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India, world markets remain +ve

Volumes on the LSE are rising rapidly and the green shoots of recovery are well on their way up, writes Dr Dasgupta.
PTI | By Dr Bhaskar Dasgupta, London
PUBLISHED ON JUL 08, 2003 03:56 PM IST
The India Babble
So it was a reasonably good week for the markets, steady upward trend, the Sensex traded in a range of about 110 points and ended up at 3303.

The news that the monsoon is on its way and looks like it's going to be a normal one was the biggest feel good factor. Another aspect was the return of the retail investors, with some of the brokers reporting the return of the small lot trading. While this really doesn't move the markets, the presence of retail investors has a lot to do with the "feel good" factor. Basic human psychology at work in the markets.

The monsoons help in kick-starting the rural economy across a vast swathe of the country. The automobile, tractor, farm implements, fertiliser, cement, infrastructure and consumer goods industry should perk up. One would notice that these are "old" economy stocks and thus would help in the broad based uplift of the market.

The "new" economy was also pushing right on ahead, based on a good continuing NASDAQ rally and a report out by NASSCOM that the Indian software exports are predicted to grow by 26% this year up from $ 9.5 Billion to $ 12 Billion. Most of the big ticket names such as HCL, Infosys and Satyam showed a good jump in their prices. Pretty good going, I must admit. The reserves situation is pretty good as well, with the reserves touching $ 81.329 billion for the week ending May 30, 2003. Remittances are said to be the major cause, but it looks like foreign investments in portfolio form are also another cause.

The foreign institutional investors are piling on into the debt market and this increase in the reserves is thought to be one of the reasons why the rupee is strengthening against the US dollar. The falling dollar and the reduced cost of hedging are also powering the growth of the US dollar loan market for the Indian corporates. According to a Reuters report, many companies are planning to raise up to a billion dollars in US Dollar loans. Needless to say, this is having a slightly dampening effect on the local INR debt market.

Now for a rant. Two stories caught my eye and that just made me absolutely furious. The first one was about a senior income tax official who was arrested for bribing a federal minister to get a good posting. The minister, Gingee Ramachandran, was sacked, but to hear news about corruption in the finance ministry makes one see red.

The prevailing thought is that the private corporations were stopped from political donations and hence "black" money, estimated to be about 40 per cent of the economy, is usually taken by our divine politicians to fund their campaigns. What rot. Give the vigilance commission more teeth and chuck these blood-sucking parasites into jail, the common one, where drunks and thieves are held. I had high hopes that the BJP/NDA, a nationalistic one, would, at least, be slightly nicer than those corrupt Congress-wallah's, but Tehelka put paid to that pious intent.

Coal India Chairman and MD, NK Sharma was suspended on alleged corruption charges. Just one week after I praised an IAS officer for doing well for the public sector, this kind of news arrives of another public sector unit being driven into the ground by the utter greed and sheer venality of these bureaucrats and politicians. Disgusting, absolutely disgusting.

The Babble in the Ivory Towers
We check a fascinating working paper released by the IMF and entitled The Dynamics of real interest rates, real exchange rates and the balance of payments in China, 1980-2002. The author finds that the empirical results suggest that capital inflows are relatively insensitive to short term interest rates and an increase in the real interest rate may depreciate the real exchange rate.

On the other hand, an appreciation in the real exchange rate may stimulate the supply of non-tradeable goods, discourage the supply of tradeable goods and reduce inflation. This will in turn, increase real interest rates, dampen domestic demand (oops), and increase the balance of payment surplus.

China has a strong economic impact on the other Asian economies of South East Asia, like India, Japan, and South Korea and has started to have an impact in the developed economies, especially in the USA. The Chinese economic behaviour has a definite impact on a rather important part of the world and given the situation with respect to the exchange rates, most other countries will keep a beady eye out on how the Chinese manage their nominal interest rates, exchange rates and capital controls.

India and China share quite a lot of similar economic characteristics in terms of controlled interest rates, protected economies, controls over capital inflow etc. Given these results, the case for maintaining the capital controls in India is strong, specially when the Indian economy is subject to external vagaries, such as the monsoon and the performance of the IT sector in the USA. No need to allow the Indian economy to be exposed to whims and fancies of quarterly portfolio allocation pressures.

On the other hand, the rise in the value of the rupee should give the RBI and treasurers some cause for concern, I would expect some murmurs to start soon about how the rise in the rupee is starting to hurt the economy.

Details of this paper and past columns are available on

The World Babble
The markets had a pretty good run for most of the week, the NASDAQ was at one point on Friday morning, up 4% but then tumbled, ending just under 1% up, while the DOW and S&P 500 were just about 2% up over the week. Nothing to worry about, says the market, normal profit taking at work. These 3 markets hit their lowest point on March 11, since then, the Dow has risen about 20 per cent, the S&P 500 about 23 percent, and the NASDAQ has done best with a rise of about 28 per cent. Mainly driven by the news that Oracle is making a bid for PeopleSoft, this gave an indication that the database company has got a good optimistic view of the future and the earnings are going to hold up. Given the heavy volumes this week, I bet the institutional buyers were sniffing the markets, mainly hoping that the M&A market would start off and get some action going.

The oil markets were running a bit scared with the price continuously rising on the IPE, with Brent Crude ending at $27.78 per BBL from just over $26 at the start of the week. The short term trend seems to be up, while the 6 month trend being down. The US Oil futures hit $31.28 following signs that the OPEC members are a bit firmer on their desire to hold down production and the looting/sabotage situation in Iraq. Something weird is going on there, with all this production happening and the inventories low.

The US jobless rate moved up slightly to a nine year high to 6.1% in May but the 17,000 drop in non agricultural payrolls was less than the market expected. Given this, it looks like the economy is on the path to recovery, but job creation is lagging behind. The job situation looks like it's stabilising with wage growth, temporary jobs and manufacturing overtime figures showing a slight increase.

Japanese foreign exchange reserves shot up by $42.6 Billion in May, showing the sheer gobsmacking scale of Japanese intervention in the defence of the Yen. Even the IMF has prodded the Bank of Japan for trying to move against the markets. Otherwise, the foreign exchange market was all over the place, up and down, dizzying ride, what? As mentioned in last week's column, the expected ECB rate change of half a point was priced in, but then the employment figures came in on Thursday and this made the Euro shoot up! Poor ECB, as I mentioned before, the rate cut was too little, too late and too obvious for it to have any serious economic impact at all. On the other hand, Alan Greenspan made a series of remarks, which could potentially mean that the US is again going to have an interest rate cut.

Guess what? All that heavy breathing in the rarefied 16th floor of the ECB Euro tower in Frankfurt was for naught and now I bet that the worthies will be worried about what to do. The economic weapons are fast running out of ammo and given the "rabbit stuck in headlights" situation of the politicians, I can't see much room to manoeuvre. Oh well, I expect the strikes in France, Germany and Italy will concentrate minds, I hope.

Still, the rate cut was good for the European stocks and the FTSE Eurotop 300 shot up by 3.9% over the week and ended up at 856. The receding SARS threat pushed up several Asian markets, while the frantic attempts by the BOJ to keep the yen weak, moved the Nikkei up by more than 4% over the week ending just under the 8800 level.

Monday should be an interesting day, with Gordon Brown, the UK Chancellor of the Exchequer, giving the final result of the tomes of research that his economists have gone through about joining the Euro. The range of answers is amusing, Yes; Yes, but not now; No, but in 3-4 years and No. I would bet on the yes but not now, given the political pressure on Tony Blair and Gordon

Still, the volumes on the LSE are going up rapidly and the green shoots of recovery are well on their way up. The FT100 ended up at 4150 and I hope it punches through 4200, the next resistance level, next week. Gold is down to $363 per ounce giving credence that people are getting slightly less risk averse, which is good news!

On the institutional front, the World Bank seems to be hitting the health sector in Afghanistan, Pakistan and India with 3 separate $ 50 million programs in each country, relating to emergency health care, HIV/AIDS prevention and drug capacity building programs. WTO Director-General Supachai Panitchpakdi was very polite in thanking the G8 for supporting the Doha round, but there was a plaintive note in his speech. He basically said, "Yeah right, those high faluting words are all fine and good, but show me the money, where's the action behind all those fine words?" I very much doubt that the G8 is really going to do something about their agricultural subsidies.

Especially the European Union (read France) who is going to be single handedly responsible for the collapse of the trade talks overagriculture. Oh, well, one can only hope that saner counsels prevail and the WTO agenda is taken forward otherwise expecting the EU to actually act in the long term interests of the world is to expect a pit-bull to be interested in knitting socks for vagrant alley cats.

(Dr Bhaskar Dasgupta will be writing 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.)

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