RBI working overtime to minimize liquidity in the face of relentless forex inflows

It has come into the notice that the Reserve Bank of India (RBI) and the government are working on new methods to minimize liquidity in the face of relentless forex inflows without only relying on instruments such as the cash reserve ratio (CRR).

In its recent currency and finance report, released last week, RBI said there is a requirement to explore further instruments or options for liquidity management, particularly in the context of a move towards fuller capital account convertibility.

“The government and RBI are looking at new options to counter liquidity,” pointed out a official at RBI. He also added that RBI would prefer using a ‘series of approaches with existing instruments’ without shutting off any one option completely, the source said.

Theoretically speaking, RBI has number of options to take into account and it can use a combination of measures to tackle forex inflows and liquidity. According to experts, these include diversifying a part of its foreign assets into non-sovereign assets like China has done, enhancing substantially the incremental CRR, go for a freer float of the rupee or even look at a disguised Tobin Tax to discourage the inflow of short-term hot money. It is worthwhile remembering that Tobin Tax is a levy on currency trades across borders to discourage short-term speculation in currencies.

The pivotal factor here is that last month; China’s new state investment agency invested $3 billion of its forex assets in US private equity firm The Blackstone Group. If experts are to be believed, these are unusual times, such unusual options can be looked at. But fact remains that such a proposal is fraught with risk since sovereign funds parked in such vehicles would expose RBI not only to currency risks but also to equity risk. “The list of entities that RBI can invest in can be expanded to accommodate not just sovereign debt but triple-A securities,” pointed out Kadar Khan, noted analyst based at India.

In my opinion, RBI can look at hiking CRR on incremental flows, rather than total deposits, as suggested by SS Tarapore, chairman of the committee on fuller capital account convertibility. In an ideal scenario, incremental CRR prescribes a reserve ratio based on the extent of growth in deposits. “The impact of this is in stemming excess liquidity in banks showing high growth without penalising the entire system,” pointed out official at finance ministry.

While there is no denying the fact that commercial banks are not needed to presently maintain incremental CRR, in the past they were required to maintain a 10% incremental CRR on non-resident deposits to reduce the liquidity created by flow of funds from NRIs. “The option of using dollar swaps to manage liquidity becomes limited as the rupee gains strength. RBI will not close the CRR option. It will look at augmenting its existing instruments to tackle inflows and liquidity, “ pointed out highly placed source at RBI. For instance, a slew of auctions will be conducted this week. This normally does not happen often.

Besides, with a 60% appreciation in the ECB limit from $14 billion to $22 billion in a single year, it significantly contributed to forex inflows. Whatever the options are, the time is now ripe for RBI to experiment, given that inflation is under control at 4.68 percent.

Source: The Economic Times.

Bharti Enterprises all set to open its first retail store by March 2008

By Avadh Singh

Bharti Enterprises is all set to open its first retail store in India by the March 2008 and plans to open a minimum of six stores by the end of that year.

Sunil Bharti Mittal, chairman and CEO of the Bharti group, in an exclusive chat to The India Street said that the branding process would be completed soon and discussions were on with Bharti’s back-end partner Wal-Mart. “The process is going according to plan and we are looking at a cluster of stores by early 2008. You will see half-a-dozen stores coming up within the year,” pointed out Mittal.

Mittal also said to The India Street that during his visit to the US earlier this month as president of a CII delegation, he met Mike Duke, chairman of Wal-Mart Stores Incorporated, in Washington separately. Mittal also held a meeting with Carlos Gutierrez, secretary, US Department of Commerce.

Point to be noted here is that the foreign direct investment in multi-brand retailing is not yet allowed in India. As a matter of fact, only 51 per cent FDI in single-brand stores and 100 per cent in the cash-and-carry wholesale business are allowed. The existing policy also allows FDI in franchises.

In general, Bharti and Wal-Mart have started recruitment and expect to sort various issues, including legal ones, soon. “We are going ahead with legal issues like brand agreement. A franchise arrangement may take some time, but we are on track," Mittal said.

It is worthwhile remembering that last year; the Bharti group had announced an investment of $2.5 billion in its retail venture. According to an agreement with Wal-Mart, Bharti would manage the front-end and the US major would provide back-end and logistics support.

Mittal said US companies were quite interested on India opening its FDI policy in multi- brand retail chains. “In the starting they will be happy to see it happening, may be with 26 per cent FDI,” he added.

Indian rupee to be traded in the futures market, dealers apprehensive

By Vipin Agnihotri

Lucknow, India: It has come into the notice of The India Street that for the first time in the history, the Indian rupee is going to be traded in the futures market. According to sources, trading is scheduled to start on June 7 on the Dubai Gold and Commodity Exchange (DGCX).

It is worth mentioning in this regard that while DGCX chairman Colin Griffith announced the launch of the world's very first Indian Rupee currency contract, some of the dealers in India have expressed apprehension to The India Street that the move might enhance volatility in the currency.

The pivotal factor here is that, as the transaction will take place in Dubai, Reserve Bank of India cannot do anything. Apart from that, there would not be any settlement in Indian rupee in the transaction. “RBI was unable to object to the move though it could affect the rupee's market value,” pointed out M Subri, a senior Forex dealer.

At the present juncture, rupee trades in non-deliverable forward market in Singapore, Hong Kong and Dubai and what’s more only big players participate. “While Rupee will be the underlying currency on DGCX, the transaction will be in dollar terms and trading will be open to everyone,” pointed out Rahul Bhandari, noted Indian economist.

Now, as Reserve Bank of India has allowed an individual to remit $100,000 a year overseas, a requirement is being felt for an international futures market. The interesting aspect in the whole issue is that the value of rupee in the global futures market identical to DGCX would be influenced by its value in the domestic market. In the domestic forward market, a transaction is settled with the physical exchange of rupee.

According to experts, at DGCX, each Indian rupee contract would represent Rs 20 lakh. Prices will be quoted in US cents per Rs 100, with a minimum price fluctuation of $ 0.000001 per rupee. Furthermore, at any point in time DGCX will list the trading price for the present and next two calendar months, in addition to the next three calendar quarterly months.

How do IPO’s fare in Secondary Market?

By Sundaramurthy Vadivelu

Important Disclosure

The views expressed below are the opinions of the author based on theprinciples of technical analysis, a science that has been tested and proven formore than hundred years. The views are unbiased and informative in nature.These do not constitute an offer to buy or sell stocks. Every effort has beenmade by the author to ensure correctness of the information presented. The author cannot be held responsible for omissions, mistakes etc.

Investing or trading in stock markets is a high risk activity. Those who cannotafford to risk their money should refrain from dealing in stocks.

The author has no vested interest in any of the stocks mentioned. He and/or hisclose associates may or may not be having positions at the time of writing thisarticle.

The reader needs to understand that this article is purely for informativepurposes only and all transactions, if entered into by him will be solely at his risk.

The author does not guarantee that the projected targets will be achieved withinthe stipulated time frame.

Source for the price data displayed in graphics and tables:

National Stock Exchange of India Limited, Mumbai, India (www.nseindia.com).

- - - - - - X - - - - - - X - - - - - -

IPO or Initial Public Offer facilitates a company to sell its equity shares toinvestors, usually for the first time. There are two ways a company can allotequity shares to investors:

1. Fixed Price Option in which company fixes the issue price.

2. Book building method, in which company fixes the floor price and theprice range for bidding by investors. The investors need to bid for equityshares between the range fixed by the company.

The difference between the two, apart from price is that the demand for thesecurity can be known every day in case of book building whereas in fixed priceoption it can be estimated only after the issue closes. The allotment price will beinitimated to the investor after allocation of shares.

A company can issue IPO’s either by fixed price option or book building methodor a combination of both. Now a days book building is more common.

When an investor applies for an IPO, he reads the offer document and if satisfiedwith its contents, risk disclosure etc. he proceeds further with the applicationprocess.

However, after the stock gets listed in the exchange and trading begins, we findthat funny things start happening. Obviously no price volume data will beavailable before the stock gets listed, and as trading goes on, the technicalanalyst will be able to understand the price action.

Before one invests in IPO, he has to realize this fact and it is one of the marketrisks. Companies with good fundamentals and decent corporate results havestruggled in the stock market.

Let us study each case with an illustration.

Educomp Solutions Limited:

Issue price was Rs.125. The stock has skyrocketed to Rs.1880 as on28.05.2007. So, the investor has gained about 15 times in 16 months time. Nice thing, if one had the vision to anticipate such price.

Let us examine the weekly chart of EDUCOMP shown below.

Every rise was followed by a corrective decline or sideways movement as it canbe seen in the chart. This is an indication of a healthy bull market.

This is an example of an ideal case where the bulls were in perfect control overthe stock.

Jet Airways (India) Limited:

It was allotted at Rs.1100 per share 2 years ago. It has been struggling eversince it got listed. Nice airline with good financial results but in the stock marketit is truly an underperformer. I have read reviews of Jet airways and they fly toSouth East Asia, Europe and USA (from August 2007) as well. Their serviceseems to be very good, I understand from the reviews. The net profit for thefinancial year 2005 – 2006 is about Rs.452 crores or Rs.4.52 billion. But let ussee the weekly chart of jet airways for a while.

It continued to form lower highs and lower lows till about late July 2006. It fellfrom 1383 to 475. It was bullish till mid February this year and managed to closearound 786. As can be seen from chart, it broke its support trendline andreached another low. Stock seems to be bearish and it is quite possible thatfurther lows may be reached. Unless it closes above 805 which will be horizontalresistance line one should not expect much from this stock.

Bombay Rayon Fashions Limited:

Issue price was Rs.70. Textile stocks have been witnessing a steep fall thesedays but this one is attempting to test its previous high.

It was almost non stop rise from 80 to 258.60 followed by a downtrend to a lowof 102.50. It managed to break its previous high and touched a high of 275.50during the next uptrend. But since its support trendline has been broken, it mayface strong resistance at its previous high.

This is a remarkable stock considering the bearish trend among popular textilestocks like Arvind Mill, Alok Textiles, Bombay Dyeing, Raymond etc.

JHS Svendgaard Laboratories Limited

The stock was allotted for Rs.58. But it was continuously bearish and reached alow of 27.50. Currently it is bullish and a close above 43.20 is likely to take thisstock further up.

There is nothing wrong with this stock technically. Uniform price volume patterncan be seen in case of both uptrend as well as downtrend. It has closed aboveits resistance trendline. One will have to wait and see whether it closes above itshorizontal resistance line at 43.20.

Reliance Petroleum Limited

Issue price was Rs.60. The stock touched a high of 105 in the listed week butthere was not much of activity for the next 10 or 11 months. It turned bullish inlate March this year and very likely to test its previous high soon. Its previouslow of 58.05 has not yet been broken, though it did come close to it at 58.10.The chart looks like a bowl – very unique.

Shree Renuka Sugars Limited

It was issued for Rs.285. After that it skyrocketed to 1665 and fallen again allthe way to 260.10. This again is unique – all this happened in about 18 monthsor so. Though currently bullish, because of the absence of clear waves, it islikely to face resistance around 917. One of the few sugar stocks the crowd isinterested when many others are on a downtrend.

Conclusion:

Investing in IPO’s has its own potential risks and rewards. Some are runawaysuccesses whereas some others have miserably failed. So, before you put yourmoney in IPO please be aware of this fact. Each stock does behave differentlybut understanding what IPO and how it fares in secondary market will make theinvestor little more knowledgeable.

India Real Estate Jitters

By F. Colton

I have recently read about a few laws the India Government has passed to slow the real estate market in India. The false claim that too many foreign real estate funds are driving up real estate values is complete rubbish. First and most importantly, I can count on two hands the number of foreign real estate funds that have actually invested money on a real estate project in India. It's just not happening like the media claims. Foreign Real Estate funds find the India market appealing, but it still lacks the transparency available in other more mature markets.

So how are the real estate prices being driven up? For one, local Indian developers and local speculators are driving the cost of real estate up. Most are ignoring real estate fundamentals and are paying any price to participate. The smart ones are forming Joint Ventures with landowners to reduce their exposure and risk. Most of these joint ventures are win-win scenarios.

Real estate is a cycle of booms and busts. The Indian government may try and smooth the peaks and valleys but inevitably the cycle must continue. Moreover, India is in need of a complete overhaul in infrastructure. Why scare away the very investor you are looking to attract to help build out the infrastructure India sorely needs? There is no so called bubble in the India real estate marketplace. Of course prices are too high in some areas and will come down. However, the fact remains that almost 95% of the buildings in India are Class D or F in other parts of the developed world.

India needs foreign capital to drive its real estate market and to compete with other Asia countries. Foreign investment brings jobs and skill development not currently found in domestic India. The India Government should be focused on enticing FDI and not protectionism. India has momentum, but as history has shown, it can change overnight by thoughtless, short-term strategies that may get one reelected but not allow the country to modernize.

In summary, India is at yet another cross roads. This won’t be the last one but it is an important signpost directing foreign investment in or out. Unlike more mature markets, India’s modernization depends on foreign capital. The world is globalizing and is looking for alternative investments outside of the US and Europe. India can either open the door a little wider to foreign capital or discontinue FDI liberalization and risk foreign capital finding other alternative markets. Large foreign investors are a finicky bunch.

The author is the Editor, The India Street.