Sebi has been making a lot of changes in the mutual fund business – there is a good chance that the size of the industry will shrink. Same thing about RBI and IRDA.

Just hold on! Is the industry shrinking in size? No. Not at all.

Some re-arranging will happen. If you have been wondering why there were 44 players in the mutual fund industry, but only 4 were profitable, well now there will be more.

Fidelity is planning to sell its stake (according to ET, but then ET has said this many times in the past, and frankly I have no clue whether they will or whether they are planning to).

http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/fidelity-set-t

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Well, over the last so many years what is the penetration of banking in India?

Well about 6-8% of the country’s population has some access to banking. Why we do not have banks with

EXCLUSIVE mandate to cater to retail needs? – savings, current, small business, retail, traders,  – and perhaps with a local bias. For example every small locality – a CP, a Dariyaganj, a Gurgaon, Besant Nagar, Dadar, Chembur…can all have small local banks catering to the needs of the local population. This would create a lot of jobs, can have local directors, can give local loans and will always remain small. This is a brilliant concept, but the ‘co-operative banks’ which were supposed to do this kind of business have failed.

We instead have a super over banked urban India – where the small account holder is too scared to even enter. Most of these banks are too posh for the common man – who is too scared to even go into such a bank!

Such small banks should have no power to give loans above Rs. 1 crore – and all the account holders should also be shareholders. All this will create good supervision and evidence gathering!!

I can think of about 500 banks / perhaps 10 varieties of banks – rural poor, urban poor, senior citizen branches, or senior citizen branches….

what say?

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The ICAI of course a well run body representing the interest of the C As. Well if this is what you think, you think wrong. Once you get in you realize that many of the regulators are not happy.

When I was doing my CA articles – it was clear that we would not do ANY CONSULTANCY work for the client. We had some amazingly high standards (I have no contact with Sharp & Tannan since 1985 when I completed my articles). I do not think we could have taken an assignment of ‘setting up internal controls’ for a client! Fairly obvious, we thought.

After all, as stat auditors we HAD TO CERTIFY that the company has adequate Internal Controls….! So what was obvious to our partners and kids who did CA is perhaps not so clear to many people today.

If we create 100 companies and say each one is a ‘different corporate entity’ – should not the ICAI lift the corporate veil and see beyond he veil? This is not sad, it is sick.

No, I am not saying this, one Mr. Subbarao who heads RBI said this. And he was addressing the ICAI which needs a LOT OF GOVERNING changes. Mr. Subbarao was very polite in what he said, but I guess the more sensitive people can get the gist of what he is saying! Just because he stopped short of saying  ICAI needs to be supervised…I think those who heard the speech…understood what he said! Read on:

http://www.dnaindia.com/money/report_subbarao-cautions-cas-against-enronisation_1626890

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- A government which has no clue what is happening. The Finance Minister talks about a 8% growth. The reality is more like a 6.5% growth (well the government says 7.1 with a downward bias)

-The Rupee headed towards 55 if not worse.

-The RBI wondering what to do. It is clearly not responsible for the European Crisis or the coming Chinese hard landing!

-Portfolio investors (especially US $ investors) have been taken to the cleaners, they want the RBI to intervene!

-The government of course has no clue about what is happening. If Subramanyam Swamy has his way, the Home Minister will be inside Tihar too!

-Suddenly growth has vanished, portfolio investors have vanished…and the deficit is heading towards the US $ 15 billion (fiscal first quarter). Overall it will be about US $ 55 billion.

-The government assumed US $ 30 billion of portfolio investment…we are at a figure of -60 million perhaps.

- If the government cannot (or will not) control the deficit, cannot do any of the reforms…it might as well call for polls!

- Indians are happily exploring the possibilities of investing abroad – remember we all can invest upto US $ 200,000. If 100,000 people do it, the Rupee-Dollar rate will get worse..

-RBI has no clue about what to do next. To me it is looking like Alice in Wonderland or like a general physician who keeps doling out a red medicine,and refuses to recommend you to a specialist.

-Into all this gloom you have to keep buying shares – assuming you or your company have not been downsized

Remember what Peter Lynch says?

If you spent 10 minutes in a year wondering what the economy will do (instead of what your portfolio will do) you have already wasted 7 minutes…

so relax…

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Well let us look at the Indian market from a foreign investor’s point of view:

Indian markets (as also China) is down by 18% over the past one year. If you are a foreign investor add another 14% of currency depreciation. It is not a pretty picture, correct?

It must have been quite a shocker for people who thought India was a domestic consumption driven market – and actually runs a small trade deficit. The Indian markets peaked in Nov last year and then has been on a ride down. From 21000 to 16000 now.

What caused this UNEXPECTED slump? It is not clear. Indian politicians have always been corrupt – however some new social changes – of wanting to punish the corrupt suddenly found ground support and has been shaking the governments. This movement has had an impact even on a few local elections. No major polls have been announced after this movement gained momentum. Also there was a Telecom scam where the Minister in charge of the licensing process was even jailed. Jailing corrupt businessmen, their executives and even a Minister that too for 180 days is unprecedented in India.

The FII cash flow into India in the year 2009 was US $ 17 billion and they invested US $ 29 Billion in the year 2010. In the year 2011 there has been a withdrawal – of about US $ 325 Million. In a country with very poor retail participation (there are no accurate figures for this – it varies from 1,000,000 to 10 Million!) exit of foreigners’ money was bound to have an impact.

India has many problems – the rate of inflation is in double digits. The RBI would love it if the economic growth rate and the inflation rates were to trade places, but there are no indications of that happening! The Indian growth rate of 6-6.5% is not bad, but when the expectations were in double digits, such a low figure of 6-6.5% (with a downward bias) does not look good at all.

If US $ 30 billion were to come in – and that too quickly what would happen? If retail FDI was really allowed what could happen?

These are difficult to handle. However a 7% growing economy with a beaten down market and a beaten down currency is very difficult to ignore. So money will come in. Will the markets scream its way to the top? No. Frankly there are no great triggers for the market to RUSH up all the way to 21000.

However we all know that triggers for a bull market or a bear market are not visible TILL THEY HAPPEN! So suddenly you might see cash flow coming in, quarterly results being good, interest rates coming down, a feel good factor – and the index could be at 21k in no time at all !

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- Domestic growth has slowed in recent months to pretty low levels, and a senior banker saying be happy with 6% growth next year

- A fallen and further falling Rupee?

-Inflation stuck at double digits – latest is 10%!

- RBI’s constant raising of interest rates have NO impact on inflation.

Foreign investors have bought just a net $800 million of Indian shares vs.  $29 billion last year!

Korean won has slipped about 1% this year

Malaysian ringgit is down around 2.4%.

The rupee has fallen 14%, ONLY  Turkish lira, down 17%, and the Kenyan shilling, – 15% are behind us.

In October, India’s trade deficit rose to $19.6 billion!

Exports are falling, oil, gold, and coal imports are hurting bad…

Slow FDI and slow FII – The benchmark Sensex is down 20% this year.

Indian government has  raised the limit for foreign institutional investment in sovereign and corporate bonds by $5 billion each. Impact on the currency? Marginal and short term!

The great Mani Shankar Iyer says we should not let the currency float…and should be in the pre 1991 era.

For any good thing to happen, we should get rid of the Congress, or ensure that the Congress gets rid of the ‘left’ inside the Congress.

My vote is for a grinding to lower levels of the sensex – no dramatic fall…but a slow process of 16500-15000 but via 17000 – so SIP will work, do not try timing…

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Inflation in the US and UK are about 5% – if you ask the people living there (increasing ‘consumer confidence’ is inflation assisted). However the Central Banks are refusing to believe this. With interest rates pegged at 1-2% in both the places, the Central Bank is making a mockery of the ‘smart’ people who ‘saved’ money. Money is losing value real fast – and asset bubbles are getting created ONCE AGAIN…in both these countries.

China holds its currency low, so the Chinese guys who export are INVESTING the money outside (Money is brilliant, it finds the best risk-return avenues). If a Chinese company has exported to Singapore, it buys more properties in Sing rather than bring it to China. Now the average Chinese who cannot do this kind of stuff happily buys gold. Gold here is not an investment – it is a way of saying ‘I do not know what will happen to the yuan’.

Our own RBI CANNOT control inflation, prices of real estate, prices of other non essential commodities. The Government of India is in sleep mode and doing nothing to reduce inflation.

We have a huge supply constraint – 30 years CTC for a house (clearly a bubble? I do not know) or complete failure of infrastructure (5 hour power cuts in parts of the suburbs of MUMBAI) cannot bring the prices below Rs. 90 lakhs for a 2BHK – 40 kms from South Mumbai!!

So at best we can only say what a tough job it is to be the Governor of the Central Bank, do sensible things with your policies, hope that the government will do sensible things, – and talk to the media on a quarterly basis (sounding smart too!),….God…are you listening!!

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So today let us look at the issues:

A stagnating Europe and USA will mean bad news for China (for its exports), Brazil (commodities not being in great demand), India (inflow of investments) Russia (falling oil prices will hurt).

Let us make no mistake. A declining EU and a stagnating US cannot be good for rest of the world. The EU and US will try to continually try to maintain their political hold even as their economic hold is fast dwindling. Political fallout of all this ‘dadagiri’ apart there will be huge economic fall out also.

Indian businessmen and other Indian asset buyers are used to benign interest rates. However the ever increasing interest rates by the RBI will start hurting. As the quarterly results start coming you will see earnings eroded by rising interest rates. Funding for infrastructure projects will not be easy to get in a world where money keeps going to the ‘safe haven’ . Rising interest rates will also dampen fresh investment in infrastructure – even guaranteed returns will not mean anything unless the guarantees are by the Central Government. The guarantees of payments will not mention the delays that the government machinery is capable of doing!

All this does not abode well….Here I am not predicting doomsday, but clearly Apocalypse is not really built into Indian prices. Well not yet at least!

All the best!

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However when a senior citizen showed me her phone – she had sms’s from the company …saying all kinds of nonsense and charging Rs. 30..IF SHE DID NOT REPLY.

She was told by her children to ignore sms from the service provider..so in a day they exhausted Rs. 120 from her account. I have chosen to write about Bharti Airtel because that is what was shown to me. I am sure other service providers – Mahanagar Gas for example charges Rs. 50 a month FOR A SERVICE THAT HAS BEEN DISCONTINUED (building is being broken down and reconstructed)..and the great RBI says in case of a standing instruction, ONLY MGNL can STOP it, not YOU the account holder.

Imagine the life of a 80 year old man or woman having to deal with these thugs. You cannot live without a phone, gas, electricity, ….we also pay one of the lowest rates in the world (arguably, in electricity we pay one of the highest!)..but these companies DO NOT CARE.

We need to start a very very strong consumer movement, and vote with our wallets. I have friends in Bharti Airtel, I hope some of them have the courtsey to call back, of I am going to Sunil Mittal with this crib. I never, never shout at the kids handling the call center – no use telling them. If nobody calls, it will SM who will get the complaint. Or the Telecom Minister. Makes sense, the EAR (for organisations too) is at the top, and it is close to the brain. Shouting at the toes or ankles is a waste of energy.

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In 2002-4 the Rupee started strengthening. This was because of the amount of foreign currency that came into India for being invested. This put a lot of pressure on the Rupee – and the strengthening hurt the exporters (remember the great software industry which did not tell you that it was profitable because the Rupee was weakening, now started crying when the Rupee was strengthening, shame shame Infosys!!).

So RBI had to buy the dollars an print an equivalent Indian currency.

This was pulled out of the system by bonds, floated under the MSS. These bonds helped the government in its borrowing program and helped the bank generate liquidity for the purpose. Banks buy these bonds if the interest rates are attractive, if they think interest rates will go up in the future, then they will not buy these bonds.

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