RBI SQR – Monetary Policy

RBI would come out with its Second Quarter Review of Monetary Policy. It came out with its Macroecon and Monetary developments today which is independent of tommorrow’s policy. Its happened many a times that things said here and tommorrow’s monetary policy and exact opposites.

MSF (penal rate) was reduced by 75 + 50 bps (latest cut on Oct 7, 2013). Now the LAF corridor width between Repo and MSF is 150 bps (earlier touched 300 bps) with Reverse Repo @ 6.5%, Repo @ 7.5%, MSF @ 9%. The spread of MSF over Repo which the RBI guv stated would do most of the walking. It has already walked 150 bps effectively (125 bps direct MSF cut and 25 bps due to Repo rate rise).

With exchange market conditions improving, RBI had started rolling back the exceptional measures that were introduced in July, i.e hiking MSF by 200bps and restrictig daily bank borrowing to 0.5% of NDTL. There were CMB issuances too to drain out liquidity. Effective policy rate had become the MSF. Cost of funds for lending institutions was a weighted average of repo and MSF. It also offered term repo in addition to overnight repo facility. The doc also talks about high and persistent inflation and the need to manage this growth – inflation trade – off.

RBI action could be to hike repo rate by 25 bps or even 50 bps (in – line with its stance to keep repo rate at appropriate level considering high inflation) and might just reduce the MSF by 25 bps (inline with stable FOREX market scenario) if repo rate hiked by only 25 bps which would normalise the corridor.

Multiple Blasts at Patna – Enough is enough!

Seven low intensity blasts took place in Patna, six of them went off in and around the venue (Gandhi Maidan) of BJP’s prime ministerial candidate Narendra Modi’s mega rally and one went off near the railway station. Casualties include ~6 dead and ~ 100 injured. Blasts have become so much of a commonplace in India that them not happening would be news. Its sad, but true.

The general apathy of the government, especially at the centre, toward such terrorist acts is disgusting. Home minister who is the person in charge of internal homeland security was seen at the music launch of a Bollywood movie rather than at the blast location yesterday. There is a precedent in the form of a former HM, who displayed similar lack sensitivity during the 26 Nov 2008 terrorist attack at Mumbai. There are senior leaders of the ruling alliance who seemed more concerned about the so called mileage which the opposition party and their PM nominee, who is seemingly generating mass hysteria wherever he is campaigning for next years general elections, would get. The state CM says he didnt get any input. Well, who is he kidding? Didnt multiple blasts rock Bihar at the historic Bodh Gaya temple complex just months ago? And isnt it basic thing to be extra alert and take precautions if a major event is supposed to take place in your state?

The ruling alliance has failed its people time and again, but there is a limit to people’s patience. Stern action is not forthcoming even if the enemy enters the country and brazenly kills the citizens (as was the case during 26 / 11 attacks). In that case, the government is shamelessly exchanging “dossiers” with our neighbour, who has got a good measure of our willingness to respond to anything. That is why the implicit support to terrorists to strike continues. Our borders are pounded. But the PM still goes and meets his counterpart, only to be mocked in private by using a derogatory term. China, on the other front too has got a measure of our readyness when it intruded deep inside our territory. Sri Lanka has started fingering us, especially after our foreign policy was held hostage by regional party like DMK.

Coming back to internal homeland security, only a credible response would act as a deterrant. Politicisng the issue would only give more ammunition to these terrorists. Patience is running wafer thin with the masses, who are already ravaged by inflation and falling income levels, death and destruction would only doom this government in the forthcoming elections.

Some details about Indian e-tail

It’s raining Diwali offers from some of the Indian e-retailers like Flip kart, Homeshop18 (B2C), Jabong etc. but here are some aspects that consumers might be missing out on.

Want to buy a digital camera, a smartphone, a tablet, a part of furniture, apparels, accessories, home ware kitchen ware, you name it or Google it and there’s a sweet deal offered by one of the many e-retailers ( as we call them) trying to be a part of the big future retail business of India.

It’s true that these ventures-websites have so far managed to prove their original critics wrong that the Indian consumer is averse to online transactions and an Indian would always prefer to physically inspect and buy his merchandise.

The new age generation having high disposable incomes, tech savvy are pretty comfortable swiping their plastic cards online. Concepts like cash on delivery and the return policies have also played a key role. We can say that the last year has been really exciting for the entire industry. Certain estimates state that apart from the handful 10-20 leading e retailers there are currently more than 4000 websites in the b2c segment in India. I call them the e-retailers!!

These are over and above the actual brand and product owners of the consumer goods industry having their direct platforms and websites for e retail. Like Croma online, Samsung, HP and others.

We think the smartphone revolution (credit to android-goggle) in our country which led to high internet penetration (3rd biggest internet user base in the world) has also played a key role in taking the e-retailing industry a step ahead.

During this festive period traveling in a Mumbai local first class compartment will confirm this view. People of all age groups from 14 to 40 are talking about flip kart, e-bay, amazon, olx and numerous websites. Comparing and even placing orders on their smartphones and tablets. Picture this with an entire country. One of the biggest consumer markets in the world. Whoa!! We are looking at one of the biggest business opportunity in our country in the last couple of decades.

So can we say that the time has arrived for the big leap for these e-retailers? Has it? Let’s try and dig in.

First a closer look into the internet surfing statistics shows that the conversion ratio of booking a product online after researching it and comparing prices is still pretty low.

Analyzing the purchasing pattern online it is very clear that maximum purchases are affected only when sweet deals or attractive discounts compared to local markets are offered, thus squeezing the margins of the online retailers. So managing their costs both procurement and operations simultaneously and scaling up volumes has become the key for survival in this industry and not all start-ups have been able to successfully manage that.

Also the recent boom in the industry is restricted to a very select group of product categories of Electronics, Apparels, Accessories, Kitchen-ware and also more of the branded goods – the organized sector. So a large pie of the Indian retail – consumer goods industry has still to find its footprint in the online space.

Even though internet penetration has increased significantly and there’s this phenomenon of the changing tech savvy plastic money user (Youth of India). But it’s still restricted to the metros and certain tier1 towns. The real challenge for the online retailers now is to go beyond these markets and tab the rest of Indian consumer markets.. If they can find a way to make inroads there then surely they have the biggest business opportunity in our country in the last couple of decades at their helms.

Right now it’s a buyer’s market out there.

We feel at this stage we can compare this industry to the story of the Indian air travel carrier industry. Since the last decade many major players or new players have wanted or have tried to tap this industry and we all know their fate.

It’s similar in the online e-retail space. There’s been a lot of funding and capital raised by the major and small players in the industry in the last couple of years. But looking at their PnL’s they are not just losing money but bleeding. They are pitching and justifying by market share and valuations and long term horizons.

But just as in the case of air carrier industry we all know that this business logic is not universal for all industries.

Except one exceptional player (Deccan), it has succeeded to be profitable because it was able to understand the Indian market. It’s peculiarity and controls its cost excellently while striking a balanced between its price offerings and quality of services.

So it will be pretty interesting to see who manages to be the Deccan of the e retail industry and also the fate of the numerous smaller players in the coming few years. Till then it’s a buyer’s market out there. So let’s sit back enjoy the sweet deals till they come, especially this Diwali it’s a carnival out there!!

Price you pay for watching your God

Sachin Tendulkar has announced his retirement from test cricket which is the last form in which he was still playing. The second test at Wankhede which will be his 200th will also be his last.

No wonder the cricket loving people of India who love him so much wants to have a last glimpse of their hero playing for the country.

The first test match is going to be played at the Eden gardens in Kolkata and the final one at Wankhede in Mumbai.

The Cricket Association of Bengal and Mumbai Cricket Association both have declared that only around 7-8% of the total tickets will be sold to normal public and the rest will be given to the local associations and VIPs.

This is similar to the World Cup final at Wankhede where tickets were given to clubs who blacked the tickets to local cricket crazy lovers at price as high as Rs.60000/- each.

This time will be the same.

Our question is that Sachin has been worshipped by these very people throughout his career and he has achieved this God like status only because of his fans. So why are these very fans deprieved of the opportunity to watch him play for the last time in his career.

The BCCI and all the cricket associations in India are run by money hungry politicians who do not care for the fans but only care about is to fill their pockets.

It is a sad end to Sachin’ career if he is not watched by his true fans.

No wonder he is compared with God in India as it happens only in India that people have to stand in queues for 4-5 hours or buy VIP passes to watch their God’s.

Securities Lending & Borrowing Market (SLBM) in India

Securities Lending & Borrowing Market (SLBM) serves 4 broad purposes;
              1.Access to securities for covering settlement obligations (Short / Bad delivery)
              2.Facilitates directional short selling by borrowing the stock;
              3.Facilitates arbitrage by borrowing the stock (Reverse arbitrage);
              4.Lending of idle securities by the investors

Global market size (as of April 2012) is $ 1.8 trillion, i.e. total securities on loan globally. It is widely regarded as a crucial link in any securities market infrastructure.

Now, globally the architechture of the securities lending market is OTC in nature. In India, it is an exchange based model.

So how does it work in India. Now being an exchange based platform it has to have a CCP i.e. a central counterparty that stands in between two counter parties. Since the contract is not bilateral, it has to be standardised so that it means the same to all (monthly expiry on the first thursday of a month). Also, there have to be brokers as also custodians. Ofcourse, there are lenders (typically institutional investors) and borrowers (propritory traders / brokers again).

Securities Lending & Borrowing Scheme (SLBS) in its current form got operationalized in April 2008 under the overall framework of Securities Lending Scheme, 1997. 
 
Market hours track the equity market timing – 9.15 am – 3.30 pm. Borrow / Lend transactions done through a separate SLB  window on the broker NEAT terminal. Price time priority is used to match trades (here borrowers and lenders quote the lending fee per share). T+1 settlement cycle followed. Lenders deliver the securities on T+1 day. Borrowers pay the lending fee on T+1. Margining involves collection of margins from both, the Lender (except early pay – in of securities) & Borrower. Lender subjected to 25% of the value of the underlying security as margin. Borrower pays margins of about 30% over and above collateral @ 100% of security value. Thus, in effect, borrowers pay ~ 130% of the value of the underlying as margin (which could be a big deterrent for borrowers who have a competing avenue for shorting. i.e the futures market).
 
Now, since the cost is prohibitive for the shorter, he would indulge in borrowing of security only if the yield (i.e. the security is trading at a massive discount in the futures market, i.e. a massive reverse arb oppurtunity). Presently, BHEL is trading at discount of 1.25 – 1.5 rs in the futures market. So ideally, the short – seller would buy BHEL Futures and go short in the underlying spot market by borrowing in SLBM. He would quote a lending fee such that on a net basis he makes a decent profit on arb.
 
Also, incases of corporate actions, the transactions are squared off except in cases of a dividend and stock split. The lend / borrow transaction can also be square off by Early RECALL / REPAY if the counter – parties wish to square off the transaction before the designated expiry date.
 
Volumes as of now are not all that great with the notional volumes of ~ 300 – 400 Cr transacted which is not that great. The avenue is a great one for exploiting primarily reverse arb oppurtunities. There are brokers / custodians who offer ‘ spot the oppurtunity’ services which is kind of a discretionary account. The regulator too has taken steps to popularise it.

Own goal & RaGa

According to Wikipedia, An own goal occurs in goal-scoring games when a player scores a goal that is registered against his or her own team. It is usually accidental, and may be a result of an attempt at defensive play that failed or was spoiled by opponents. It is considered one of the most embarrassing and humorous blunders in sports.

RaGa or Rahul Gandhi recently gave two speeches on his campaigning in Churu (Rajasthan) and Indore. To give an analogy of movies his Churu speech essentially borrowed from a typical Karan Johar sob drama (Dadi, Dad getting killed storyline .. ) whereas his Indore speech essentially focused on riots in Muzzafarnagar borrowing from say a Mani Ratnam movie ala the critically acclaimed and national award-winning 1995 Tamil film Bombay.

RaGa speeches leave us gasping for breath. Lets look at his Churu speech in Rajasthan. He tried to strike emotional chord by saying that his ‘Dadi’ AND his father fell victims of “communal hate” And then he attacked the BJP. Its very important to notice the stress on AND and communal hate. He clubs the killings of two former prime ministers and then links it to the BJP. Is he linking the BJP to the killings? Answer should be certainly not. Then why the insinuation of communalism by raking up the killings of the PM’s. Indira Gandhi was killed by Sikh extremists after the storming of the golden temple whereas Rajiv Gandhi was assasinated by the LTTE after he ordered IPKF into war torn Lanka. What connection does “communal hate” have with these two historical events? Infact it was the Congress leaders who were later convicted by courts for killings of thousands of Sikhs after Indira Gandhi’s death. How does BJP come into the picture here? And why the insinuation that he too might one day get killed by “them”. “Them” whom? The BJP again? What a pile of garbage.

In Indore, he tried to scratch the surface of the communal conflagration between the Jats and Muslim community and once again link the BJP here, although the state is a SP (an ally at the centre) run government. He said that Pakistani intelligence agency ISI contact muslim youths and were in touch. This he said was told to him by an intelligence official. Few questions. 1) Why would any intelligence official share such a thing with him. He is not a part of government. 2) Why did he not inform the government first that Pakistani agents are infiltrating and they should be cautious. Thius, if true, is a grave national security issue 3) Isnt he unfairly targeting the Muslims for being in reach of a Paki agency. Again, how does BJP come into the picture? This ones especially very disturbing.

To give him benefit of doubt, his party has given up on urban indian votes and now concentrating on only rural votes who might get swayed by the emotional drama (Difficult since how badly ravaged they have been by inflation). By again and again, referring the BJP and hatred in the same breath, his party might just succeed in scare mongering.

But his Indore speech (Shades of a certain diggy raja), went a bit too far and rather than appeasing the minorities it would end up driving them away.This own goal could prove costly.

Dollar in Doldrums: Even the US investors are investing in rupees

Decline in the value of the Indian rupee (INR) against the dollar from 55 to 69 in short term, made domestic importers, stock market and even commoners run for cover and now the US citizens are facing the same scenario.

The recent drama of the US politician’s shut down the government and even brought the country on the verge of defaulting on its debt obligations. US Federal Reserve would consequently continue to print dollar in the guise of QE i.e. bond buying program. As a result, the dollar hit 9 month low.

The US pensioners now feel that dooms day is near. Apparently, they have started investing their savings in foreign currencies like Australian dollar, Brazilian real and Canadian dollar and even in the Indian rupee. They believe that now US dollar would lose its value. Central bank is printing dollar in such a way that there won’t be tomorrow. Currently, the biggest inflow of foreign currency in the US is coming through the Japan Yen trust and the market makers of INR/USD exchange traded notes. Investors are worried about default, or about debt levels and the amount of money in circulation, or about something else taking over as the world’s reserve currency.

But no matter what your views of the dollar, you should be diversified, and not hold all your investments in one currency. Ultimately, all global central banks are keeping their foreign currency reserve in different currencies. After green back, they are keeping their foreign currency reserve in euro, British pound, Japanese yen or Canadian dollar. Foreign currency Certificate of Deposit (CDs) gives more yield that any bank product or deposit of the US. One thing is clear that if you are really frightened with your country’s currency or the USD, you must keep some money in foreign currencies. Such action would provide some safety and relief to your mind. If you are afraid about dollar or other currency crashing rapidly, then you must keep other foreign currency in cash. Such advice is being given to the US investors by their investment managers.