Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / Online-views/  The wayward indices
BackBack

The wayward indices

The correlation between quantitative easing and the receding hairline of global investment strategists is worth studying

A file photo of the BSE. Photo: Hemant Mishra/MintPremium
A file photo of the BSE. Photo: Hemant Mishra/Mint

Two separate developments prompted me to devote this column to Indian economic affairs. Recently, Bloomberg noted, “...the Sensex has risen 20% this year, driven by flows from offshore funds and policy reforms. The gauge is the best performer this year among global benchmark measures with at least $1 trillion in value, data compiled by Bloomberg show." Second, I sent a mail to a friend sharing the anecdotal information that I had gathered during my numerous visits to India this year—18 hour power cuts in Tamil Nadu, lack of work ethic among government staff, failure to pursue cases of theft of state property, arrest of youngsters for relatively innocuous messages on social media, etc.—and expressed my frustration at the direction the country was taking. He replied tersely that the Indian stock market disagreed with me.

We all know that market prices contain information, but we also know the problem lies in figuring out how much of it is useful. If markets were efficient at all times, the return on the stock market would be slightly better than the nominal gross domestic product growth rate of the economy. Instead, we have long periods of euphoria and long periods of gloom. In other words, it is legitimate to argue with market valuation. Indeed, that is what most strategists do for a living.

Some of the decisions the Union government took last week were troubling, to say the least. Some in the private sector take up jobs with the government, nudged in parts by a higher calling and by a desire to embellish their curriculum vitae. Then, they come back with a strange attitude. Since they understand better the functioning of the government, they begin to justify its decisions instead of suggesting improvements to the way the government works. This is a variant of the Stockholm syndrome at work. It is quite possible that they will have some persuasive explanations for the decisions that the government took or the statements it made last week.

According to the Business Standard, the government is likely to include many sectors under the definition of infrastructure (education and healthcare, for example) so that they become eligible to borrow overseas. This move is fraught with considerable medium-term risks. Most of them do not understand foreign exchange rate risk nor do they have any hard currency earnings to service their loans. Many Asian countries went down this path and paid for it with a severe balance of payments crisis in 1997-98.

As for government raising money to cover its deficits through asset sales, the sale of a small quantity of shares in the state-owned Hindustan Copper Ltd did not receive much interest from foreign institutional investors. State-owned banks and Life Insurance Corp. of India (LIC) bought the stock on sale, playing their part in reducing the state’s fiscal deficit. This is Indian creativity at its best. This is not the first time that LIC has ridden to the rescue of the government. In March, it bought almost all shares on offer in the government divestment of the Oil and Natural Gas Corp. Ltd. To legitimize such purchases, the government increased the limit of LIC’s holding in any publicly traded corporation to 30% of paid-up capital from 10%. It did so over the objections of Insurance Regulatory and Development Authority.

India reports its third quarter economic growth estimate later this week. Market consensus anticipates a growth rate of 5.3%, slightly lower than the 5.5% reported for the second quarter. The finance minister thinks the growth rate would be 5.5%. Bare Talk would like to remind readers that, on an expenditure basis, India’s second quarter growth estimate was 3.9%. The finance minister has not just stopped with making a growth forecast. He continues to blame the Reserve Bank of India (RBI) for slowing growth without providing any formal analysis to back up his claims. There might not be any connection between the two but, nonetheless, it does not strike us as mere coincidence that the finance ministry chose to consolidate regional rural banks without keeping RBI informed. That makes it two in a week—the finance ministry thumbing its nose at two key regulators.

In the final analysis, your humble columnist is left scratching his head for an explanation for the stellar performance of the BSE Sensex. He is still trying to figure that one out and has no success to report at this stage. Of course, this is not the only market whose judgement he has a hard time understanding, let alone accepting. In the week ended 23 November, MSCI world stock index went up by 4.1%. That is a head-scratcher too. It appears that he may only end up with a thinner hairline rather than becoming any wiser for all the scratching. It is worth studying the correlation between quantitative easing and the receding hairline and greying among global investment strategists.

V. Anantha Nageswaran is the co-founder of Aavishkaar Venture Fund and Takshashila Institution.

To read V. Anantha Nageswaran’s previous columns, go to www.livemint.com/baretalk

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 26 Nov 2012, 07:09 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App