDA margin due to strong demand and drop in coking coal prices. At 12% demand growth, cement industry needs 60 mn tons of additional capacity by FY12. So, in our view the increased supply will be absorbed by the market without significant drop in realization. Cement has strong linkage with the domestic growth, valuation is reasonable and current sentiment is negative.

Shree cement can be big winner in these circumstances as apart from cement - in one years time additional 300MW of power capacity will come on stream and this would be on a merchant basis. Incremental EBIDTA could be as high as the current EBIDTA of the company (assuming a EBIDTA margin of Rs 3 per unit). It is one of the most profitable cement companies in India and available at very attractive valuations

In the back drop of the European crisis, I expect that world recovery will lose some momentum in 2010-11 but I do not anticipate that the recent turmoil in the markets will derail the global upswing. The implication for Asia is that the regional rebound will slow rather than stall and it remains likely that growth will stay far higher than elsewhere. Accordingly, Asian central banks will be focused on inflation. Policy rates will move up further and most countries will be nearing the end of their tightening cycles well before rate hikes even start in the US and in Europe. Finally,I would like to forecast that Asian currencies and stocks will end FY11 stronger and higher than where they finished in FY10.

In India, Q4FY10 has most certainly climbed following a weak Q3 which was caused by a slump in agriculture. In coming quarters, I expect that GDP will continue to climb at a 8-9% q-o-q annualized pace, even as fiscal stimulus measures are pulled back. There is very little spare capacity and corporate profitability is strong. Private investment should pick up while industrial output and consumer spending should be supported by ongoing infrastructure improvement projects, rapidly rising household incomes and increased bank lending

The Government is committed to cutting the budget deficit. The fiscal shortfall and the overall level of government debt at 82% of GDP remain quite high. Nonetheless, financing problems are unlikely. The prospects of continued high nominal GDP makes debt ratios manageable . The liabilities are also overwhelmingly owned by on-shore institutions. This means that India especially is not vulnerable to shifts in foreign investor sentiments . In addition ,the 3G license auction which generated almost double the target and the equivalent of around 0.5% of GDP, has also made the government borrowing programme less daunting .

I remain very firmly bullish. Bull markets works the best when doubted the most. With interest rates closer to zero and expected to remain so in the developed countries around the world for years, there is a limit to which equity markets can fall. Every correction should be used as a buying opportunity . Real estate stocks should surprise most analysts on the upside . Just wait and watch

Sensex :16,022(-2.71%) Nifty : 4,806 (-2.78%)
BSE MidCap: 6,489(-3.00%) BSE SmallCap: 8,176 (-3.43%)

Top Gaining Sectors: Nil
Top Losing Sectors: Metal, Consumer Durable, Capital Goods, Banking and Oil&Gas.

Market Moves:
Sixteen - Not so Sweet !!!
Weak overnight US cues, tension in Korean peninsula and further worsening of debt crisis in Europe were villains of the day. Stocks were sold off as fear gripped the bourses. All the sectoral indices ended in the negative. Sensex slipped below level of 16,000 for the first time since February 11, to marginally recover and end the session a tad above the sweet-spot.

I am building a bullish case scenario in India inspite of all the turmoil in financial markets around the globe. European markets are further down 2% today, as I write now. I am pretty confidant that inspite of sensex and nifty having broken the 200 dma, there is a very strong case for being on the long side of the market now. I would avoid commodities for sure, but would strongly look to buy consumer discretionary and consumer staple names in these panicky circumstances. I would think that markets may be very close to a bottom and these may god sent oppurtunities to buy especially for those who might have missed it earlier. I know that this is in sharp contrast to many people’s opinion in the market but this how I feel at the moment .I must also add that one should be buying only in the cash market from a medium to a long term perspective and not on the derivatives side

 

Looking at the fourth quarter results: As on 17 May 2010, 87 companies in our universe reported results for the March 2010 quarter. Aggregate performance is in line with estimates: Sales grew by 32% , EBIDTA grew by 27% ,and PAT grew by 23% .35 companies in our Universe reported PAT higher than estimate, 22 in line and 30 below estimate. On the EBITDA front, 32 companies reported above estimate, 31 in line and 24 below estimate. Among large sectors, Metals, Auto, Pharma, Engineering and Telecom PAT were above estimates, whereas IT, Oil & Gas and Cement were in line.On the sensex front, of the 20 Sensex companies that have reported March-10 quarter results, PAT aggregate is in line with estimate PAT growth of 13% vs estimate of 15%. (EBIDTA growth is 25% vs estimate of 29%).Thus quarterly profits are in line

 

 

In Europe, things are not as bad as it is being made out to be. The Union is not as indebted as one may think. Aggregate leverage in Europe (consumer, corporates and government) at 220% of GDP is below that of the US (270%), the UK (300%) and Japan (363%). The savings ratio in core Europe is 6x that of the US. The problem is the distribution of the government debt. Hence, from an economic point of view core Europe can continue to finance transfer payments to the periphery. To stabilize government debt-to-GDP, fiscal policy has to be tightened by 3% of GDP in the Euro-area as a whole, but by 7% to 8% in the US, Japan and UK (assuming a normal economic recovery). The relentless fall in European markets may be  more on account of technical factors like ban on short selling certain securties, imposition of tax on securities transactions etc .Again, If interest rates in the G3 are going to be closer to zero, there is not too much that equity markets can fall in these regions as well.These things will automatically get corrected sooner than later

 

In China there is monetary tightening to slow down the economy and that is why commodities are falling. However, I  feel that one should not take a country sitting on two trillion dollars of reserves too much for granted. They can do anything .Commodites are therefore best avoided for the time being.

 

In India, the fiscal situation may have just got somewhat better .The 3G booty has given the government enough elbowroom to manouvre around the fiscal deficit target of 5.5% for FY11.Structural reforms on the oil and gas are happening and more of these are in the offing, monsoons seems to be on track and domestic demand pretty strong as reflected by consumer confidence indices

 

So the moot question remains -Why should one be so bearish?Haven’t we seen markets before that Indian markets always fall because of global reasons and always rebound very strongly due to local reasons . It is only a matter of some time.

Telecom regulator (TRAI) released drastic recommendations on spectrum management and licensing framework this week. The recommendations propose significant changes including:

(1) One-time pay-out for spectrum allocation beyond 6.2MHz for GSM operators,

(2) Hike in annual spectrum charges (linked to revenues),

(3) Significant pay-outs for spectrum (linked to 3G auction winning price) and return back of spectrum allocated in 800MHz (CDMA) and 900 MHz (GSM) on license renewal,

(4) Phased decline in license fee (charged as a percentage of AGR),

(5) Tightening of roll-out obligations,

(6) Linking of spectrum allocation beyond start-up spectrum (4.4MHz for GSM and 6.2MHz for CDMA) to roll-out obligations (vs. subscriber base currently), and

(7) De-linking of future licenses with spectrum.

 

Most of the recommendations, except proposed decline in license fee and incentive for rural coverage, are negative for incumbents. The recommendations, though subject to approval by the department of telecom (DOT).are retrograde in nature. It will bring down the overall profitability of the sector in a major way. Already the sector is in big stress and these new regulations will be like a nail in the coffin. I fear the sector might be headed the airlines way depriving it of the necessary investments….something which the country badly needs.

 

Additionally, gold has touched new 52 week highs, metals remain very weak and crude oil has broken $ 75 on the downside. All of this is plating out as anticipated before. Internationally steel scrap prices  have started falling in some markets following a sharp global run-up from the end of 2009.Scrap prices are a leading indicator of the steel demand and the decline in the scrap prices could therefore signal a coming slowdown in the global demand growth for steel .Steel stocks should therefore be sold or shorted as a fresh trade

 

Industrial output expanded by 13.5% yoy for the month of March .manufacturing expanded by 14.3%, Mining by 11% and electricity by 7.7%.Overall, FY10 was characterized by a sharp recovery in industrial output, I expect this momentum in industrial output to be maintained for FY11 driven by strong economic growth particularly in the agriculture and the services sector. As far as monetary policy stance of the RBI is concerned, I think they will continue with baby step increases in policy rates slowly and steadily. Nonetheless, if inflation shoots up due to global conditions or hike in fuel prices, they might tighten rates very swiftly and sharply. Immediately, this does not look like happening

 

 

From my perspective as an analyst, the past week has been tedious because financial markets have been reacting to "headline risks” rather than the long term underlying fundamentals of the economy. Of course, financial markets are always pricing in new and unexpected risks, so this is nothing new. However, the intensity of the situation in Europe (i.e., Greece) and Washington (i.e., financial regulatory reform) makes rational assessment difficult because of the nature of the situation.

Specifically, it is hard to assess how politicians all over the world will make and implement decisions that will have a significant impact on all economic activity. The uncertainty about those decisions is high and the resulting uncertainties will weigh on investment decisions until clarity is achieved. It can be interpreted that the liquidity will become a major issue for global markets going forward. Corporations may find it difficult to hedge against important risks or alternatively, may find that the cost of doing so will rise significantly.

All near term indicators remain bullish, but there has been a diminishing of the positive signal over the past few weeks. This reflects the pullback in risk-taking that occurred since mid-April. It is worth monitoring for further deterioration.

Some of the indicators which could be looked into are as follows

1) The Yield Curves of the G3 nations remains near cyclical and historic highs, but has flattened by 25 bps since early-April. The current steepness of the curve is still indicating a sustained global recovery, but the signal has diminished slightly.

2) The real yield in the US, as proxied by the 10-year TIPS, has fallen by 39 bps since early-April. The 10-year UST yield fell 25 bps over the same time period, which means that the inflation breakeven has risen by 14 bps. Slower growth and higher inflation is not good for financial assets. It is worth mentioning that real yields reflect expected rates of return on capital. Falling real yields are bearish and rising yields are bullish, all else equal.

3) The Industrial Metals/Gold Ratio has fallen by 9% since mid-April. Industrial metals are sensitive to business cycle demand while gold is not. The 9% decline in the index was caused by a 6% decline in the industrial metals index and a 4% increase in the price of gold. Again, this is indicating slower growth and higher inflation on the margin. The Metals/Gold Ratio is up 33% from a year ago. The recent 9% decline does not indicate a reversal of the bullish macro environment. However, the entire commodities markets remain very tentative and vulnerable

To sum up on the markets, I maintain my bullish cyclical view with positive implications and cyclically sensitive industries except commodities. I believe that the recent pullback in stock prices last week is an excellent opportunity to buy.Banks, autos and capital goods are good bets at this point in time

Additionally, the Honorable Supreme Court pronounced its judgement in the RIL-RNRL case today .The principal points on which the apex court laid out clarity is that promoter / shareholder agreements is not be binding on the corporate entities behind them or for that matter the government .Second, natural resources are the assets of the government and it will have a final say in the quantity and price at which it is to be consumed, irrespective of policies and regulations at that point in time or future policies/regulations which might come . This judgment, to my mind could have immense implications for Corporate India going forward. It could also impact bidding amounts for future NELP auctions

The judgement went in favour Reliance Industries. To that extent, there are is a positive implications for the stock . Also there may be excellent value in Reliance Infra (even after subtracting Dadri from the SOTP valuations) at lower levels.

The crisis in Greece crystallises the worries about the dire state of the public finances in many countries around the world. The fact that a Greek default is even considered possible is a fundamental shock to confidence in the world order. For a start, Greece has been seen as an advanced economy, if only by virtue of its membership of the euro-zone. As such, the shock value of a sovereign default in Greece could be much larger than the frequent defaults in emerging markets. We have to wait and see the events unfolding till May-19th (the day by when Greece should have paid 12 billion dollars to her lenders)

What’s more, the pressure will inevitably increase on other weaker members of the monetary union, notably Portugal, Ireland and perhaps Spain and Italy (PIIGS). That pressure would be all the greater if Greece were to leave the union and then, in time, be perceived to be doing better outside than in. The contagion from a Greek default could also spread to much larger economies where the public finances are also fragile, including the UK and, perhaps the biggest risk of all, Japan.

What’s more, even if Greece is rescued, the appetite for another bailout would surely be limited. Greece might therefore end up as the next Bear Stearns – the last to be bailed out before patience finally runs out, and some other country is allowed to default.

The dollar is also likely to strengthen further. Indeed, safe haven demand for the US currency is likely to be even greater than it was in late 2008 given the concerns over the future of the euro and the much worse state of the public finances in Japan.

The Greek crisis could also be the catalyst for a long overdue correction in the prices of most commodities. Many participants in these markets seem to assume that the world economy is returning to the strong growth that fuelled the commodity price boom from 2004 to 2007 as if nothing has happened in the meantime. In contrast, I expect big falls in commodity prices especially crude oil and copper. While this may good news for consumers, a collapse in commodity prices could be a big shock for financial markets. It could be very bad news for many emerging economies including India.

It is surely now or never for gold. Safe haven demand should be strong and rising given that gold is not dependent on the creditworthiness of any government. Despite this, current gold prices of around $1163/oz are still some way below the peak of $1227/oz seen in December last year. Gold’s failure to set new highs in dollar terms most likely reflects the resilience of the US currency, still-low inflation and the lack of any new impetus from central bank buying. Prices would spike higher in the event of an actual Greek default. But, gold may fallback to much lower levels by year-end as the dollar rises further and global deflation fears return.

Back home, economy is on an upswing, inflation remains stubbornly high, and RBI has started to lift policy rates. Worries over contagion from Greece have curbed the rise in Asian markets including India, but Asia has deleveraged since its mid-to-late 1990s crisis and there is not much to worry. Rollovers have been strong at 82% indicating that markets are likely to remain strong in the near future.

80% of people who fail on the job fail due to lack of interpersonal skills – not lack of technical skills

A senior executive is fired after a run-in with the Board of Directors. An ineffective team leader is given a new team to manage – the team mutinies. An employee is reprimanded after losing her temper with a customer. Three different individuals, three unique situations, one common problem: Getting along with others.

According to noted author and sociologist BJ Gallagher, 80% of people who fail on the job fail due to lack of interpersonal skills – not lack of technical skills. That’s the specific problem Gallagher addresses in Getting Good at Getting Along – a helpful new guidebook that’s jam-packed with proven techniques for maintaining productive working relationships. One of the many ideas from this work that got my attention is taking TOTAL responsibility for the relationships we have with others (see excerpt below). A novel idea that, when you really think about it, makes a lot of sense. Give it a try – encourage your people to do the same. And remember …

Whether you and your people work in a large corporation, a small business, or a non- profit organization, your work involves dealing with people. Organizational life is all about bosses and employees, teammates, peers in other departments, customers, vendors, clients, and other stakeholders. Your ability to get along with them is the single most important factor in how well you get along in your career! If you want to be successful, you must get good at getting along.

Lead well ... LEAD RIGHT

 

Excerpt from Getting Good at Getting Along

Many people say that the best relationships are those that are 50-50. It’s a nice idea, but it often falls short in real life. People hold onto resentments – waiting for the other person to “see the light.” People insist that others take their share of responsibility when an issue comes up: “I’ve done my part; now it’s their turn.” The problem is, you might be waiting a very long time if you always insist that relationships (and their problems) be 50-50 propositions.

If you’re really serious about getting good at getting along with others, here’s an idea that can transform your life: Instead of expecting people to meet you 50-50, try making it 100-0. You take on the entire responsibility for making the relationship work, and don’t worry about whether the other person is doing their part!

Yes, it’s a somewhat radical idea. But if you’re up to really having amazing relationships at work – and in your personal life – this will do it. You’ll never again feel that you’re at the mercy of someone else. You’ll never feel like a victim of another’s actions or inactions.

Here’s how it works …

• Assume that the other person is a given. “He is who he is.” “This is her personality – she isn’t going to change.” Just accept the person exactly as they are – and exactly as they aren’t. This is who you’ve got to work with.
• Ask yourself, How can I change my words or actions when I deal with this person? You don’t have to change your whole personality – you’re just going to use different language and behaviors when dealing with this person.
• Try out new behaviors and new ways of conversing with your “problem person.” See what works and do more of it. If something doesn’t work, stop doing it.
• Learn from others. Watch others who have excellent interpersonal relationships and learn from them. If you want good relationships like those, mimic them.
• When there’s a problem, take ownership of it. As long as someone else is the problem, you’re powerless. But if YOU own the problem, then YOU can own and control the solution.

 

The RBI’s credit policy for FY11 was largely on expected lines, but the quantum of hikes was lower than expectations of few market players. The latest monetary measures and policy review clearly reflect the increasing emphasis on reigning in inflationary pressures. While, economic growth has been strong; the central bank highlighted possible risks due to an uncertain global environment and erratic monsoons. The RBI has highlighted the shift in the composition of inflationary pressures from supply led constraints to demand led factors. Increased capacity utilization and higher global commodity prices are also concerns. The higher credit growth expectations seem to be in line with the 8% GDP growth expectations (with an upward bias). The economic growth is expected to be spurred by strengthening exports/service sector activity; increased fund raising activity, and improved corporate profitability

The strong economic growth and the potential for relatively higher earnings growth has led to increased fund flows into India leading to a strengthening of the currency. The ultra accommodative monetary policies in the developed world should lead to increased inflows into emerging market economies like India with strong growth prospects. The RBI doesn’t seem to be overtly perturbed about the quantum of flows, given the strong absorptive capacity of the economy compared to the past.

Also, given the lingering global concerns, RBI appears to be taking a sanguine view on inflationary trends by the end of FY11 and doesn’t want to impact the current growth momentum. The new norms for infrastructure-related companies and securities appear to be in line with this thought process and are aimed at boosting investment activity.

Bond yields eased from highs and closed below yesterday’s levels as the quantum of rate hikes was less than expectations of some market players .Equity markets have gained during the week due to absence of aggressive monetary tightening with interest rate sensitive sectors in particular moving up very sharply.

Outlook on the market remains that inflation and global oil prices will continue to determine market sentiment and direction.Nonetheless, bulls have an upper hand .I don’t see the rate hikes impacting upward direction of the markets just yet.However, inflation remains a overhang . One must also understand that inflationary pressures are still largely due to the low base effect and supply constraints along with poor rainfall last year . I learn from various reports that inspite of droughts last year, food grain production in FY10 has matched that of last year-thanks to a very good Rabi harvest . This instills some hope that inflation may not be allowed to go out of control due to better supply- chain management by the government.