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FDIs, BPO are hot

The government's decision to impose a 76% FDI cap across all sectors is an interesting development, says Dr Bhaskar Dasgupta.

india Updated: Oct 14, 2003 20:08 IST

The India Babble

The week began with a nice little uptick of 78 points with good interest being shown in the banks and automobile stocks. The Sensex closed at 4631. Tuesday saw a very volatile session and the Sensex closed just two points up at 4633 and the ructions in the international market meant that the Sensex closed about 50 points down on Wednesday. The news that the Indian Economy will grow at more than seven per cent made Thursday's open reasonably good, the Sensex opened more than 75 points up. After a bit of volatility, it closed 64 points up at 4699, a 37 month high. Friday was even better, as sustained buying pressure meant that the Sensex moved up by 70 points to close at 4768. Infosys and HDFC gave pretty good quarterly numbers and this floated the entire market. CMIE has upped the growth forecast for 2003-04 to 7.4 per cent, which gave an added fillip to the markets.

Abbey National became another of the big British banks to decide on outsourcing its back office work to India. The crucial difference is, that the Indian employees will be Abbey employees, which is a rather half way house to full outsourcing. Needless to say, the unions are complaining. I am now getting the feeling that the Indian government or NASSCOM should step in for a publicity campaign, where India Inc has to explain why and where and how's of outsourcing. Politicians have this knee jerk reaction when jobs are concerned and it needs to be handled diplomatically and sensitively.

The government's decision to impose a 76 per centFDI cap across all sectors is an interesting development. Finally we have the emergence of a rather integrated high level policy. The idea being that while the foreign investor will have majority control, the Indian government can still impose disclosure and governance codes on it. The remainder of the 24 per cent may well have the condition of a compulsory public float. This is still under discussion and while I would hesitate to say that such a broad policy would fit into every industry, it can well be a good compromise. SEZ's are excluded!

Transparency international released its global corruption index and please don’t yawn, I know it’s not bad. India came up on the index from 2.7 to 2.8 but the international ranking fell from 71st globally to 83rd. In other words, there was a slight improvement, but other countries did far better. Why do we always have to be in the third division in anything which is faintly praiseworthy? Perhaps the learned justices and the honourable parliamentarians would like to see about this ranking rather than rush after the other rankings. This makes me really want to rant. Who am I saying this to? As the Tehelka scandal proved, this current government is full of them. The Financial Times reported that Mayawati, the ex-chief minister of UP, had 150 million rupees of allegedly illegal assets in her homes. Nice one, Mayawati, steal from the poor. The allegations are absolutely gobsmacking, and when leaders are like this, why wouldn’t the normal ram public do the same?

The Indo-ASEAN free trade framework deal was signed, with a view to have a free trade area between ASEAN and India by 2012. Needless to say, let us not forget that this was more as a reaction to China's decision, last year, to sign a framework deal with ASEAN. Why do we always have to be second and reactive, eh? Anyway, this is still good news. The WTO can go hang, the Europeans may want to live in their stultifying and choking economies, but other countries will keep on going right ahead. Here's a thought, why not a free trade deal with Japan and America? Oh! Sorry, I forgot the legendary lethargy of the North and South Block.

The Babble in the Ivory Towers

Jon Wongswan of the Federal Reserve Bank wrote a recent discussion paper on the transmission of information across international equity markets. The author investigates the transmission of important macroeconomic announcements across the USA, Japan, Korea and Thailand and measures it using high frequency intra-day data. The study analyses the return volatility and trading volume, instead of just returns and finds a large and significant association between emerging-economy equity volatility and trading volume and developed-economy macroeconomic announcements at short-time horizons.

The author finds that the effects of the US and Japanese announcements on the Korean and Thai’s in terms of return volatility lasts for about 30 minutes, while the trading volume effect lasts for a period of about 45 minutes. There are several interesting issues which come up, first is that this provides the first intra-day link between developed markets and emerging markets and gives an indication of the strength of the impact. Secondly, this will allow emerging market regulators and stock exchange regulators to manage excess volatility appearing from outside their domain. Third, this is useful for international arbitrageurs who may want to play with the differences in timing and volatility between emerging markets and developed markets (but they better have strong nerves and stomachs as the emerging markets are usually less liquid).

Details of this paper and past columns are available on http://beady.blogspot.com

The World Babble

Japan moved up 0.29 per cent to close at 10740 after good movements on techs and autos, but the high Yen value is still hitting the markets. The banking sector was another one doing well. Europe and US were involved in desultory trading, the FTSE Eurotop dropping by 0.60 per cent while US moved up 22 points. Knight Trading and Peoplesoft reported good numbers. In particular, Knight's performance is indicative of the fact that the equity markets are gathering steam. Tuesday saw the Nikkei closing for the 5th day up at 0.75 per cent at 10820, as domestic economic optimism returned to the economy. The dollar hit new lows on Tuesday, following fears over the mounting US current account deficit. It traded at Yen 109.39 (a 3 year record) and at 1.193 against the Euro. The Japanese, South Korean and Hong Kong monetary authorities are throwing record sums of money at the problem, trying to reduce the appreciation of their currencies. The European Markets took a bit of fright at this, closing at 0.88 per cent down. The DOW was up 59 points, while the NASDAQ was up 14 points.

Wednesday saw the weakening dollar hitting the major indices, with the Footsie closing down 2.4, DOW down 23 and NASDAQ down 14 points. Thursday saw the markets hitting highs, the DOW closed up 49 points and the NASDAQ up 18 points following a good jobless claims report. The data for new claims by jobless dropped to an 8 month low in the USA. This is giving hope that the jobs market may actually be turning now. Friday saw the Nikkei move up 2 per cent to close at 10786, cheered up by the rise in the US markets overnight and the rather soft stabilisation of the yen. The US markets treaded water again, pausing before the earnings announcement season and the weekend, with the DOW closing 5 points down at 9674.68 and the NASDAQ 3 points up at 1915.

The fact that the Investment Management Association of the UK has decided to drop its hard-line opposition to soft commissions is an interesting step. This is a first for the world, when soft commissions are abolished or made transparent for fund managers executing through brokers. This step has the potential to change the structure of every investment bank's equity as well as research divisions. Putting it simply, soft commission is the practice of getting freebies from brokers, such as custody fees, research, market data, etc. in return for trading flow. The costs are incorporated within the order commissions. Needless to say, this cost is not transparent and ultimate users of funds, you and me with our mutual funds/unit trusts/pension funds, lose out. So, attaboy to the Financial Services Authority for pushing this against rather severe opposition from both the investment management sector and the sell side sector.

Ok, have a laugh at this one. Members of the European Parliament, already the biggest pigs in the public sector trough, have now voted themselves as eligible to receive a taxi allowance to get home after late night dinners. How nice of the members. They already are paid a basic salary of €100,000, then on top of that, a whole cascade of allowances, then a daily allowance of €257. I wonder just what do they do with this daily allowance? Breakfast will be about €20, lunch in their subsidised restaurant, and dinner of even say €100. Oh! No, but they want their taxi allowance as well. Interesting use of tax payer money. Then these guys worry as to why their constituents, that is me and you again, are totally switched off this entire European enterprise?

An interesting item from Sony, which wants to cut the number of parts it uses in its electronics division from around 800,000 to 100,000, standardise the parts which they do use and ask its people to concentrate on product design. If this does take off, it will change the landscape of the world's electronics industry and the winners of this process will be China, Taiwan and India. A very interesting development indeed.

The European Commission agreed on the Investment Services DirectiveII. This is really going to set the cats amongst the pigeons of the European stock exchanges. This directive will allow investment banks to compete with recognised stock exchanges and allow internalisation at market rates. While the opportunity to improve on market prices is limited, this will definitely suck away liquidity from the recognised exchanges, at least the liquidity coming from the institutional investors. This is seriously going to mean more exchange mergers and more money poured into the European equity markets by the big investment banks.

Russia is back in play, with Moody's upgrading Russia to an investment grade status. This will allow foreign direct investment as well as regular fund flows into the country. The previous low credit rating would have stopped global pension and mutual funds from investing in the country, some due to regulatory reasons, and others due to risk reasons. This will also help Russia to reduce its borrowing costs as well as investment costs.

On the trade front, the USA and Australia requested a panel to rule on the European Community rules on the protection of trademarks and geographical indications for agricultural products and foodstuffs. Now that the panel has been established, they are asking the panel to rule on their concerns, that the EC regulations are discriminatory, in the sense that while the EU wants to restrict its European Names (like Parma Ham), it will not allow the same benefit to other countries which do not have the same geographical indication protection that was equivalent to that of the EC. Bit funny that.

(Dr Bhaskar Dasgupta writes a weekly Monday round-up on markets and indicators. He holds a Doctorate in Finance and Artificial Intelligence from Manchester Business School and works in London in diverse capacities in the banking sector.)