Category Archives: Indian Economy

Nifty undervalued in terms of Dollar

Nifty’s move to 9119 in March 2015 from the previous high of 2008 around 6330 was applauded by our traders alot but not investors. This rally i would term as “Traders rally” because fundamentally we were not globally competitive as suggested by our rupee vs dollar (Green line) which has been weakening regularly. Because of our weak rupee, Nifty in terms of Dollar (White) has not even achieved 2008 high as you could notice in the charts. This huge divergence between the Nifty (Yellow line) and Nifty in Dollar terms need to narrow down soon and we could see fast rally in equity markets. But this rally would be accompanied by strengthening rupee.

Why would rupee strengthen? because finance budget and RBI has won back trust of Investors. By achieving 3.9% of Fiscal deficit target and setting off new target of 3.5% in budget, has surely given a confidence to global investors. Secondly, PSU bank’s cleaning up of NPA’s and Basel norms restructuring has given financial sector a boost. Thirdly, investor friendly initiative by many states in form of global business summit has boosted FII flows in various sectors. Fourthly, bounce back in Commodity prices will boost companies revenues which were hard hit in last few years.

So to conclude, Nifty has yet not at par with 2008 and as  India is considered brightest spot in world map as only emerging market growing we can expect Equity market investment to be a multi-beggar even from current levels in next 5 years. Start investing if you havent yet.

Money Supply and Equity markets

We often here the word “Money Supply” while referring to our economy condition. So today i will try to explain in simple term, what exactly is Money Supply.

Money supply can be defined as amount of money or its equivalent in circulation at any particular time in an economy. Money includes:

  • Coins and Currency
  • Foreign Exchange Reserves with RBI
  • Time Deposits and Demand Deposits
  • Post office deposits
  • Or any such instruments

Supply measure of money in the economy could help monetary policy maker to take a interest rate decision to control inflation. As money supply in the economy increases, so will the purchasing power in hands of public. As public have more and more liquidity to spend, their need would rise which results in increasing demand of all goods and services. This causes inflation. Inflation to some extent is necessary for growth but hyper-inflation is dangerous for the country’s financial system. So with money supply in act with inflation, RBI balances economy by controlling the driving tool Interest rate.

Now going further there are mainly 5 components considered while calculating money circulation.

M0  also known as Reserve Money includes: Currency in circulation + Bankers’ deposits with the RBI + Other’ deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial sector + RBI’s claims on banks + RBI’s net foreign assets + Government’s currency liabilities to the public – RBI’s net non-monetary liabilities.

M1: Currency with the public + Deposit money of the public in banks

M2: M1 + Savings deposits with Post office savings banks.

M3: M1+ Time deposits with the banking system = Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Government’s currency liabilities to the public – Net non-monetary liabilities of the banking sector (Other than Time Deposits).

M4: M3 + All deposits with post office savings banks (excluding National Savings Certificates).

To Sum up M0 is the money which is owned by RBI and its known as systems reserve money. while other all components are owned by public and are in circulation or with banks as deposits or with post office. So higher the money supply with public higher would be the inflation.

Now lets take some example with the graph

in the graph Yellow line is M3 which means its the M1 (Currency with the public) +Banks foreign reserve and lending to commercial sectors and the Blue line is our Nifty index. While Pink line is our Repo rate. Time frame for charts is Monthly

Observations:

  • 2008-2009: We experienced Lehman crisis because of which markets , which squeezed money from the circulation and foreign reserves which is a part of M3 decreased as FII sold off and took out dollars from the banking sector. So we saw all three leading downside as rate cut also didnt spur buying as FII were not confident yet.
  • 2009 bottom: We saw interest rates bottoming out, which led some money supply in the market and it spur equity market from the low of 2260 on Nifty.
  • Since 2010-2014: We have seen rising repo rates which has squeezed some money from the circulation but still markets performed as FII were buying during the time of post crisis. Banking and financial sector already in having huge NPA’s post 2008 crisis, it has squeezed its lending to commercial sector which is seen clearly with money supply line decreasing YoY on the charts since 2008 
  • 2014-2015 March As Money supply continued to decrease but markets pinched a new high, it was clear that FII money was driving market as there was no money circulation or supply in the domestic market as represented by yellow line which is M3
  • 2015 April-to present: As we knew that there wasnnt domestic buying in the markets as  liquidity was squeezing, our markets were purely dominated by global factors. Since March 2015, crude supply rising spurred crisis fear in the global markets which made FII exit our markets which was the result of the correction in last one year.

But now……..

I Expect that next rally would be surely dominated by the domestic players and that would be strong rally. Points for my support are:

  • We Have seen many banking companies cleaning up balance sheet as per new guidelines and as we have rate cuts now, they will surely start lending to good commercial sectors which have shown confidence.
  • As the money supply to commercial sector rises, it will rise money supply in manufacturing which improve profits which will eventually results in rally on the markets

But ofcourse it will take some time and we cant predict the low exactly as the divergence between domestic money supply and Nifty is the most widened in last 20 decades and it should narrow. I expect markets to stay volatile for next few months. Dont be saddened or fearful, if you are sitting on cash or can arrange some liquidity start shopping from here on..its honeymoon period for you guys…

Hope you guys find this post useful…..do leave a comment for any suggestion.

 

 

My view on Railway Budget

February’s last two weeks each year, newspaper are flooded with the word “Railway Budget” and its always difficult to understand for a common man what exactly it is. So let me explain you guys in some simple words what is it and what shall we expect. To define Railway Budget, ” It is the estimation of Income and expense of Railway department for next financial year”. For the Railway major revenue comes from Sale of passenger tickets and second most source of income is Goods carriage or say freight. On the expense side they have a long list from maintaining coaches, tracks etc to staff expenses.

On the budget day we all wait for new trains to be announced from our home town while companies related to rail industry waits for new tenders and staff wait for rise in salary. But leaving all this expectations aside, i feel this year we also should lookout for some other announcements from the minister which are though minor but will surely improve our travelling experience with railway.

These are some of the points which i personally feel should be focused:

  • Internet on Travel:  Today when we are talking about Digital India and trying to connect more and more Indians through internet, we should think of seamless connectivity with less disconnection. At present, we are not able to get seamless connectivity on 2g/3g on mobile while travelling on trains but if wi-fi connection is available , though at some minimum cost it should surely make our travel more easy.
  • Entertainment on the Go: Entertainment could be by many ways, but on the simpler note we should have a small screen display on each compartment which may display a list of movie just as we have on international flights or may be a common movie should broadcast  across one bogie. This has a minimal cost but requires a lot post installation maintenance.
  • Quality Food: A major step is required for quality food to be served on the train. We have seen some unhygienic food served so i expect some private contract for the catering. Even the tea quality hasnt been maintained.
  • Verified Staff: It has been noticed many times that passenger finds it hard to verify the staff that whether he is a railway appointed or a random guy in the cloths alike railway staff. So may  be some system that could make it easy for passengers to identify railway staff on the go
  • Cleanliness: Of-course to some extent we the passengers are to be blamed  for the dirty coaches but may be we can have a on demand staff to clean our compartment while the travel with some charges, because sometimes in long journey its difficult to travel with dirt around but we dont mind paying few bugs and get it clean. By this way may be we can improve overall conditions.
  • Instant Quota: Though we have a Tatkal Quota, but we should also have some instant quota wherein a last minute travel can be arranged for which booking opens only 2 hours before with some high charges.

Though this all our points which i feel that should be prioritize for the betterment of our travel rather than expecting new travel options. There may be many other such suggestions, keep it coming the comments below.!! Lets discuss and get some idea what other things should helps our railway to improve. Until we dont consider as OUR we can keep it better. Government takes the initiative but we should follow it with true heart.

 

Disclaimer: All views mentioned are my personal and they are not intended for any one in person.

 

 

Why Invest in India?

Global economy scenario is a bit vague at current situation but this should be considered as an opportunity to invest for the long term, those who have liquidity. Am sure many of you are confused that where should we Invest? Answer is INDIA. It is not just because i am an Indian citizen but currently if we compare developed and developing countries, India has the most favorable factors to outperform in next 5 years. Now, you guys would say that if world economy is fragile, India would not grow too. But i am going contrary to this statement as i believe we have so many domestic factors that are going to lead our economy. I am trying to list down few points which i feel are positive points or may say booster to our economy.
    • Government with Vision: NDA in center this time is most differential with all past government strongly on one point which is, it has vision for changing India. I am not politically against or for any government, but what i feel different about this government is that it  has initiated many ways to change India at same time. Ofcourse previous governments too took steps to change india, but this time they are going with Digital world which is helping to reach out large pool of people at one time and also making work quit easy for departments to manage data. So biggest game changing for this government could be Digital India campaign, more than even any other change because it is connecting people and also its making  information available to citizens easily. With Make In India campaign, government is trying to support all sectors of India and its also boosting on Exports. I may go down to write endless pages, if i mention all the points of visionary government but in short to say,if we see even 35% change than current situation, its going to change India in alot better way. So i have faith in this government!!
    • Youth Population: As per the UNFPA’s 2014 report, India’s 25-30% of total population is Youth between 10-24 of age which i believe are going to spend the most in coming decades as they are going to be next work force who will earn. In terms of total population, India is the second highest and so a simple math would suggest that atleast we are going to stay in top 5 country to have youth population in next decade. Even as per CIA report 2015, India birth rate is far more than China, Australia, USA or say any other developed country. Considering this angle of economy, other factors remaining constant across countries, Multi national companies would surely choose India as its destination for manufacturing. To add to this, Indian Government, Led by Modi, has initiated a programme, SKILL INDIA to create a ecosystem to train labors across India through training partners. So am sure main blood for economy to prosper is always human and stats says India is going to be most preferred.
    • Change in Workforce: It could be considered a continuation of above point but there were two things which i wanted to mention here which was China, who has largest workforce, is losing in numbers where as India has added 366 million in last decade as suggested by articles in leading magazines. This could be the biggest example that youth population of our country is joining skilled labor more than agriculture. So this is surely changing our demographic. Secondly, women workforce is increasing in India which could increase demand of various products in next decade as they would have purchasing power. Until recent or even still many families have tradition of housewives but now as more and more girls are completing their graduation, they prefer to stay working even after marriage. Though still many families doesnt allow to work but thought is changing at rapid pace. This will surely push more women in labor market. Now how this is positive for India? Its simple logic…As now women would earn themselves, they dont have to be dependent on Husbands to fulfill their demands for luxury products. This  will raise demand for clothing, jewellery, cosmetic etc and the money will keep circulating in economy. So i Feel even this could play part in changing India.
    • Untapped Rural markets: As per the census report of 2011, India’s approx 68.84% population stays in rural while just 31.16% are living in urban. That number has improved from previous 72.19% in 2001 so we can assume that this number could max be revised to 60% in coming census . Which means still more than half of India is going to stay in rural in next decade. That also concludes that halve of our population is dependent on Agriculture. But interestingly, if you guys notice around you, we are witnessing major change in vision of rural people. Until before 2 decades, it was by default assumed by a farmer’s son that his future is going to be farming, but now the scenario is different. Now 50% of farmers want their children to be a doctor or engineer or even a chartered account. What has brought this change? Awareness!  Today Digitization has made it possible for information to be available at each and every corner of the world where there is Internet. As we are having largest pool of mobile users, even internet is reaching  each part of India, which is bringing awareness in Rural India. People there are getting informed of Education, Products, Jobs etc. This is creating demand of each and every type of products and services in Rural. As Food inflation is rising so is income of rural india. This states that when urban people are into somewhat liquidity crisis, rural people have purchasing power as money has been transferred to rural india by the way of food inflation and real estate inflation. On opposite, they havent spent at the same pace as they earned because they were unaware of spending option until now. But now Internet have educated them. In next decade they would demand say Electric appliances, Education services, etc more than urban in term of sales growth. So untapped rural markets is biggest advantage of India currently.
This were 4 basic points which are  creating biggest opportunity to invest in India for next 5-10 years. Ofcourse there are many other financial factors and commodity factors such as lower crude oil price which are also going to play crucial role for growth but that is common for many developing countries. While 4 points which i mentioned are unique advantages of India over developed countries and developing countries so i feel we should STAY INVESTED IN INDIA OR START INVESTING! Where and how should you invest within India, is upon you to decide. You may take advise of your financial consultant and work the best investment opportunity as per your goal. So my formula for next decade is I.I.I (Invest In India)
 
Disclaimer: All the views are personal and the actual figures may differ. I am not biased to any political view. Please refer to you financial consultant before investing on my idea. This is purely what i think.

A myth: CPI and Nifty inversely related?

Its commonly believed by a trader that a Higher inflation means bearish trend in the market. That may be true for a day or 2, but interestingly i noticed that we are wrong! Attached graph is a comparative study between CPI and Nifty for last 10 years on QoQ basis. Green line is Nifty while other one is CPI ie., consumer price index or you may say inflation. As you all can notice that both the lines are trending the same direction except near bottoms and tops which clearly states that Inflation and Nifty are directly related on broader time frame. So now may be we can workout that inflation to some extent is needed for the growth of economy. If there is inflation more money would be spent by consumer which means large sum in circulation. More and more circulation of money in the market would divert extra margin or say extra profits to equity markets so logical it fits too. If u take recent example, we saw Nifty high in last march and since than we have seen decrease in Inflation too. Interestingly now in January we saw marginal rise in inflation which makes us believe that nifty low too can be near by or say in this quarter. Investors can now atleast buy partial portfolio at CMP. Can this theory be true, will check after we complete this quarter in March. Till then lets wait and watch!!

INDIA'S MARKET CAP-TO-GDP RATIO

Nifty had a non-stop rally from 6000 to 9000 over the last year on the promises of getting rid of policy paralysis, passing of key reforms and bringing back the India’s growth on the track given by the pro-growth government at the centre due to the strong mandate given by the people of India. After the non-stop rally over the last 12 months, the question arise in the mind of investor whether the Indian market cheap or not.
 One of the key indicators considered by Warren Buffett is Mcap to GDP ratio. A ratio used to determine whether an overall market is undervalued or overvalued. The result of this calculation is the percentage of GDP that represents stock market value is as follows a ratio < 50 represent that market is significantly undervalued; Ratio between 50%-75% mostly Undervalued, Ratio between 75%-90% fairly valued and Ratio above 90% is overvalued.

India’s current Market cap to GDP stands at 87% which is at the highest level in last five years. India’s current Market cap to GDP ratio at 87% shows that the market is Fairly Valued. We believe that short term investors should remain cautious and for the long term investors it is good time for SIP.  

IS INDIA GOING THROUGH STAGFLATION?

Stagflation refers to environment of both high unemployment and increasing inflation or a condition of slow economic growth with a rise in prices and low demand. Now the question arise that “IS INDIA IS GOING THROUGH STAGFALTION”.
If we can see the data India’s GDP growth which has come down from its peak of 11.4 in 2010 to 4.6 in 2014 and the inflation rate of India  in  2012-2014 was in between 11.4% to 8.4% which is on the higher side compared previous years. So going by the above data we believe that India is going through stagflation.
The key reasons for stagflation is Lower GDP, High Inflation, High fiscal deficit, High CAD, High Unemployment, Low capex etc.  We believe that if there is stagflation one should increase investment related to commodities in anticipation of higher commodity prices.

But we are more confident that India would come out of Stagflation on the back of positive election results and also positive macroeconomic data like Increase in IIP numbers and higher HSBC Manufacturing PMI at 53 almost 17 month high. So we believe that one should buy nifty on every dip.

GOVERNMENT ON DRIVE- INVESTMENT IN GREEN ENERGY:-

The government is showing its concern towards reducing fossil fuel reserves. The government is taking up initiatives to invest in solar and wind power projects in order to give a boost to the power sector and resolve electricity problems, in fact the government has started working on unexplored potential lying in the desert regions- Thar in Rajasthan, Rann of Kutch in Gujarat, Lahul & Spiti in Himachal Pradesh and Ladakh in Jammu & Kashmir. The plan could include an investment of Rs. 2 Lakh Cr by 2022.

The use of solar power is a “GO GREEN” approach taken up by the government to reach the increasing demand for power. The government’s goal is to produce 10 gigawatts of solar power by 2017; already the country has 2.8 gigawatts of the technology installed, enough for 6 million homes in the nation of 1.2 billion people. Hence the government is going great on investments in the power sector and I can see growth in this sector. So, we are bullish on companies which are in solar and wind energy in power sector.

WHAT AN ENTREPRENEUR NEEDS TO FOCUS ON WHEN HE STARTS UP A BUSINESS?

Firstly a person, who wants to starts a business, should have the courage to face the challenges and losses in order to achieve success. He should be Risk taker, passionate, curious to know how things work, imaginative, persistent, hardworking and self-confident, strong people skills and he should have a pre definite goal to achieve.
The business idea has to be unique in today’s world, in order to give tough competition to his competitors. Ideas he can get from the existing products and services, the people, distribution channels or any other source. The three things entrepreneur needs to have 1. Lawyer- to make him aware of the rules and regulations, 2. Patent – to make his product his own, 3. Insurance – to bear the uncertainties.
Having a unique business idea will help to attract customers. You can take an example of Facebook or Redbus.com. Uniqueness is the key to success because if you are offering the same thing then the customers would not be attracted as they already have their trustworthy brands, and if you are not innovative then you have to cut your cost which will be difficult at the initial stage. Hence come out with innovative ideas and your business will definitely bloom if know how intelligently to market yourself.
Failure should not affect the entrepreneur, the best example of failure to success entrepreneurs – KFC’s Colonel Sanders developed a “chicken recipe” which he took to different restaurants got rejected 1000 times but still he did not lose hope and finally he started up with KFC and has reached heights. A unique trademark will also help your brand to gain recognition. So, if you have a unique idea, unique business plan, an attractive trademark, then you are all set to “START UP”.

IS RAILWAY FARE HIKE REQUIRED?

Recently in a statement PM Narendra Modi had told to everyone in related to economy that Agar Admi Bimar Ho To Usko Thik Hone K Liye Dawai Deni Jaruri He. He means that currently Economy is not in a good phase and it required taking tough decision to improve economy. So the first pill he gives is rise in passenger rail fare hike by 14.2% and freight price hike by 6%. Now the question people or Aam Admi is asking does this is required? Currently Indian Railway is running on Rs 30 Cr of loss in a day. To cover that government is paying subsidy of Rs 26000 Cr to Indian railway every year. Thereby increases fiscal deficit.
So Increase in fare price will help Indian Railway to earn about Rs 8000 Cr to Rs 11000 Cr per year. So how these will be benefited
1)      This will help Indian railway to become more modernize
2)      It will help to improve safety
3)      Will help to increase more rail lines
4)      More importantly It will help to reduce the subsidy burden
As lower subsidy means reduction in fiscal deficit. And reduction in fiscal deficit means chances of reduction in interest rates, strong rupee, help in to bring down inflation, and rise in GDP. These will lead to increase jobs.