The premium Indian companies enjoy with their depositary receipts listed in the US has plummeted in the past month. In the case of Infosys Technologies, the premium had averaged 10% in the third week of July, when the Indian markets had peaked. Last week, the premium averaged just 3%. Similarly, ICICI Bank’s American depositary receipts (ADRs) traded at a premium of 0.8% to Indian prices last week, from as high as 8% in the third week of July.
The drop in premium is simply because the drop in ADR prices was sharper than the fall in the underlying Indian stocks. In ICICI Bank’s case, its shares traded on the National Stock Exchange corrected by 10% from their highs in July. Its ADRs, however, have fallen by nearly 15%.
Evidently, foreign investors trading on the Nasdaq and the New York Stock Exchange see relatively less value in Indian stocks than they saw a month ago. According to market experts, some of the sales were by hedge funds that were forced to liquidate positions to offset large losses on other trades. Local investors, led by institutional players, however, have used the drop in foreign investor interest to buy into these shares. That’s also reflected in the large net purchases made by the domestic mutual funds during the market correction.
Indian ADRs typically trade at a premium to prices in the Indian market because of a limited supply of shares and lower liquidity. Companies such as Infosys have tried to address this by increasing the supply in the US markets by converting Indian shares into depositary receipts.
As a result, Infy’s premium on the Nasdaq has progressively reduced from as high as 20% early last year to just 3% currently. But, the recent contraction in the premium is a reflection of the fact that the market correction this time has stemmed from problems in the US, which has resulted in a sell-off in ADRs.
The rise in interest rates and the consequent slowdown in consumption growth have already led to anguished cries by some bankers that interest rates need to come down. But, how restrictive has the Reserve Bank of India (RBI) policy been so far, when viewed in an international context?
RBI’s annual report provides data on the real policy rate in select countries. The central bank defines the real policy rate as the nominal policy rate (the repo rate in India) minus consumer price inflation (CPI-Industrial Workers Index in India). The results are revealing: the real policy rate in India, at 2.05% as on 17 August, was the fourth lowest among the 12 economies considered by RBI. Real interest rates were lower than India’s in Russia (1.2%), China (1.24%) and Thailand (1.55%). But, the RBI data considers the CPI-IW at 5.69%, the June number, rather than July’s 6.45%, announced on the same date as the RBI annual report. If the July data is considered, the real policy rate for India changes to 1.25%, which is the second lowest in the entire sample.
But consumer prices are higher in part because of higher food prices. Surely the conventional wisdom suggests that “core” inflation, after stripping out volatile food and energy prices, should be considered? RBI doesn’t think so, pointing out that “in the current scenario, a large part of increase in the oil price is widely believed to have a large permanent component. Even the recent rise in food prices is viewed as having a permanent component... Accordingly, persisting supply shocks to prices of these commodities can impart a lasting impact on inflation expectations. Therefore, the use of core inflation, excluding oil and food prices, could be somewhat misleading. In emerging economies, core inflation is, therefore, not considered relevant for several reasons, especially because the two major sources of supply shock, food and fuel, account for a large share of the price index. Moreover, the pass-through of higher oil prices has been halting and not full and headline inflation in a way understates the problem.” Viewed in that perspective, India’s policy rate remains one of the lowest in the world and the central bank’s stance far from restrictive.
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