RBI: Deposits in Indian banks are safe, not to worry!

The Reserve Bank of India (RBI) has assured that the deposits of the Indian common man in indian banks are safe and not to worry at all. Due to the financial crisis in US and incertainity of the global financial markets everyone in the world is fearing about their hard earned money kept in their respective country's bank. As far as India is concerned RBI governer assured that Indian banks are not hit due to the sub prime crisis in US, which is the root cause of the financial turmoil seen in the world economy. All central banks of almost all countries are taking care of the their banks- Japan & S.Korea have promised unlimited cover to their banks. Even Indian central bank RBI is injecting about Rs:60,000 crore liquidity by reducing the CRR ratio.

Yes, we are witnessing worst time in the stock market industry, but this is just the result of fear and uncertainity in the global economy. So, the conclusion is not to worry about your deposits in Indian banks and just chill! If you are an indian stock investor you may find this article (What to do in such turbulent times? ) to decide upon your strategies to face the stock market uncertainities.

Reliance Power IPO - how should a retail investor approach it?

Reliance Power IPO is causing daily news and todays is its last day of offering. The price band is 405-450. This is 4th day - the last day and untill tommorrow the issue was over subscribed about 38 times - I dont know exact figures but it will be around it. Now should you apply to this one or not?
I think its not a good company to remain invested in. Relaince Power have no mega projects going on - all it has are promises. Other power companies in India like Tata Power, NTPC look more strong than Reliance Power, just for comparison NTPC will have a capacity double to that of Reliance Power in 2016 - even we consider all the promises of Reliance Power to be true. I feel we should make just listing gains in this IPO as i think above 800 the Reliance Power share is over priced.

What are p-notes? - restiction on which caused SENSEX to fall 1744points on 17th Aug,2007 and Market closed for an hour!

The 30-share index, SENSEX; which reached a life-time high this week, crashed 1744 points, after the SEBI put up its suggestion late on Tuesday evening. The market was closed for an hour. The p-Notes are said be behind the hugh surge in foreign inflows, which caused the latest market rally. "The steps taken by SEBI are in the right direction," the Finance Minister P.Chidambaram said. The Securities and Exchange Board of India (SEBI) on Tuesday proposed to tighten the rules for purchase of shares and bonds in Indian companies through the participatory note (p-Note) route. The move is aimed at arresting the surge in foreign inflows through p-notes.

So, what are these p-notes? Why such a havoc about them? What makes them so special? P-Notes are financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India to invest in Indian securities. Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. Participatory notes are like contract notes. These are issued by FIIs to entities that want to invest in the Indian stock market but do not want to register themselves with the SEBI. SEBI was not very happy about participatory notes because they have no way to know who owns the underlying securities, it feared that hedge funds acting through participatory notes will cause economic volatility in India's exchanges.

I feel that this step taken by the SEBI is good step towards improving clarity of FII investments. Many are saying this should have been done a lot before, say 6-7 years back. But at that time p-notes were not that much a highly weighted investment instrument by the FII. As a report says "the notional value of PNs has zoomed from 20% of FII/sub-account assets in March 2004 to 51.6% in August 2007, in other words from Rs 31,875 crore to Rs 3,53,484 crore!". While FIIs were net investors to the tune of $8.5 billion during the last calendar year, expectations are that they would invest close to $12 billion this year. This would take the market's exposure to P-Notes to over $5 billion, if the same ratio were maintained for the next three months.

What exactly were the restrictions put by SEBI on p-Notes - check out in next post.

Sandip Sabharwal: Bull market may continue...

In the past two months, global markets have fallen substantially on inflation fears and central banks’ responses to the same. The inflation argument in India has been carried forward too far. In reality, inflation has little impact on the direction of stock markets. An analysis of the past 20 years’ history of the Indian market reveals there have been bear markets in periods of very low inflation and bull markets in periods of very high inflation. For example, the Japanese market had been in a bear phase for years, during times of zero interest rates and negative inflation. To understand the impact of inflation on markets, we have to understand why there are inflationary pressures. Inflation picks up where there is growth and declines when growth slows.

Today, when growth is picking up in Japan, the market is doing well and is expected to do well, as long as the economy expands, companies increase profits and consumers are confident. The era of very low inflation seems to be over globally. The faster central banks globally come to terms with this fact, the better it is for the global economy. This is because, contrary to the 1980s and 1990s — when growth in the world economy was not as widespread as it is today, and overall growth was driven by growth in the US, Europe or South-East Asian Tigers — today, there is growth all around. China and India have emerged as strong engines of growth. Other BRIC economies, as well as Middle East economies, are growing at 7%-plus. Growth in Europe has also picked up and Japan is growing after more than 15 years. Even Africa is growing at rapidly, driven by a commodity bull cycle. Such widespread growth will lead to inflation.

The second factor is that currently, there is very high inflation in metals, oil and agri-commodities. Agri-commodity inflation is mainly due to two reasons — firstly, growing prosperity worldwide is leading to increased consumption of food grains; secondly, diversion of products like palm oil, corn etc to bio-fuels production is creating a demand-supply gap in these products. It is unlikely that agri-commodity inflation will come down anytime soon. This is because, increasing production of agri-commodities is a long-term process; it involves increasing acreages and improving productivity, which cannot be done in a year or two. Monetary policy can do little to reduce agri-commodity inflation.

Under these circumstances, the response of central banks becomes critical. Under the current scenario, excessive monetary tightening may not reduce inflation significantly, but it can impact growth negatively, as costs for corporates rise and consumer demand is affected. The US Fed seems to be realising that excessive tightening can take the economy to recession, without bringing down inflation significantly. Over a period of time, as supply of various commodities increases, inflation will reduce to a certain extent. Moreover, the impact of monetary policy on demand is normally felt 18 months after the action.

In the current situation, when interest rates have already risen substantially over the past four years, a policy of status quo is desirable. Given the current interest rate scenario, economic growth in India is likely to slow down to around 8.2% for FY08. However, long-term growth prospects remain bright and the next 10-15 years should see average growth of 8-10%. Overall view on the equity market remains positive for both the medium and long term. The market is trading at valuations of 14.7x ’08E earnings on the large-cap side, while mid caps are trading at a substantial discount at 11.5-12x ’08E earnings. From these levels, the downside to the market looks limited. Over the next few days, the market can potentially move down by 6-7%. But from there, it should be able to give a return of 18-20% p.a. over the next three years.

The bull market may continue over the next few years. But the Indian market is now integrated with global markets. Global market movements, like that of May ’06 and February ’07, will affect the market in the short run, but in the long run, individual markets will perform on their own merits.

Originally By Sandip Sabharwal - CIO,JM Financial Mutual Fund.