Equities may remain positive, thanks to RBI

Equity market is likely to respond positively this week to RBI’s moves on the weekend. The sentimental value of these moves may leave short-term impression on Dalal Street. Last week, we wrote in these columns that those who expected RBI to give stronger signal for reversal in interest rate cycle have to wait. The central bank did not keep them in waiting for long.
The RBI not only paved the way for more liquidity into the financial system, but also signalled lowering of rates.Market had begun to turn last week on expectation of regulators’ steps.
The measures may ease pressure on some banks, mutual funds, NBFCs, real estate players and corporates in the short-term. There is a likelihood that in a trickle-down effect liquidity situation and confidence level would improve for the equity market too. More importantly, improvement in equity valuations may set in motion a virtuous cycle for the financial system, even if for a short term.
Some scepticism Overseas institutional investors are still troubled by problems in their own backyard. Investors across the world, after almost concerted efforts by majority of central banks in October to release more liquidity and reduce rates, wonder if these measures will be sufficient to stabilise the financial systems and prevent economic depression. Throughout last month they mopped up money from markets including India.
Three things have emerged in the melee – authorities are likely to use available means to address the problems as they crop up; investors would like to wait for clearer indication of depth of the oncoming global recession and identify economies that might be less impacted; and since a strong element uncertainty shrouds the unfolding developments none would like to take fresh moves in a hurry.
Interim relief In India monetary and regulatory actions may bring about an interim relief for the market. More of such actions cannot be ruled out in the near future through unconventional mode also. Some market players are expecting good news on capital gains tax front.
Would the Government announce a new package of fiscal stimulus for infrastructure or would it cater to political demands for “aam admi” before elections? Can the Government, which is in a policy bind to balance growth with containing inflation, arrest growth impairment in the third and fourth quarters? If global depression were unavoidable, how India would fare?
Investors would be looking for answers to these questions in pricing in a medium term outlook for equities.

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Surprise element

The award of the Nobel Prize for Physiology or Medicine to the two French scientists who discovered the human immunodeficiency virus (HIV) that causes AIDS, and to the German who discovered the human papilloma virus (HPV) that causes cervical cancer cannot be faulted. But it has nevertheless thrown up a surprise. While there is now little doubt that the French scientists — Luc Montagnier and Francoise Barre-Sinoussi — are the real discoverers of HIV, the Nobel committee’s announcement can be seen as giving a quietus to the controversy over the claim of the American scientist Robert Gallo that he was the real discoverer. In fact, the investigations carried out a few years after the dispute became bitter proved beyond doubt that the viruses Gallo studied were really the ones supplied by Montagnier. Yet Gallo, despite his overreaching claim, was responsible for many seminal contributions that followed confirmation a year later that it is HIV infection that causes AIDS, and the fundamental discoveries about the genes of the virus and how it enters human cells. Deviating from the usual norm of recognising the most important contributors, this year’s award has quite surprisingly ignored Gallo’s work. And this is made all the more obvious as the citation makes only a passing mention of his work.
One can only surmise that Gallo’s vain attempt to take credit for a discovery that was not truly his could have been one of the factors behind the Nobel committee ignoring him. Gallo did acknowledge that he was “disappointed” to be left out. But there is something more than disappointment that will haunt him. He has been quoted as saying by the Science journal that “the only thing I worry about is that it may give people the notion that I might have done something wrong.” Professor Bertil Fredholm, the chair of the Nobel committee, has tried to clear the air by stating that the decision was based purely on who had initially discovered the virus. One thing is for sure: this year’s prize will be remembered more for the committee overlooking Gallo’s contributions than for its recognition of the scientists whose discoveries of HIV and HPV have saved millions of lives. The discovery of tests to identify these two diseases, and medicines to treat those infected with HIV came about quite quickly. But unlike in the case of vaccines to prevent the two predominant HPV subtypes that are responsible for about 70 per cent of cervical cancer worldwide, the quest for a preventive or therapeutic vaccine for HIV/AIDS has proved to be elusive so far. Currently, there is no vaccine that is at an advanced stage of human clinical trial.

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Performance Inspired By Good Leadership

The successful management of an organisation can be measured by the people working for it and their level of satisfaction and happiness. The overall success of an organisation must necessarily be geared to the satisfaction and happiness of the customer as well. In the business world, customer satisfaction is given top priority — the customer is always right, no matter what! Much depends on the leader in an organisation, who must rise above limited views. He must carry in his mind the total vision, the complete panorama. If his idea of success is limited, then his success will also be limited. Ultimately, the vision of the totality that the CEO carries, determines the growth, development and success of his enterprise. True knowledge gives us humility. Humility leads to greater ability which in turn leads to higher prosperity. Prosperity if used for righteousness will lead to true happiness. Every leader has some duties or responsibilities towards those working for him. A good leader must assume three basic responsibilities towards his employees: 1. He must give security to his employees. 2. He must design their job content appropriately. 3. Teach them what dharma is. Explain to them the significance of ethics, and the importance of right values. Of the three, the third aspect is most important. A leader must instil the right moral values in his employees and teach them the right way to live and work. Inspiration gained from the empirical world alone cannot give true fulfilment. People must understand that joy lies in inspired action and not in material gain. When happiness depends on the result, we postpone our experience of happiness to the future. There is a contradiction here. We want happiness in the present but have, by depending on the result, delayed the experience of enjoyment to the future. The result that we look forward to with great anticipation also does not last. We often lose it and promptly return to square one. The secret of enjoying life is to understand that joy lies in the very performance of the action. Action is always in the present and so too is happiness. When workers are happy, they are more productive. If they are disgruntled production figures fall. The higher or greater the level of inspiration, the more will be the output of the workforce. When people discover joy in the very execution of action, the quality of their performance changes. With dedication the quality of performance undergoes a radical change. When actions are dedicated to a nobler and higher ideal, inspired thinking produces more refined performance. Akbar was very pleased with Tansen’s singing prowess and praised him greatly. Tansen humbly requested the emperor to listen to his guru, who he opined was a greater artist. Akbar was intrigued and after listening to Tansen’s guru, wanted to know the reason for the difference in the quality of his singing. Tansen attributed the superiority of his guru’s singing to the fact that his guru sang for the Lord, whereas, he himself sang for the emperor. The inspiration gained while working for the Higher Self is much greater. Inspired performance will yield superior result. Knowledge leading to humility ensures success and power, which in turn leads to greater knowledge, more humility and even greater success and power.

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Life In The Raj Era

Sharmila and Raj Thackeray’s usual Diwali hamper is exquisitely crafted boxes with a selection of choice chocolates. When a friend asked why not Marathi mithai for the occasion, Raj shrugged, non-committal. He does not particularly like being challenged. This Diwali, Raj finds himself bang in the middle of a sort of confrontation he hadn’t planned on. The Congress-NCP government in Maharashtra, which he had assumed was on his side, suddenly turned the tables on him. The government’s Diwali gift: 54 cases in 30 police stations across the state. In addition, Raj faces charges of murder in two police stations in Bihar. This sudden, seemingly tough crackdown is the only part that didn’t go according to the script Raj wrote out for himself when he was a young boy who spent more time with his uncle Bal Thackeray than with his father Shrikant. If there is a sense of deja vu in the Raj Thackeray story, it is completely intentional on his part. In manner and thought, in cartooning and satirical one-liners, in dress and gait, in belligerence and false bravado, Raj has so completely moulded himself in the image of Thackeray, and his Maharashtra Navnirman Sena on the Shiv Sena, that his relentless, name-calling, issue-obfuscating campaign against Uttar Bharatiyas—those from Bihar and Uttar Pradesh—invoked direct memories of the one his uncle had unleashed in the late ’60s.
Back then, as Bal Thackeray’s party was similarly targeting ‘Madrasis’, successive Congress governments turned a blind eye. The Sena flourished, thanks to then chief minister V.P. Naik’s refusal to act tough since it went well with the Congress party’s gameplan to use the Sena to counter the Left trade unions and the CPI(M). South Indians were stealing away jobs from Maharashtrians, thundered Thackeray Sr. North Indians are stealing away jobs, says Raj now. Touch me and Bombay will burn, threatened the older Thackeray. Arrest me and Mumbai will burn, declared his nephew last week. The idea of democracy and the rule of law did not hold appeal for the Sena’s tiger. Government does not understand the language of non-violence, said Raj recently.

Take a genuine issue, highlight half-truths about it, exhort the "boys" to bully and bash the outsider, and hold the city to ransom. It was Bal Thackeray’s favourite formula. Raj has adopted it lock, stock and barrel. We profile the rise of Raj Thackeray with a few fundamental questions.
What is Raj Thackeray’s agenda?
It’s called chasing power. But a naked, hurried run hardly appeals to voters. Hence the need for an issue. Mumbai, teeming with migrants, stark disparities in growth and wealth, and a creaking infrastructure, presents many issues to rally people around. Migration is a highly emotive one, closely tied as it is to the idea of one’s identity. Raj has mischievously mixed up the two: equated all migration with lower-middle-class north Indians, their "mini Bihars" and "Bhaiyya bastis".
Raj’s modus operandi is best exemplified by his audacious declaration that "the Railway Recruitment ads were not printed in Marathi newspapers". When it was proved that local editions of papers had, indeed, carried pointer ads in February itself and the main ad had appeared in Employment Times, a national publication, he quickly changed tack to say that had the ads been prominent, Maharashtrians would have applied.
On the eve of his October 21 arrest, Raj asked: "Why does Chhat Puja become a show of strength for Biharis here, why don’t we see Navratri turning into a show of strength for Narendra Modi? Karunanidhi and Jayalalitha don’t come here.

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Bulls Eye

Last week, Chief Justice of India K.G. Balakrishnan wrote to all the high court chief justices urging them to evaluate the performance of judges when they turned 50. If found incompetent or of doubtful integrity, he suggested they be removed. The CJI wrote: "Such a provision will keep deviant behaviour in check, besides getting rid of those who are found to be indolent, ineffective or with doubtful integrity." He added that such a review had proved to be "quite effective" for the Supreme Court.
This approach is welcome. There is just one snag. Has the SC been effective in eradicating misconduct from its own ranks? Reference to the SC is inevitably respectful. But does such respect arise from propriety or from conviction?
Frankly, the SC’s credibility is not as high as it should be. The lax conduct of SC judges themselves is responsible for this. The SC rightly is very zealous about maintaining its high reputation for integrity. That is why it never overlooks word or deed that remotely questions its reputation. Recall how Arundhati Roy was slapped with a contempt notice for staging a dharna outside the SC. However, the public gets puzzled by instances when SC ignores damaging allegations made against SC judges. Why is the conduct of judges not swiftly reviewed then? Such instances are many. Two current cases are noteworthy.
In the Rs 23 crore Provident Fund defalcation scam, high court judges, retired SC judges and one sitting SC judge are allegedly involved. After hearing the case, the SC empowered the high court to authorise the police to investigate. Has the sitting SC judge suspended work until the probe concludes?
A more vivid example of a casual SC approach is related to sitting SC judge, Justice A. Kabir. Earlier, as a Calcutta High Court judge, Justice Kabir passed a judgement deemed perverse and motivated by a litigant. The litigant approached the SC for relief. His petition was upheld. Justice Kabir’s judgement was overruled. Meanwhile, Justice Kabir had been elevated to the SC. Three judges of the Calcutta High Court ignored the SC ruling and followed Justice Kabir’s judgement. In an unprecedented scenario, a contempt notice against these three sitting judges was admitted by the Calcutta High Court. Did the CJI review the performance of Justice Kabir? Was it found satisfactory?
Such instances confuse the people. They will always speak respectfully of the SC. But what do they inwardly think? The CJI should know: respect cannot be legislated, it must be earned.

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Emerging India

What started about a year back is continuing. India is slowly beginning to assert itself in the global scene. Half a century after it freed itself from the shackles of foreign rule, this country is feeling a kind of confidence that allows it to stand shoulder to shoulder, without any complexes of inferiority, with developed and developing countries of the world. The change is visible in the many faces this country represents to the world. Indian businesses which for long have been dependent on their big brothers in developed countries for technology and finance are not only competing globally on equal terms but also buying out foreign businesses at will. A country which has for long been a symbol of stagnation and underdevlopment in the eyes of the international community has suddenly become the cynosure of all eyes. Investors today do not hesitate to put their money in India and openly admit that returns on investment in India is greater than most developed nations in the west, including the United States. Indians today no longer believe in spending for a living but “living for spending”. Even the poorest of the poor aspire to daily luxuries and strive to get them. This departure from frugality in the Indian society has opened up a tremendous scope for development of the country and its businesses. In fact, the President of the US unabashedly stated that the growth of the Indian Middle Class has caused a shortage of food and essential commodities in the world!! India can no longer be ignored by the world. No longer can the West blackmail this country to sign the CTBT with the threat of sanctions. In fact, it is countries like India and China who will control the economies of the west in a few decades. Even in trying times as they are now, with an uncertain global economy, rising oil prices and an uncontrollable domestic inflation, there is a quiet undercurrent of confidence in India that seems to assure that these hurdles are not enough to stop the Indian Juggernaut from rolling on.The emergence of India as a global economic power is also reflected in the activities and confidence level of its citizens. Indians are no longer subservient to developed countries when it comes to performance, be it in business or sports. In cricket, India is fast surging ahead in its bid to attain top position In the Olympics, this time Indians have put up a record breaking performance. Abhinav Bindra’s equanimity even after getting a gold in the Olympics is testimony to the fact that Indians are no longer overawed by the big stage. The assertiveness of Indian delegates at international meets, be it the WTO or the UNO signals the arrival of India as a major player in world affairs. India only needs to maintain this acceleration steadily to achieve what many still think is impossible - to become an economic superpower by 2020. I am certainly not among those cynics.

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Economic Slow Down: Time to overreact

If there ever was a time when the government needed to overreact to a situation, it is now. The drying up of global liquidity after the bankruptcy of Lehman Brothers has hit financial markets across the board in India with astounding ferocity and speed. And with that, market uncertainty has spiked to unprecedented levels; rarely have we seen the stock market change direction by 500 points or more in a day, these many number of times, in this short a time. In this environment of hyper-uncertainty, traders, investors and businesses are likely to have overreacted and prices of equity, bonds, foreign exchange have probably overshot their fair valuations. Finely calibrating policy moves to meet the liquidity needs of businesses is an impossible task when there is this much uncertainty. Some businesses are looking for liquidity just to stay afloat, others may be pre-funding future needs, fearing the worst. How much of the future demand is being brought forward depends on how these businesses view the liquidity situation prevailing six months from now. And to assure businesses that adequate liquidity will be available not just today but also in the next six months and more, the government needs to overreact now. It isn’t as if the government has not reacted. Indeed, many have been pleasantly surprised at the speed at which the government has changed policy and that too in all the right areas. In the last month or so, the government has cut CRR by 250 basis points, the SLR by an effective 150 basis points, the repo rate by 100 basis points, increased foreign participation limits on corporate bonds, raised capitalisation of public sector banks, eased quantity and price limits on ECBs, reversed the restrictions on participatory notes and despite pressures has not banned short-sales. However, there is a sense that these measures are event-driven and reactive. What is needed is a set of standing liquidity-injecting facilities that will assure businesses that liquidity will be there if needed. In a paper co-authored with Ila Patnaik and Ajay Shah, we argued that given the underlying and proximate causes of the crisis there is a need to increase both rupee and dollar liquidity in a predictable manner. Last year, India received nearly 10 per cent of GDP in capital inflows. At that time we thought that this surge in capital inflows was a “problem”. This fiscal year, except for FDI, other sources of inflows have dried up. Today, we are being rudely reminded of how dependent our businesses, banks and mutual funds are on this inflow of liquidity. Why are foreign sources of liquidity this important? The reason lies in the funding models of Indian businesses, banks and mutual funds. For a while, Indian firms had been tapping global money markets for fund raising, often through the foreign branches of Indian banks. Many Indian banks have been relying on money markets, both domestic and foreign, to fund their loans. And before some of us start calling for a ban on such business models, let me stress that this is a well-accepted, safe and successful model, provided money markets work, which they did for the last 25 years and will do so once we get over the current liquidity crisis. So when global interest rates shot up after September 15, the rates at which the Indian firms could borrow rose, as did the cost of rolling over their maturing debt. These firms and banks turned to the Indian money market for funds, spiking the demand for domestic liquidity and for dollars as the funds raised needed to be converted into foreign exchange. The result was the upsurge in the call money rate and the sharp depreciation of the rupee. Domestic corporations typically place a significant amount of short-term funds with mutual funds to take advantage of the lower tax rate. When the domestic money market tightened, these corporations redeemed their investments to finance their own funding needs, setting off a wave of redemptions by mutual funds and plunging bond and stock prices. In the coming months and years, we will have time to gain distance from the current events, reflect on the crisis and debate reforms to the financial architecture to prevent a reoccurrence. But this is not the hour. Instead, the government needs to step up liquidity injection now; erring on the side of excess liquidity, not just enough. In our paper, to increase rupee liquidity we argued for cutting CRR to 5 per cent and SLR to 20 per cent, making oil and fertiliser bonds SLR-eligible, increasing the range of repo-eligible assets and even providing insurance against counterparty risk in interbank transactions. To raise dollar liquidity in a predictable manner, we argued for setting up a weekly dollar-swap facility against rupee-denominated assets and investing part of the foreign exchange reserves in one-year deposits in foreign branches of Indian banks. Some will argue that surely these measures will create too much liquidity and sow the seeds of the next asset price bubble and fan inflationary expectations. Perhaps. But if such signs emerge all these measures can be retracted. Indeed, all these measures can be made explicitly temporary. But they need to be done. The government not only needs to provide liquidity but also certainty. For the last, it needs to provide liquidity in spades.

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Recession looms as economy shrinks sharply

The British economy shrank by far more than expected in the third quarter of the year which, barring a miraculous bounce in the current three months, means it is in recession for the first time since the early 1990s. Official data showed gross domestic product contracted by a much-bigger-than-expected 0.5% in the July to September period, the first fall since early 1992 and the biggest drop since the fourth quarter of 1990. Liberal Democrat leader Nick Clegg warned that the UK was "on the edge of a new winter of discontent". "This confirmation that we are heading for a recession puts a name to the fear that many people have been feeling for months," he said. "These growth figures show that the credit crunch is hitting the real economy and harder and faster than was first feared."
Chancellor Alistair Darling, speaking on Sky television, said he was confident the British economy would get through a "difficult period" and reaffirmed the government's commitment to help individuals and businesses. "If we do that I'm confident that we along with other countries will get through this difficult period," he said. But the sharper-than-expected contraction in the economy alarmed the City and sent shares crashing. At one stage, almost £90bn was slashed from the value of the FTSE 100 companies, as the index crashed almost 400 points.
"It's a big shock that the decline [in GDP] is so large. It is truly dire," said Philip Shaw, chief economist at Investec.
The contraction was broad-based with manufacturing and private sector services showing declines while only agriculture and government services showed an increase in output.
The pound slumped on the foreign exchanges on the news, dropping to below $1.55 and to nearly 81p to the euro. Indications were that Wall Street will open sharply lower, perhaps more than 500 points, when trading begins this afternoon. "My comment to traders was 'dive, dive, dive'," said Brian Hilliard, economist at Société Générale in London. "It's a very emphatic entry into recession which underlines the need for very dramatic interest rate cuts which we think the Bank of England will deliver."
James Knightley at ING Financial Markets said: "GDP has plunged far more than expected. So much for Gordon Brown's 'no more boom and bust'." He said he thought there could be at least four quarters of contraction, which would make this recession similar to those of the early 1990s and 1980s. Neville Hill at Credit Suisse agreed: "This is clear evidence that the economy is in recession. Recessions tend to last more than the technical two quarters, so there's likely to be more of this to come."He said it was now possible that the Bank of England's monetary policy committee would cut rates by more than the half a percent expected in the City. That would take the MPC into uncharted territory - it has never moved rates more than half a percent in one direction or the other. It cut rates by half a percent last month in concert with other central banks around the world.

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GLOBAL MARKETS-Stocks plunge, yen surges as crisis worsens

World economy feared in recession, emerging markets at risk
* Yen at 13-year high vs dollar with safety most important
* Stocks bloodied: Japan's Nikkei -8 pct, S.Korea -10 pct (Updates prices, adds quote, European outlook)
By Kevin Plumberg
HONG KONG, Oct 24 (Reuters) - Asian stocks plunged on Friday, led by a 11 percent drop in South Korean shares, as the global economic slowdown and emerging market instability hurt an array of corporate outlooks, pushing up government bonds and the yen.
European stock futures were down 5.5 percent, with sentiment on global equities worsening despite signs this week of stabilisation in short-term money markets.
The financial crisis has spread far beyond the banking sector, with electronics maker Sony Corp and U.S. online retailer Amazon.com Inc cutting their forecasts in the face of weakening consumer demand. The stronger yen, which this week rose the most against the U.S. dollar in a decade, has been particularly damaging to the competitiveness of Japanese exporters because it curbs their overseas profits when they are brought home and erodes the competitiveness of their products. Fears about potential sovereign debt default in some developing economies, especially in Europe where many of the countries run current account deficits, has accelerated a move out of emerging market assets and increased an unwillingness among investors to take risks.
"Players are now focused on emerging markets as the credit crisis takes its toll on them," said Mitsuru Sahara, senior manager of foreign exchange sales for Bank of Tokyo-Mitsubishi UFJ in Tokyo. "Nobody is willing to take risks under the current circumstances, and risk aversion will only accelerate," he said.
The MSCI index of Asia-Pacific equities traded outside of Japan fell 5.6 percent to a fresh 4-year low and was on track for its eighth weekly loss.
South Korean stocks have been hit especially hard this year, with the benchmark KOSPI index finishing down by a record of more than 20 percent in the week. The index ended the day 10.6 percent lower, falling below the psychologically key level of 1,000 points for the first time since June 2005.
"The 1,000-point level has a lot of meaning for the Korean stock market. It took 16 years to get there and the level collapsed just in a year, with investors completely losing confidence about economy and government bailouts," said Kim Seong-ju, a market analyst at Daewoo Securities in Seoul.
Japan's Nikkei share average plummeted 9.6 percent to the lowest in 5-½ years. Sony slumped 14.1 percent and was one of the biggest decliners in the index.
DOLLAR AND YEN RULE
The U.S. dollar and the yen have strengthened significantly since the financial crisis broke in August 2007, particularly in the last month, as investors in Japan and the United States cut overseas investments and brought money back home.
A lot of this investment had gone into government bonds, with money managers figuring the backing of the world's two largest economies was the closest thing to safety. State Street Global Markets, which tracks 15 percent of the world's tradeable assets, said capital flows from institutional investors into sovereign bonds were the highest in the 7-year history of its data.
Many of these investors have been keeping their capital in dollars. "In a market where discretionary traders are on the sidelines, scared by volatility and the expense of trading, these institutional flows are likely to have an even greater relative price impact," State Street analysts said in a note.
The yen has also been a beneficiary of investor repatriation and the unwinding of investment in higher-yielding currencies, which have accelerated as economic conditions deteriorate in some emerging markets dependent on portfolio investment and trade from developed markets.
"While there has been a marked improvement in interbank money market interest rates, the velocity of money in the global economy continues to decelerate," said Sean Darby, chief Asia strategist with Nomura in Hong Kong.
"The recent EU and U.S. measures to restore confidence in domestic banking systems may have come too late to reverse capital outflows from emerging markets," he said in a note.
The euro dropped 2.6 percent to 122.20 after earlier hitting a six-year low of 121.70 yen on trading platform EBS. The dollar fell 1.6 percent to 95.69 yen after sliding as low as 95.35 yen .
However, the dollar was at a 5-year high against the British pound, while the euro was down 1.6 percent to $1.2767, near a 2-year low of $1.2726 hit on Thursday.
Government bonds in the euro zone, Japan and the United States have been a haven for investors hoping to wait out the market turmoil and steep global economic slowdown.
Many economists are expecting rising unemployment in major economies to curb consumer spending further, especially after continued U.S. claims for unemployment insurance remained above the 3 million high watermark for a 26th week and reports that Goldman Sachs was cutting 10 percent of its staff.
The benchmark 10-year note rose 22/32 in price, pushing the yield down to 3.605 percent from 3.69 percent late on Thursday in New York. The 2-year note yield slipped to 1.525 percent from 1.60 percent. The 10-year Japanese government bond future rose 0.59 to 137.70.
Oil prices turned lower on the day on expectations recessions in major economies would hurt energy demand. U.S. light crude for December delivery fell 87 cents to $66.97 per barrel.
OPEC is widely seen cutting output at an emergency meeting later on Friday after slowing demand and the growing financial crisis sent prices crashing from record highs set this summer. (Additional reporting by Chikako Mogi in TOKYO and Seo Eun-kyung in SEOUL;

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