Category: Opinion

The rupee has breached 41 against the dollar after many years now and the RBI is not doing what it is best at, which is going in the market and buying dollars to maintain a comfortable exchange rate.

What is stopping the central bank from doing this, is the inflation rate. Which is already quite perturbing for all politicians, some economists and quite certainly RBI.

The rupee to dollar rate is decided by the relative demand and supply between the two, so historically whenever the RBI wanted to push the price of the dollar higher, it used to go out in the market and buy dollars using rupees. This ensured that the relative demand of dollar became higher vis-a-vis the rupee.

What this would also imply is that the supply of rupees in the economy became greater. And greater money supply causes higher inflation in the economy. Simply put, if earlier there were a thousand rupees in the economy, and now the supply is equal to a couple of thousand rupees the value of a single rupee halves (ceteris paribus of course). In case you are wondering how the thousand became two thousand, unlike you and me, RBI can pretty much print money and circulate in the economy jacking up the monetary base of the economy or what is called in Economics text books as – too much money chasing too few goods.

The other major head-ache that RBI has is to control what is now started being referred as over-heating of the Indian economy. The most potent weapon for controlling the over-heating was to increase the interest rates and making borrowing costly and slowing down the investment and consumption in the economy.

However the central bank has avoided this measure as well because higher interest rates offered by domestic banks are enticing NRIs and other institutions to deposit the dollar holdings that they have in India. What that means is that there would be more dollars in the Indian economy weakening the dollar further and then the RBI would have to print more rupees to buy more dollars and in the process push the inflation higher as well.

It is a tricky situation that is being faced by RBI and one that is being dealt with using a different nature of solution this time around that of allowing more dollar investments by Indian companies and Indian individuals and other factors which look at pushing out dollars from the economy. However by its very nature this measure is more longer term than the previous short term measures and hence the current exchange rate.

Whether the new exchange rate is a temporary phenomenon or Indian exporters will have to adjust to lower realizations is anybodys guess. For now it seems that most of the Indian companies focusing on export revenues will bear this brunt in fiscal 2007 – 08.

Manshu Verma

There are two defining characteristics of any economic revolution, one is that they bring unprecedented prosperity to the regions that these revolutions start off and another is that these revolutions percolate to other regions albeit gradually. As an after-thought there is a third characteristic as well, they are taught in schools long after they are over.

However it might have been an interesting thing for someone to have gone and asked people of those times whether they knew they were part of a revolution. Chances are that most of them would not have realized that they were part of any revolution at all and a still greater part of the population would not even have known what a revolution is and would have thought that the prosperity that they were enjoying was temporal in nature and the cause of it was there own diligence and intellect.
The later half of the 20^th century and the 21^st century would be known in the history of mankind for another kind of revolution which is the IT revolution. While people who live through this revolution would also be unaware of the cause of the prosperity that they enjoy and would also see incomes rising in a way never known before there is one factor which will make the IT Revolution different from all other revolutions of the past.
The difference is this ? This revolution would in times to come not be known as belonging to one country but rather one class of people belonging to most of the countries in the world.
By its very nature IT and the internet are making the world smaller, at a personal level they are making it far easier for people of one culture and country to connect to another and making the world boundary less in a never before known manner. At the level of businesses and corporates, IT would strengthen the invisible hand of Adam Smith to hitherto unknown strength and business would truly reach where it ought to for economic reasons as the geographical boundaries that are put up by countries would be breached not by swords or cannons but by megabytes and fiber optic.
In this revolution not only would people from all across the world be able to participate but would also contribute to it by bringing to the table skills to the disposal of enterprising individuals at never before known prices and would make doing business much easier and much more profitable than it was for any individual during the history of mankind.
How does this work? Take an example of a violin manufacturer in Australia who wants to sell his violins in Australia and other parts of the world through his ?physical? shop and also his virtual shop which is the internet. The internet provides the Aussie a means to hire a web designer in Romania to design his website and a content writer in India to write the content, using the services of a website hosted and run by a company in the United States and ultimately using his website to sell violins to people of Australia, UK and New Zealand among other countries. The most striking point about this is that all continents but Africa and Antarctica have been involved in this business cycle.? Africa I am sure will pick up in years to come but we will have to wait till the Penguins learn English for Antarctica to really join in. All this is already happening today, I know because I have been part of this chain and anyone who looks around him would find many more examples for himself.
The future would see more of this because of which small businesses would thrive and there would be truly a monopolistic market without any geographical boundaries. Competition would be intense and in this competition the fittest will survive regardless of the country of there origin.

The reason why the IT revolution promises to be ?boundary-less? is that the people from all these countries would benefit from the enterprise of there people and increasingly more and more people from different countries would be participating in a single business cycle and these business cycles would in turn promote other business cycles locally like for instance our Romanian developer spending money on Ice cream in Romania which helps everyone right from the retailer to the ice factory.

The sum would be much greater than the parts and although at the end we may see that one country has benefited from IT more than others the world in general would be a richer place.

At the end of the IT revolution or rather when the IT revolution as we see it today has peaked out one would see that a lot of countries have thriving businesses started off by first generation entrepreneurs who employ lot of smart people around the world and the number of Multinationals that we have today would have grown multifold with businesses doing business across geographies and making money across continents hiring people from all of these places. These business would spread there wealth across the world creating sprightly economic conditions in not only there own country but in a lot of other countries.

For investors such as me and probably you what is important is to recognize that there will be a lot of interesting stocks which will be ?start ups? and which will either enable these business cycles or be part of it, and on a more macro level we are in a revolution so don?t get left out by sitting on the fences.

Manshu Verma

The IPO Excesses seems to be finally over 

In the recent times in the Indian stock markets there have been many IPOs that have listed much below there offer price and would have therefore meant a loss to those investors who had subscribed for the same. 

Traditionally IPOs were offered by the promoters with a certain discount to the inherent value of the stock to the public so that they public at large could benefit from what is knows as “listing gains”. However the trend lately has been one where the promoters have priced their IPOs very aggressively and most of the times there had been nothing left for the investors at the time of listing. 

However old habits die hard and even though investors could see for themselves that there is no money to be made in the IPOs were still queuing up for IPOs of similar nature where the pricing was aggressive, pedigree of investors not too well known and the track record of business not proven. 

One can only hope that after seeing a series of IPOs fail in a short while the investors will finally come to terms with the reality that today investing in IPOs do not mean easy money as it used to in not too far a past. And increasingly promoters are pricing their stocks very aggressively and do not leave anything for the retail investors at the time of listing. 

The retail investors need to be wary about which IPOs to invest in as the numbers of profitable IPOs are really dwindling and the only one in the recent past has been MindTree which has provided some listing gains to the investors. 

Investors should be really wary about borrowing money to invest in IPOs because of the same reason as when one borrows to invest in the markets because of being allotted lesser number of shares than the application and the rate of interest of the borrowing it becomes more and more difficult to make any money and one bad investment nullifies all the good ones that have been done in the past because often the price falls are more spectacular than gains. 

With all this in mind investors need to come to terms with the reality that IPOs today are not as profitable as some time ago and therefore one would need to exercise a lot of discretion before investing in any one and the practice of blindly borrowing money, investing and then selling on listing would not work for most of the stocks any longer. 

Manshu Verma