High current account deficit (CAD)

One of the major challenges facing the Indian economy has been the high current account deficit (CAD). This has resulted in substantial downward pressure on the Indian rupee. Under pressure, policymakers turned hostile towards India's obsession with the precious yellow metal. Between January 2012 and August 2013, the import duty on gold was raised from 2% to 10%. Further the Reserve Bank of India imposed a ban on imports of gold coins and medallions in a bid to tame the rising CAD. This ban resulted in a substantial drop in gold imports.

As the chart of the days shows, from 140-160 tonnes during the months of April and May 2013, gold imports have fallen sharply to about 11-12 tonnes during the months of August and September. One important point to remember is that while legal gold imports have fallen, this has resulted in a significant rise in gold smuggling. This is a major challenge for policymakers as it makes the curbs on gold imports futile but also results in revenue losses for the exchequer.

Sharp fall in India's gold imports

Global youth unemployment

The impact of economic crisis has been felt the most on the scope for youth employment all over the world. As per a recent report by International Labour Organization (ILO), lack of employment opportunities is expected to be the biggest risk for an entire generation of youth. The global youth unemployment level has never been as close to the 2011 high of 13%. At 12.8% of global youth population, the number does look scary. But for countries like China and India that house most of the youth population, the unemployment problem is much bigger than it appears to be. 

Global youth unemployment near two decade high

Investing in ATMs

Fixed income investments are hardly offering any inflation adjusted returns. Bond yields have been very volatile. Stocks, mutual funds and property are already part of their portfolio. Hence, high networth individuals (HNIs) have been looking for alternative investment options that offer returns commensurate with risk. And they have found the answer in ATMs! Yes, you read that right. Investing in ATMs to fetch rent is the latest fad in Indian realty investment space. As per an article in Business Standard, the high demand for social infrastructure near new townships has created this opportunity. Townships need infrastructure such as schools, hospitals, malls and ATMs. Plain vanilla realty investments are no longer fetching the double digit returns per annum seen earlier. Hence, theme-based properties such as ATMs, warehouses, industrial plots, private schools, hospitals, high-street shops, etc are now being invested in. In this case, the HNIs buy the property from a developer that assures a guaranteed rent every month. The agreement to stay invested is with a pre-decided lock-in period. The lock-in period for ATMs and warehouses is usually three to five years. For hospitals and schools, it could be as high as eight to ten years. While there is seemingly nothing wrong with the nature of such investments, the potential risk could be for the tenants. Demand for higher rental from such social infrastructure could push the operating costs for schools and hospitals to unsustainable levels. 

Unemployment : a big concern in the West

Unemployment is a big concern in the West. Widespread slowdown and rampant outsourcing due to cheap labor available in other countries have hurt the employment prospects particularly in US. With hiring having virtually come to a standstill, the western region is glaring at a big unemployment menace. While slowdown in the West has impacted the employment opportunities in other countries as well, however India Inc seems to be in a buoyant mood as far as hiring in 2013 is concerned. Approximately 62% of the businesses plan to hire workers in India this year. This is despite the fact that business sentiment in India is low. The hiring plans are quite surprising considering that bureaucracy has become a big hurdle for smooth functioning of businesses in India. In fact, many Indian honchos have expressed their desire to set operations overseas. However, the optimism reflected by India Inc in hiring is a signal that things are going to settle soon. After India, Georgia is likely to witness the next best hiring statistic followed by Peru and other smaller countries. No major developed country appears in the top 10 list. It appears that unless some sort of revival happens the developed world is likely to face the problem of unemployment. 

Countries with best hiring prospects in 2013

Data source: Yahoo Finance

What to expect from future US Fed chief Ms Yellen?

So, Ms Janet Yellen is almost confirmed as the next US Fed Chairman barring some last minute surprises. However, don't expect any radical changes in the way the US central bank is run. For if her public statements are anything to go by, she seems to be cut from exactly the same cloth as her predecessor. And there is no doubt that she will continue with the policies Bernanke-led Fed has pursued. In other words, the best way to deal with a problem of excess money is to throw more money at it. Indeed, for people like Yellen and her ilk, the economy is nothing short of efficient machine. You pull and press some levers here and there and low and behold, the problem is solved. Nothing can be further from the truth though. For unlike machines, every economy has thinking, decision making participants. And one just can't have a one size fits all approach for these kinds of systems. Consequently, the best solution is to leave the economy alone and not continuously meddle in its affairs. However, the appointment of Ms Yellen goes to show that nothing has been learned at all. 

Stock Recommendation Dabur

The counter seems to have formed a strong base around 166 level as it is witnessing regular bonce back from the said level.
The counter formed a strong bullish candle followed by a sort of pin bar candle on a daily chart.
Besides the counter is trading very close to its all time high.
Considering all these facts and with indicators looking quite bullish ,
We are of the opinion that the counter is all set to touch new heights in near future.
Recommend buy at 171.7 with closing stop loss of 166 target 185-192 in short term.

Stock Recommendation EMCO LTD.

The counter after a long consolidation managed to close above rs.14.5 mark with decent volumes.
With other indicators too looking quite bullish further upside in a short term can't be ruled out. Recommend Buy at 14.75
with strict Stop Loss of 12.5
Target 18-29 in a short term.

7 new bank licence coming soon

Despite being acutely affected by the economic slowdown, this sector remains in the wish list of government and private sector alike. The licenses for new banks in India have been under deliberation for a while now. RBI governor Dr Rajan has committed to issuing the licenses by end of the fiscal. And despite the RBI's initial reservations about allowing too many entities to foray into banking it seems the number is not too small. As per Economic Times, the RBI has decided to issues banking licenses to 7 applicants. More importantly, in the RBI's own words, the entities fetching the license will not be 'look-alikes'. The RBI had earlier proposed differentiated licensing. This is a practice already followed in the US and Singapore. Differentiated licensing could enable specialists such as infrastructure lenders or gold loan companies to do niche lending. Such banks get a regulatory treatment different to what it is for existing banks. For now, nothing except the number of licenses to be issued is finalized. However, we believe that the new entities will not immediately have a meaningful impact on the level of competition in the sector. In fact, it will be at least two years before that is the case. Meanwhile, the inefficient entities need pull up their socks. 

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Can India survive QE tapering by Fed?

For years, emerging-market currencies benefited from the US Fed's ultra-low interest rates and easy-money policies. Since the time the US Fed adopted near zero interest rate, cheap money in the developed markets found its way to emerging markets, particularly ones in Asia. 

But this trend showed a sharp reversal when Fed Chairman Ben Bernanke signaled the move to exit quantitative easing (QE). More than US $47 bn has been withdrawn from global funds' investments in emerging market stocks and bonds since May 2013. The largest reaction of this was on the currencies of current-account-deficit (CAD) countries. These include the Indian rupee, Brazilian real and Turkish lira. These currencies were most vulnerable to Fed guidance because they rely so heavily on foreign capital flows to fund their current account gaps. This sell-off reminded everyone of the 1997 Asia financial crisis. But, according to CNN Money, the present situation is very different. 

The depreciation in Asian currencies is not a reflection of their regional economic weaknesses. The economic fundamentals of the region have strengthened due to the prudent economic policies implemented since the 1997 crisis. Similarly, Asian companies and financial institutions have built stronger balance sheets and healthier gearing levels. This has made them more resilient against market volatility. Asian policy makers are also more proactive and pre-emptive in managing asset price inflation and consumer credit. 

Additionally, Asian economies have benefitted from rising intra-regional trade, investments and consumer affluence. These trends will continue to drive the region's economic growth and cushion it from possible global capital outflows. It is true that QE pullback announcement has put pressure on Asian currencies. But it is more due to the result of improving growth prospects in the US. As a result money is starting to return back to the US. 

The US Fed's decision to postpone the "tapering" of its easy money policy has given emerging Asia valuable breathing space. But with continued uncertainty over the Fed's actions, how long before the Asian market sell-off begins afresh? 

It remains to be seen to what extent a scaling back of QE will impact financial market conditions in emerging Asia. What is clear, however, is that asset prices that have become unnaturally inflated by cheap money will correct. Whether or not in the proportion of 1997 crisis, the correction will be painful, for Asia in general and India in particular. 

Do you think Asia can survive the QE tapering by Fed?
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Inflation by WPI and CPI

The Reserve Bank of India (RBI) in its September quarter review surprisingly increased the repo rate onconcerns over inflation. One macro issue in India that deserves renewed attention is the preference for the wholesale price index over the consumer price index for tracking inflation. Indeed, the WPI is given much greater importance than the CPI by the Reserve Bank of India for calibrating its monetary policy. This is a serious policy faux pas. Or core inflation - defined as non-fuel, non-food inflation? In the past, WPI and CPI inflation moved closely together, so ambiguity on which rate to focus on was not such an issue. But over the last five years they have consistently diverged - largely due to food inflation, which has a much bigger weight in the composition of the CPI Index. India's use of WPI inflation for monetary policy is in contrast to the reliance on CPI inflation by central banks and governments in other countries. Perhaps the RBI should rethink the way it gauges inflation. 

Inflation by WPI and CPI

Source: Business Standard

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