Monday, December 19, 2011

The Rupee Fall

The RBI is in a soup. For the past few months it has been trying to tame Inflation by increasing the repo rates (The rates at which Banks borrow from RBI) and CRR (The amount of money banks have to keep with RBI). It hoped to reduce the amount of money flowing in the economy, thus reducing demand and dousing out inflationary fires. It is well on its way to achieving this but the past few weeks have given them a new headache. The never ending troubles in the Euro Zone, and India’s insatiable demand for Oil has led to this mess. Let us simplify the situation.


(1) Troubles in Europe: Economies in Europe are toppling one after the other. The famed European Lifestyle, extravagant spending and low taxes have led to a situation wherein the government is not able to pay its dues. It started with Greece and has moved on to Spain, Italy, Portugal etc… The acronym PIGS does suit them. As an investor in global currencies, when I see that the Euro is not doing too well, I am forced to shift to other currencies. The first name that comes is the Dollar. This mad hunger for dollars has caused a shortage of dollars in the world and India, being a majorly importing country is suffering from it.

(2) Imports of Gold and Crude Oil: India being a developing country, has a huge energy bill. Since we don’t have enough to feed ourselves, we are forced to borrow. We borrowed lots of Crude at high prices which has increased the country’s debt. We have a huge dollar bill but not enough dollars to pay them. So we need more rupees to borrow dollars.

(3) High Inflation: Say there is X amount of Rupees in the economy. At times of Inflation, we are paying more for a particular product. Indians will demand for cheaper products. These products will come for other countries therefore demand for rupee falls.

Possible Solutions:

(1) We cannot really do much Europe but what we can do is make sure our Economy is performing well. For that we need to make investments in Infrastructure, Public Spending has to increase and this will attract foreign investors to India rather than other countries. To increase public spending, the public should have money to spend. The public gets money from banks who get it from RBI. If RBI keeps its rates high, then people won’t be able to borrow; so an appropriate rate cut is required without releasing too much money into the economy. Rate cuts are double edged swords, lower rates mean higher Inflation and Higher rates mean low demand.

(2) We need to attract more capital into the country from our own brethren. Increasing deposit rates of NRO, NRE accounts will make Indians earning in dollars to invest in India rather than anywhere else. This allows an injection of much needed dollars into the economy.

(3) Open up FDI in various sectors. Everyone loves to invest in a booming business and India’s growth story is well known. Putting FDI in Retail on the backburner was a bad move and in hindsight, we might just regret it.

(4) Another possible move is to put a cap on Imports. The rate at which China is sucking Gold out of the economy, there may not be much left for others. A cap on Gold imports for time being might be a good idea. Increasing our debt bills will cause an unpleasant Europe like situation. The Investments have to match up with the revenues else India could face the Payment crisis of 1991.

(5) The current policy paralysis which has hit the UPA government doesn’t augur well for the economy. Investor’s confidence depends on how well the Government performs and this could be the wakeup call for Congress to push key reforms.

I am no economist but what I have suggested are basic and logical solutions to a problem which is fairly well documented and well known. It’s not an unknown virus with strange symptoms but a disease more akin to a common cold. I believe India is in safe hands as we have the World’s best bankers (probably not the best politicians) and they know what they are doing.

Thursday, December 15, 2011

India Down Under

It’s that time of the year again, when all things move south and what better place than Australia. The Christmas period is upon us and the traditional Boxing Day test awaits us. Watching cricket in Australia is a different experience all together; massive grounds, large crowds, sporting wickets all make viewing a pleasurable experience. I sometimes wonder how strange it must be for Australians to celebrate Christmas during Summer time. I guess Santa in Australia doesn’t come on a Sleigh, a Ferrari perhaps to beat the heat.

After the bitter disappointment of the England Series, the Indian fans are expecting a much better show down under. I believe that they have the right team to do the job. The WI series has given the key players some good batting practice and this should help in their performance. The team which I think India should put out for the Melbourne Test is,

(1) Virender Sehwag

(2) Gautam Gambhir

(3) Rahul Dravid

(4) Sachin Tendulkar

(5) VVS Laxman

(6) Rohit Sharma

(7) MS Dhoni

(8) R Ashwin

(9) Zaheer Khan

(10) Ishant Sharma

(11) Umesh Yadav

Looking at the top 6, except Gambhir, everyone else has been among the runs. The true wickets at Australia will help Gambhir get his touch back, all he needs is a little time at the centre. The whole world is expecting Sachin to complete his centum here and what better place than the MCG and what better occasion than the Boxing Day Test.

I guess India has two big decisions to make in their selection of the final eleven. One of them is Rohit vs. Virat and the second is the choice of the third seamer, a tossup between Umesh, Mithun and Vinay. I think the 2nd dilemma is an easy one with Umesh clearly the leading choice. His performance against the Windies in the two tests has amply demonstrated his caliber. His ability to clean up the tail would come in handy and his extra yards of pace could make a lot of difference to the final outcome.

The question of Rohit and Virat is one for the ages. You can’t ask for two players more similar, matched in temperament, skills and all round abilities. One factor which differentiates them could be Rohit’s ability to play with the tail. His experience in getting India out of difficult situations will be useful in case the top order fails to click. He has also played in Australia before and his technique of playing short balls is better than that of Kohli’s, although both have a lot to learn in that area. If Sharma does get a chance to play, then it would be his maiden test. He also has a triple hundred in first class cricket, so he has the capability to construct a long innings. He is definitely Indian Cricket’s investment for the future, someone who has promised a lot but has always been on the threshold of greatness.

If you were to check both the teams Man to Man, India would probably win hands down. Clarke seems to be the only batsman in form but Ponting, Hussey and Watson are not people to take lightly. Bowling wise, Australia is definitely weakened with the absence of both Mitchell Johnson and Cummins. Johnson always had the ability to take wickets in groups something which Australia would sorely miss. James Pattinson would probably be the person who will support Siddle in the fast bowling department. He performed admirably against NZ, moving the ball both ways in helpful conditions. In the spinning department, I doubt if Lyon has the credentials to trouble the Indian Batsmen. He does give the ball a good tweak but turning it a long way won’t get him too many wickets. He has got to develop variations to sow doubts in the minds of the Indians.

Overall, you do get the feel that this could be India’s series to lose but you can never underestimate the Aussies. A good start by India at Melbourne would set the stage for a wonderful series. The key factor in the series would be India’s bowling which needs to take 20 wickets. We have the required firepower but planning and execution could be the difference between a win and loss. My prediction, India to win 2-1 and Sachin to get his elusive hundred at the Sydney Test.

Wednesday, December 7, 2011

Why this Kolaveri (F)DI?

“1 kilo onions do” (Give me a Kilo of Onions). The neighbourhood sabjiwala from Kerala was busy gathering vegetables when he asked me, “Bhaiyya, ye FDI kya hota hai?” (Brother, What is this FDI?). Surprised I turned towards him; Not that I was astonished at the question but why me? Does he know I am an “yum-bee-ay”? Anyways I started explaining to him what FDI means and how it works. After I finished my rumbling, as if I was pitching to a client, he nodded with a smile in an assuring manner. He asked “Mere dost bolte hain ki agar bahar ke log aayenge tho humara nuksaan hoga. Who log bade bade dukaan kholenge aur yahan ke IT log sab wahi challenge. Phir humara kya hoga. Aapko kya lagta hai?” (My friends tell me that FDI would mean that foreigners would open up big outlets and drive away us small retailers. All the IT people would start going there, then what would happen to us?) This piece of conversation got my brain cells in overdrive as I started to think about how an ordinary Indian will convince one of his own as to the benefits of this move. Now I know why they say sitting in power is tough. Even a good deed needs convincing. Sometimes even educated people don’t see the benefits. It’s the change philosophy. No one likes it even if it means life becomes easier and better.

Let us first understand what Retail really is. It’s a medium of distribution which reaches right to the customer’s doorstep. Thanks to small time Kirana shops, you don’t really have to walk more than 100m to reach the nearest shop. So convenient and easy. The major point of opposition to the FDI bill is that they would send the mom and pop stores to oblivion. Let us not complicate the answer to this by saying FDI would improve Supply Chains, Reduce food wastage etc…The most important thing to understand is the psyche of the Indian customer. We are simple, lazy people. We love the options of home delivery. Isn’t this why Domino’s is so successful in India. Even if Walmart were to sell things 20% cheaper, we would still prefer the nearby Kirana which will offer us a home delivery. The neighbourhood shop would also treat you with respect and remind you if you forget to buy something. He probably knows your home needs better than you do. We are not the type of people who will make a list and plan our shopping. We are impulsive buyers; we buy things as and when we remember or see them. When was the last time your family bought your monthly groceries all at once. It is so easy for mothers to just step put of the house and find the nearest sabjiwala. Sometimes he might come in front of your house with his rhythmic screams, “Tamatar, Aloo, Bhindi..” Who wouldn’t buy from him?

Taking the case of a city like Bangalore, Walmart would open at the most 2 or 3 shops, somewhere in the outskirts where real estate is cheap and in plenty. In MBA they always talk about value added to the customer. The value you get from a Walmart is basically cheaper goods. Quality is something which I believe would be the same throughout. The pains which you would take to commute to the shop, then carry all those bags back might just equal the return you get. Once you come back, you realize you have forgotten something. Nothing worse than that.

The point is there is nothing wrong in giving more options to the consumer. Its always better for us to have everything under one roof. Its easier to find stuff and plan. Since the big chains source directly from the botton of the supply chain, the prices you get would be better and in order to maintain the quality there would be improvement in the logistics aspect. WSJ once reported that nearly 30% of the country's fruits and vegetables perish due to a lack of cold-storage facilities, while thousands of tons of food-grain spoil in ill-equipped warehouses. A collosal waste for a developing country like ours. Foreign players would definitely solve this problem leading to lesser wastages and better prices for farmers. The elimination of middlemen would reduce jobs is another argument against FDI. Although this is true, but these people can venture into other areas which would open up due to FDI. There would be a large scale requirement of Warehouses, Material Handling Equipment, Transportation vehicles etc… Each store would employ by the thousands as they would be needed for billing, guiding customers, movement of goods, back end operations, accounting etc… All in all this is a win win situation for the country. If anyone has any doubts then they need to remember the effect which Retail chain like Food World, Reliance Fresh etc… had on the Indian Retail scenario. No one lost their jobs or no kiranas closed due to this.

Like we enjoy the benefits of KFC, Pizza Hut, etc… in India, let us also open up in retail. This is a move in the right direction and the benefits far accrue the losses. As for my sabjiwala, he says, “Bhaiyya, aap tho mere paas hi aayenge na” with a smile.