Money, money, money; it’s a rich man’s world
Stock markets being driven significantly by liquidity, investors are watching the actions of those in charge of money supply central bankers, writes J Mulraj.india Updated: Nov 04, 2007 22:43 IST
Stock markets being driven significantly by liquidity, investors are watching the actions of those in charge of money supply—central bankers. How effective are the levers they move is another question. The Reserve Bank governor batted a day before the chairman of the US Federal Reserve, and sought to control money supply with a hike in the cash reserve ratio--funds banks need to set aside as liquid assets. The problems of YV Reddy are different from those of Ben Bernanke, in fact, partly created by his actions. The next day Bernanke decided to cut the Fed funds rate by a quarter of a point, stating, however, that another cut was unlikely in the December 11 meeting. Since the bar was kept open, the party continued and Dalal Street took off.
The BSE Sensex ended the week at 19,976, up 733 points. In fact, two shares--ICICI Bank (which contributed 268 points) and Larsen & Toubro (252)--accounted for nearly 70 per cent of this gain. Add two more--ONGC with 150 and HDFC with 100--and the entire gain is accounted for. Foreign institutional investors, especially late entrants, are veering towards large-cap stocks. The big losers were Bharti Airtel and Tata Steel.
Bharti is hit by the vicissitudes of telecom sector reforms. Since spectrum is scarce, the telecom regulator has tried to make its use more efficient by recommending that existing cellphone companies increase their subscribers by 2-6 times within their existing spectrum allocation before being eligible for more. The technical arm of the department of telecommunications went further and recommended increasing this by 2-15 times.
Cellphone companies were up in arms, seeking that spectrum be taken away from state-owned telecom firms instead.
Valuations, meanwhile, took a tumble despite excellent second-quarter results by Bharti, whose net profits rose 73 per cent to Rs 1,617 crore. Not to be outdone, Reliance Communications improved its net profit by 86 per cent to Rs 1,305 crore.
Telecom has been India’s poster boy since economic liberalisation began, but with a spectrum crunch coming up one needs to see how the story unfolds. Given its preoccupation with big battles, the regulator has no time to look at the biggest benefit to the consumer, through the introduction of mobile number portability. This alone will ensure true competition for the retention of customers; there is enough for the acquisition of new ones.
A far bigger mess is in the oil sector. With oil prices close to hitting $100 a barrel, the prices of petroleum products have not been raised for political reasons. This, naturally, entails a loss (Rs 55,000 crore estimated this year). Less than half of this is borne by the government, which forces the loss on oil retailing companies, and that too using oil bonds.
This is an accounting fraud for which any private sector company would be hauled over the coals by auditors and taken to the cleaners by investors. The liability will suddenly pop up 15 years later, leaving a big hole in the Budget, instead of showing up now. The balance sheets of Indian Oil, Bharat Petroleum and Hindustan Petroleum--once ‘navratnas’--have been destroyed.
The party continues if the monetary tap is kept open. A correction will be desirable and will provide a buying opportunity. It is the private sector that is performing well. The government has to pull up its socks.