Investment Art

Global Marketplace: Contradictions Galore & Policy Jitters

Business in India is increasingly becoming global. Market is abuzz with news about loads of money flowing in all directions. Each day, newspapers enthusiastically announce yet another takeover of a foreign entity by yet another Desi company. This is in stark contrast from just three years back when India's corporate sector feared being gobbled up by the global giants. This too, is at a time when foreign funds are pouring billions of dollars in buying portfolios of all kinds of assets in India, the stories of which fill airtime of all TV channels. Globalization has indeed resulted in increased complexity of the financial markets. Forecasting & policy making in such a market is a humongous challenge, because yesteryear proverbs & gospels no longer hold true in the current market.

Now, look at various pieces of news. Economic Times dated Saturday 6th October 2007 , declares that Indian companies invested over 30 Billion dollars in acquiring foreign assets over last one year. This is quite in contrast with the news reported a few days earlier announcing that sub-prime crisis is leading to falling asset valuations in US & some other countries. The implies that at a time when western giants are not feeling confident about the value of their assets, Indian minnows are confidently making big buy decisions about the same assets. It may be directly attributed to the survival of the fittest theme of the Globalised world. It only shows that even the Indian minnows which are competitive have a fair chance to not only survive but also thrive in the new order. Then, we are informed that there is a surge of investment dollars in India, while our market seem to be having increasingly lesser appetite for the same(otherwise they might not have been bulging as the Finance minister seems to hint). The pieces of news leads us to ponder that while foreign giants are interested in India, our big boys are increasing enamored to acquiring foreign assets. However this phenomenon can be traced back to globalization which seems to have come here (in India) to stay.

We also have the Indian exporter community that is fretting over the steady rise of the humble Indian Rupee against Dollar & other currencies. Such was the pressure, that the master of the Indian currency i.e. RBI, had to step in to soak the supply of foreign currencies. It tried doing so by tightening the norms for raising foreign currency borrowings (by Indian corporates) & opening the tap of foreign currency investment by Indian companies even further. This was done by tightening the ECB norms on one hand & raising the Investment ceiling by corporates to 400% of their net worth & for Mutual funds to 5 Billion Dollars. However, this proved insufficient as INRs upward march continued unabated. An unkind domestic inflation, somewhat fluid political situation with the onset of the elections season, high international energy/oil & other commodity prices threaten to complicate the matter further. If Rupee appreciation continues as it is, it might not be long when domestic players start crying horse about competition from imports.

Now lets visit the challenge of raising investment in Infrastructure which is creaking under the pressure of ever rising Indian consumption demand. It is already proving inefficient to support current growth rate 9 percent & falls much short of expectation to put growth to above 10 percent trajectory as desired by much of the nation. Apart from domestic resources our political masters seem to be counting hugely on Foreign investments to meet this requirement. Which means that foreign investments cannot be shunned for much longer without having significant effect on domestic growth rate.

Also, analysts of all hues & colours of both domestic & foreign origin, predicting volatile markets for stocks & assets in India. This means that Risk adjusted return might not be available unless one has been extra cautious in selecting the investment opportunity in India, meaning that it is no longer a game for common Indian small investor & SMEs. RBI has also empowered itself to raise MSS bonds to a higher ceiling (by 50,000 Cr.). This signals its intention to intervene in the Forex market to not only stabilize INR from rising further, but also to soak

increased supply of Rupee to control resulting inflationary effects. The last one shall off course be at taxpayers cost who shall be made to bear the burden after elections just as he gears up to meet the pressure of rising global energy costs & associated liability. One must note that the foreign investors whom our political bosses are trying to attract do not like an interventionist central bank & become jittery if it deviates much from the stated policy of minimal controls.

However, the point to ponder is: why the novel idea of RBI to liberalize external investments had minimal impact, if any and what else could be done to make markets more sensitive to its policies & concerns. It may be noted that already an MSS outstanding of over 1,45,000 Cr. has failed to check the rise of Rupee, which has risen steadily over the past year & a half. So would some higher ceiling be effective or shall it just been another wasteful burden on the Indian Taxpayer who would be made to pay for the decision without having any kind of say over the matter (RBI bosses are not his elected representatives). Also, while the going is good regarding FDI inflows, not many shall bother about the feelings of foreign investors. However, this shall necessarily lead to some tough questioning when our policy makers go out to raise long term foreign money for our creaking infrastructure & might result in somewhat higher cost of such borrowings.

Though the policy of RBI in itself was quite responsive to the prevailing conditions like allowing mature Indian players to take more risks & march ahead boldly to acquire even greater amount of assets, it also allowed smaller investors to invest more of their money abroad through mutual funds. However the policy failed to elicit adequate response from Indian market for mainly two reasons. First, the banks won't lend enough money to corporate as higher leverage means more risk to them which is not advisable to be taken in a volatile market & second, the small investors in India are yet to accept Mutual Funds as its trusted partner for his Investments. Historically, money in India has been saved with Banks & Mutual Funds as an Industry do not have the reach to

convince investors about their credibility to lay claim to a greater share of his wallet. Also, there is nothing much for SMEs in the RBI policy. Although SMEs can technically invest upto 5 million USD or may be even more to acquire foreign assets, however this investment has to be financed at high costs that prevail for INR borrowing as many of our SMEs are unable to raise cheaper ECBs. The FCNR (B) funds which are available to SMEs cannot be used for foreign investments by SMEs. The same holds for individuals who are allowed to invest upto 2,00,000 USD per year but neither ECB nor FCNR (B) funds are available. No wonder market has not been very kind to RBI policy. It may be noted that total FCNR (B) reverses in the country are estimated in access of USD 42 Billion & nearly half of it (may be higher) can be conservatively estimated to be deployed in funding of domestic business. The RBI can safely direct banks to use all these funds for financing fresh capital goods imports (which would have pro-growth bias),Overseas acquisition finance & may be export finance at suitably advised rates as the case with ECBs. The banks can be directed to pull out FCNB (B) funds from financing domestic trade & investments at the time of renewal of such loans or at Rollover dates by substituting such loans with MIBOR linked INR demand loan. While first two options shall result in outflow of foreign currency meaning more demand for INR funds, the last option shall be to fulfill RBIs commitment towards exporters for funding them at cheaper rates.

Now in the coming review of monetary policy, RBI has a chance to correct its policy stance by making FCNR (B) funds available to SMEs & individuals at competitive rates for acquisition of foreign assets like industrial, commercial as well as reality assets. Individuals should also be allowed to buy housing & commercial assets as well as for funding foreign education loan, foreign travel loans etc. The individual banks might be allowed to frame their policy (RBI can keep a right to review the same if it so desires) for such lending as well as provide all kinds of advisory services to SMEs & individuals for making such investments. To protect Indian investors it might ask banks to do necessary due diligence of the foreign assets which shall also be in banks own

interest & they shall be happy to do the same for a fee to the consumer. This shall not only be in keeping with existing policy stance of RBI but shall also save the burden on taxpayers. In the long run this shall expose the SMEs to thrive in competitive global environment to boost the confidence of Indian entrepreneurs even further. Indivuduals shall also have a chance to go for their second house abroad which might cool domestic real estate a bit. It would also prepare domestic banks to take up a role in fast globalising marketplace, thus preparing them for the competition ahead.

Amit Bhushan The author is a Regional Manager at ICICI Bank Qualification: PG in International Marketing & CAIIB. Also placed on Hindustan.org Blog. Address: 1003, Rishikesh Appartments, Subhash Chowk Ahmedabad, Gujarat Ph.0-9909910903 email: [email protected] The views are personal. (Ref: ET dt 6/10/07;FCNR (B) deposit estimate given by Financial Express in July2007, RBI ECB policy can be checked at Bank of Baroda website or rbi.org)