FII Trends: Net investments Surge in India

Summary

*FIIs were net buyers in 2007

*Inflows have surged multifolds since Sep 2007; surge in inflows coincides with the reduction in short-term rates by the Fed

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Foreign Institutional Investors (FIIs) were net buyers in Indian markets in 2007. According to the data published by Securities Exchange Board of India, FIIs have made a net investment (in both Equity and Debt) to the tune of $36.2 billion ($33.1 billion in Equity and $3.1 billion in debt), for the first 11 months ending November 2007. This is substantially higher in comparison to the $8.9 billion invested in 2006.

Though net investments were positive over the past three years, a closer observation at the trend indicates a different picture. During the first 8 months of the current year, only a fourth of the $36.2 billion was invested, while the remaining was invested in the last three months (see chart). FIIs invested in both Equity and Debt markets during this period. Interestingly, this coincides with the reduction of short term interest rates by the Federal Reserve. Since September 2007, Fed has pared interest rates by one percentage point in order to protect the economy from falling into recession. Reduction in interest rate, appears to have induced investors to move money into the Indian markets.

Madhan Gopalan

The author, currently based at Louisville, Kentucky, is a Global Equity Research Manager with Ness, USA. The views expressed in this article are his and not necessarily of his employer. He can be reached at gmadhan72@yahoo.com

Federal Reserve's Juggling Act

In my post dated April 4th (American New Home buyers can wait), I had indicated that the Federal Reserve will be forced to ease the interest rates if the housing market crisis continues. This is what appears to be happening in the US economy. Between September and now, driven by an economic slowdown in the wake of housing market crisis coupled with rising oil prices, Fed has lowered the short-term interest rates by 100 basis points (one percentage point).

The Outcome

When Fed lowers its interest rates, a string of things starts to unfold.

1) Investment and consumption expenditure increases – Propelled by lower lending rates offered by commercial banks, businesses get into the expansion mode by making sizeable investments. In addition, big ticket consumer items that are generally purchased through financing also surge, as retail loans (e.g. auto loans) becomes relatively cheaper

2) Dollar falls – When interest rate plummets (relative to other countries), Investors preferring higher returns move their funds to countries with a higher interest rate. When money moves out of the US, people sell dollars and buy other currencies say the Indian Rupee or the Chinese Yuan. With less dollars demanded, the value (price) of the dollar drops in the Forex market

3) Exports surge – A decline in the price of dollar means that foreigners only have to pay less (than before) to buy US made goods and services. Consequently, foreigners buy more goods produced in the US.

4) A multiplier process unfolds – Increase in expenditure results in an increase in income, which in turn augments the consumption expenditure. This enhances the aggregate demand, resulting in higher Real GDP and inflation rate.

The Juggling Act

Fed’s decision to increase the money supply (by paring the interest rates) to avoid an economic slowdown has a trade off, in the form of inflation. A cursory look at the CPI, an index that tracks the price level of key commodities, stands testimony to this. Inflation, since September 2007 has steadily increased both on a sequential basis and on a year-over-year basis (see table).

Now, Fed’s choices are caught between a rock and a hard place. Fed has limited incentives to pare the interest rates further, given the surge in inflation rate. Why? If Fed lowers the interest rate further, the rising inflation would pose a huge risk to growth. For instance, between 1975 to 1977, Fed continued to increase the quantity of money supply to accommodate increasing oil prices. This pushed the inflation stratospheric levels. However, when the OPEC cartels pegged up the price of Oil again in 1979, Fed didn’t react. Though this action curbed the inflation rate, the US economy went into a deep recession.

On the other hand, Fed will also find it hard to increase the interest rates, given the state of economy. Why? An increase in interest rate, at the current juncture, will prolong the economy’s recovery. Fed must be closely monitoring the supply-demand situation in the economy. It would be interesting to see how Fed nudges the economy into the growth path, concurrently keeping the inflation under control.

Madhan Gopalan

The author, currently based at Louisville, Kentucky, is a Global Equity Research Manager with Ness, USA. The views expressed in this article are his and not necessarily of his employer. He can be reached at gmadhan72@yahoo.com

Where are the Markets going?

Indian equity market has been on fire for the last couple of weeks.From the moment Big Ben had made his decision, there has been a unbound optimism on part of Equity investors. It was no wonder that the sensex made it's quickest 1000 points recently and looking at the way it is going, it might as well break that record. Is this optimism based just on faith or is there a sound foundation behind it? Only speculative reasoning can give the answer.

The way Energy and Power sector companies like Reliance Energy and Tata Power have moved is just amazing. If you had invested in one of those companies about 20 days back, you would be sitting with handsome profits by now. The Entire pack of reliance group companies have led the way followed by traditional banking and Financial sectors. To an extent this move has been based on fundamentals, Indian banking and Power sector has tremendous scope for growth and a part of that is being reflected in the way these stocks have moved. The Foreign fund houses have also helped by bringing in quite a lot of money into the market.

What do we do now is a pertinent question every investor would have to ask himself.It is a difficult and futile exercise to predict the market, hence it is always better to stay safe. The question of concern is short term rather than long term. Long term investor can rest in peace, it is the investors who are looking at shorter horizons that need to make decisions. Have you invested in a company or in a stock, answer to that question will help in making your decision. Investors who have invested in a company based on it's strong fundamentals and the management are in a relatively better position than those who have placed bets just based on market movements. It will be an exciting month going forward, no doubt about that.

Lessons from the sub-prime mortgage crisis

Estimated to have impacted about two million American homeowners with spotty credits, the sub-prime mortgage crisis continue to chug along. With their homes at stake, these homeowners and their lenders are increasingly finding the going getting tougher. According to NewYork Times, which cites the data of Realtytrac, 1.2 million homeowners have been forced to opt for foreclosures in 2006, a 42% increase from the previous year. The US Government is trying to resolve this crisis through a package comprising tax breaks to homeowners whose loans have been written off by the lenders, a federal mortgage insurance program, and modernization of Federal Housing Administration. The outcome of this, however, remains to be seen. Meanwhile, what should an invididual American investor do if he/she is seriously considering buying a home?

Perhaps the suggestions made here might err on the conservative side. But it will certainly help you to hold on to your hard earned money. And, you will own your home and not your bank. If you can afford only a rented apartment and not a home, stay where you are until you save adequate money to pay the downpayment costs. If you still want to go ahead with your new home, consider this.

1) Check your credit score. If you don't have a good credit score, this perhaps is not the right time to take housing loans. A good credit history can help you raise money at lower interest rates.
2) Don't opt for a 4 bed-room home in a four acre land, if you can afford only a two-bedroom house in a half-acre land, because the financing rates are low. Your purchases should be based on your affordability and not the availability in the market.
3) Identify the right home you want to buy. A bit of scouting/search over the internet, will help you to narrow it down. Look for deals. You may easily find one now given the spate of homes available for sale.
4) Get your loans only from a genuine lender and not a loan shark. Try and speak with different banks and lenders. Find out from them the following, interest rate on your loan, installments you have to dole out monthly, and the foreclosure taxes you have to pay. Compare them. Also, speak to your friends on their experiences. You should be able to identify the right one.
5) Once you have decided the lender, read the fine print in the documents that you will be signing. It is worth an effort.
6) Lock your mortgage at a fixed interest rate and not on a variable (adjustable) rate. This may increase your interest rate by few percentage points, but you will know that your cash outflows are going to be constant, irrespective of changes in the prime rates.
7) Ideally pay a higher down payment. This will help to keep your monthly installments low and well within the manageable limits. You may also be able to bargain a lower interest rate from your lender in such cases.
8) Once you have bought your house and taken the loan, try and pay your monthly installments on time without default. Delay's, if any, can be costly, as many lenders levy penalties.

In all, buying a home is like buying any other thing. Do the required ground work, don't take risky bets, and stick to your committment. Enjoy your new home with a freedom that you really deserve.

Madhan Gopalan

The author, based at Louisville, Kentucky, is a Global Equity Research Manager with Ness IBS, USA. The views expressed in this article are his and not that of his employer's. He can be reached at gmadhan72@yahoo.com

Who wants to be The President (of India)

Every now and then as bollywood goes into a slumber the Indian politicians put together exciting games that interests the country as a whole without any regional barrier. As the political parties in India start the president game, many players will come and go until they find the one who can play the president role to their liking.

The president Of India is given the Honour of being the country's first citizen, In Addition he/she also plays part as the supreme commander of the armed forces of the country. India has had many presidents in the past who had lived up to the role and been a Model citizen. India's first president Rajendra prasad is such a great man and remembered even today for his contributions.

In the recent bygone days many new names have been proposed. However the question is not which party's candidate will win, but it is rather how badly will the people lose. Without discrediting anyone proposed or the proposer, My thoughts are that the current president Dr Abdul kalam played the role of a Model citizen quite perfectly. He was not elected just because he had got the desired votes, rather he was voted because he had the desired credentials for the role and he elected himself to his role by his contributions to the country.

The current day political setup has shown that the presidential role is merely constitutional, and is more as a reflection of the party the elected belongs to. Do we need a president who act as a mere puppet to the ruling party, some one like that would be abusing one of the more important powers vested with the president, which is the power to intervene with policy decisions. A bill cannot be passed until it is signed by the president. Given that in our country laws are made for political gains, the winner of the presidential game would have much to benefit.

Who do you as a Indian citizen and a reader of this post think should be the president? Would you have some one from a political outfit or someone from other walks of life who have contributed significantly to the country's betterment?
Please leave your thoughts as a comment.

-Suresh