Weekend Links June 28 2013

The best thing I’ve read this week is this column by Jason Zweig on Saving investors from themselves. He talks about how the financial press is at odds with what is really useful for investors, and I think this is something that all of us should read a few times and remember it well.

HBR on How money actually buys happiness? Good article with an interesting angle that I’m sure a lot of you are already aware of.

This is one of those questions that when you find out the answer to you wonder why you didn’t think of it yourself.  Why don’t planes fly in a straight line?

Do you know why do we yawn and why is it contagious?

Amazing article about about horse DNA that is 700,000 years old recovered in Canada

A little lighter topic – World’s fastest boat

I really loved this article about Darwin on why language exists?

Enjoy your weekend!

Why Government bond yields have suddenly started rising here in India?

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

I think retail investors in India can never make money out of any market-linked financial asset, be it stock market or debt market or forex market or gold. Our past experience in the stock markets has been very bad and even with extremely difficulty, you’ll hardly find any Indian investor who is 100% convinced that there is a scope for the retail investors to make money in the Indian stock markets.

It is quite natural that most of the investors will always invest their additional surplus in an asset class which has given highest returns to them (or general public) in the recent past. Investment in gold is the best example. Gold prices have crashed dramatically in the last 3-4 months. Around Diwali last year, gold prices crossed Rs. 32,000 and people in India have this mindset that gold prices always rise. They also have a view that around festivals like Diwali and marriage season during October-November, gold prices usually rise even more. Even after a sharp fall from its all-time high of $1917.90 in August 2011 to $ 1223.54 in today’s trade, you could still find many people having these kinds of views.

After a sweet & swift rally in the Indian bond markets, the Indian retail investors had just started investing in the long-term debt securities like gilt funds or income funds in an anticipation of a further rate cut. A mild economic recovery in the US and Japan has once again shattered the hopes of Indian retail investors.

Indian Rupee has been falling like never before. The rupee today breached an all important psychological mark of 60 against the US dollar and now it has fallen by approximately 12% in the last 2 months itself. Reason – Fear of foreign institutional investors (FIIs) pulling money out of Indian debt and equity markets even faster, which they have been doing very fast in the past 3-4 weeks.

At a time when we badly require foreign investments to pour into Indian markets due to a very high current account deficit (CAD), FIIs have decided to turn their taps off.

After pumping in $15 billion in the Indian markets in 2013, FIIs have decided to book their profits here in India (and also some other emerging markets) and switch their investments to their own countries or to those economies where they are foreseeing more stability in terms of economic and political decision-making. FIIs have pulled out some $5 billion from the Indian debt markets since May 21st this year.

The situation is so bad that the analysts who, at the start of this month, were expecting the RBI to cut its policy rates on June 17 to help economic growth recover somewhat, have started issuing reports stating that RBI may even be compelled to raise rates in its efforts to protect the falling rupee.

It is a vicious cycle. One factor is playing its role in the other factor becoming worse and then itself getting worst due to some other factor coming into the picture. Slow economic growth, high current account deficit and poor economic decision-making are putting huge pressure on the Indian currency and thus forcing FIIs to pull their money out of the Indian equity and debt markets, thereby putting even more pressure on rupee.

A falling rupee would make our imports costlier, which would again fuel inflation on a higher side and thereby forcing the RBI to increase its policy rates in order to reduce liquidity from the system and save the rupee from a further fall. Ultimately, it would result in a higher yield on Indian government securities (G-Secs) and more losses for the retail investors.

India 10-year Govt. Bond Yield

US 10-year Govt. Treasury Bond Yield

Japan 10-year Govt. Bond Yield

Look at the charts above. If we are able to keep the Indian rupee stronger, clearly our debt markets have been extremely attractive to the foreign investors as there is a huge yield difference between Indian govt bonds, US treasury bonds and Japanese govt bonds.

At the beginning of April this year, the 10-year Indian govt. bonds yield was ruling at around 8%, the 10-year US treasury bond yield was at around 1.75%, a huge gap of approximately 625 basis points (bps) and the Japanese bond yield was at around 0.57%, an even bigger gap of approximately 743 bps.

After that, Indian govt. bond yield fell sharply to touch 7.09% in May, whereas US treasury yields rose to 2%, thereby narrowing the yield gap to just 509 bps and Japanese yields inched closer to 1% mark, thus making Indian govt bond yields extremely unattractive to the foreign investors amid USD and Japanese Yen becoming stronger and Indian rupee losing its value.

By late May & June, after the announcement of QE tapering by the US Federal Reserve, the US bond yields have jumped even sharper, crossing 2.60% mark on June 25th, making it more attractive to the long-term US investors and the yield gap has gone below 500 bps. Moreover, US and Japanese investors would like to invest in their own country in order to avoid risks related to currency and other geopolitical factors.

At this point in time it is the topmost wish of our finance minister P Chidambaram that Indians should stop purchasing gold for some time and thereby help our country fight the continuously rising current account deficit. I think it becomes our duty to listen to his appeal and stop purchasing gold till the time we are able to stem this huge current account gap.

It is yet to be seen when and where this yield rise will stop, but India badly requires a benign interest rates regime in order to kickstart the economy again.

On why people lose money in the markets

I got the following question in the Forum yesterday, and it is a great example of common investor psychology, and the need for SIPs.

With the markets losing ground, is it a good strategy to switch to Debt funds from Equity Funds? I have invested in equity funds (Reliance TOP 200 and Reliance Regular Savings Funds), I am planning to switch the investment to Reliance Monthly Income funds. Not sure if this is the right thing to do.

Also, should debt fund be a part of investment portfolio?


When the market is up like it has been in the past few months, it is common for people to say that the market going down by 20% or so in a year is an expected event and you should anticipate such a thing and not worry too much about it. If you are in it for the long term then such temporary blips shouldn’t worry you.

However, when the market does actually fall by that much people forget all about the long term and either stop their investments or switch to debt funds or do something similar. This is the exact opposite of what you should be doing which is to buy when the market is low and sell when it is high.

Somehow, this is very hard to do as far as stocks are concerned. Psychologically, it is just so much easier to buy when the market is rising, and then sell when the market is falling because that’s what everyone else tends to be do.

When I look at my investments, a large part of the success has been because of taking advantage of panics and buying when the market has been low and people didn’t want to touch stocks with a 10 foot pole. If you follow me on Twitter or have been reading this blog for a while then you would see me Tweeting or writing about buying when the market falls fairly consistently.

After doing it a few times, this just becomes habit and a very useful one at that too. Please don’t look to sell off your investments when the market is going down, rather look to increase them. For young people this should be a lot easier than it looks, you have a lot longer for the market to recover and pay off.

Quite a few readers have done this here and I’d request you to share your experience on how you were able to hold on to your investments when the market went down, what made you hold on to them when others around you panicked? I’m sure there are lessons for everyone from these stories.

Will reducing gold imports help the Indian economy?

Nagu43 posted the following comment today, and I thought these are interesting questions that are relevant to today’s economic environment.

I have few questions, haven’t come across post on these topics, Pls share links to post incase I have missed.
What’s wrong with Indian Economy
Why is Indian GDP low than that of other developing countries
Does stopping gold import will improve Indian Economy
Why is rupee depreciation continuing, what would help rupee to gain

These are all big questions and a lot has been already written about them but I think it is worthwhile to look at them again, and today I’m going to take up the question on gold imports, why it is perceived to be bad for the Indian economy, and why they say that reducing gold imports will be better for the economy.

Let’s start at the start.

How do we pay for imports?

The most important thing that India imports is crude oil – we  import crude oil from countries like Saudi Arabia, Iraq, Venezuela etc. and these countries don’t accept the Indian Rupee for payments, they want us to pay them in an internationally accepted currency like the USD or Euro. It would have been great if these countries accepted the Indian Rupee because India can print as many Rupees as they want but India can’t print the USD or the Euro, so we have to rely on other means to get US Dollars.

How do we get US Dollars?

There are three main ways in which India gets USD. The first one is obvious enough, when we export goods and services – we get paid in USD. The second one is also fairly obvious which is investment. When foreign investors invest in India – they bring in USD and that’s another way to get USD.

The third way which is not very apparent is remittances. I did a post some time ago in which we saw that remittances were as much as 46% of India’s total services exports, and this means that NRIs sending in money to India is also a big contributor to foreign exchange reserves.

What do these two things tell us?

These two things tell us that it is absolutely essential for us to have a steady flow of USD or other big currency coming in the country in order to finance our oil bill and pay for our other imports, if we run out of foreign exchange, we will be in big trouble because without oil, nothing else will function.

The measure for whether this equation is fine or not is called CAD (Current Account Deficit), which is largely the difference between exports and imports and in India’s case, the CAD is becoming higher and higher with each successive month, and this means that India’s foreign exchange reserves are diminishing.

One of the big factors worsening India’s CAD are the ever increasing gold imports. The festival of Akshaya Tritiya contributed to heavy imports recently, and that in turned made the CAD even worse. If India spends USD on gold then that reduces the forex reserves for other important commodities like oil.

Theoretically, if there were no gold imports then that would eliminate the burden on forex reserves, and in a way it will help the Indian economy. However, you can’t eliminate gold imports completely because a lot of people depend on gold jewelry and investments for their livelihood, and India has always imported gold.

So, the problem then is not so much gold imports but the great pace at which these imports have increased in recent years, and the pressure it is putting on the foreign exchange reserves, and the worsening CAD.

Will stopping gold imports help the Indian economy?

The answer to this question is simple – no, simply stopping gold imports will not help the Indian economy because a lot of people depend on gold for their livelihood, and they need gold imports to remain in business and survive.

Will slowing down gold imports help – yes I believe they will help because they wouldn’t be such a big drain on our forex reserves and that will be great.

However, the recent rise in gold imports have been investment driven and that is largely due to the rise in gold prices, and a lack of other investment alternatives available to Indians.

Simply increasing duty on gold does nothing to alleviate either of these causes and that won’t do anything to help the economy. What we need is a better investment climate that helps people get other alternates to gold for investment, and that also helps with the other factors that I wrote about above related to bringing in foreign exchange in the country. You want a climate where exports rise (services exports declined last month), foreign investments come into the country – both in the form of FDI and FII, and all that in turns help the CAD.


To conclude, I’d say that what the problem that these huge gold imports cause is a worsening foreign exchange position, and the way to help the foreign exchange reserve is not to increase duty on gold imports to discourage them but attack the root and look for long term solutions to problems lowering exports, FII, FDI flows, and a sluggish stock market.

Resumption of Email Delivery

Long time readers will remember that there was a lot of problem with OneMint going down a few months ago. I had upgraded to a much better server and the problems had stopped. However, the problem resurfaced, and I got completely exasperated. I’ve changed hosts now, and moved to Synthesis Webhosting. So far it is a lot cheaper, and the site is faster as well, but fingers crossed!

In moving the site something happened and email delivery stopped. It was only last Sunday when Bemoneyaware helpfully told me to validate the feed that I found the error. Fixing that was how the email delivery got restored and a big thank you to Bemoneyaware for their help.

The large majority of people don’t realize that I was still writing while the email feed stopped working, so I’m using this post to announce that the email delivery is working along with links to the posts that never went out as emails.

Which countries does India import its oil from?

Why NRIs shouldn’t rejoice the Rupee fall?

Short term measures to stop Rupee slide won’t work

How to fill Excel ITR Form?

How to fill Excel ITR 1 Form?

There is a lot of interest in learning about filing taxes online, and very little good information available online. Bemoneyaware has done a couple of posts dealing with this subject and I think it is a good reference for anyone who needs to do this.

Here are the links to the two posts:

Fill Excel ITR form : Personal Information,Filing Status 

Fill Excel ITR1 Form : Income, TDS, Advance Tax


Weekend links: June 14 2013

Dinesh Thakur has a great op-ed in the Hindu about the all pervasive damage that India’s chalta hai and jugaad attitude has. 

Pattu has created a great comprehensive fixed deposit calculator. 

It seems like the situation is going to come to a conclusion in Turkey: Turkey’s leader issues ‘final warning’ to Gezi Park protesters

Economist talks about Pakistan’s electricity crisis

A former US drone operator talks about his job and the trauma of it.

Fascinating read in National Geographic about adventurer and explorer Gregg Treinish.

How fast can the Cheetah actually run, and how is it so successful in its hunts? Cheetahs’ Secret Weapon: A Tight Turning Radius

Short term measures to stem the Rupee slide won’t work

I’ve wrote about the Rupee fall yesterday, and I also described the factors causing the Rupee fall more than a year ago. I think the factors listed in that post are still valid, but due to the political process, and short term thinking, not much is being done about it.

There have been some short term measures that have been taken to reduce the Rupee slide and in this post I’m going to talk about two such measures and say why I feel they are counter productive.

Gold Imports

The government is citing gold imports as a big reason for the trade deficit and indeed it is the second biggest import item after crude oil.

Anything that leads to outflow of USD causes the Rupee to depreciate and the government has zeroed in on gold imports as one item where they want to discourage Indians from buying gold and draining forex as a result. They have increased the duty on gold to 8% to achieve this.

I think this is not going to achieve anything and may just work to counter what they are trying to do. We’re in a situation where the US listed Gold ETF GLD is down about 18% YTD (Year to Date), while India listed GOLDBEES is down only 9% in that time frame.

What is the difference due to?

Due to exchange rate depreciation and taxes, and that’s a problem right now.

People aren’t buying gold because the prices are low, people are buying because it is getting higher. The higher it goes, the more people make in notional gains in their gold investments, and increasing taxes isn’t going to do anything to dampen that. Gold demand has gone from consumption led to investment led, and higher prices will only fuel this.

The other aspect of this is where do people invest if not in gold?

The stock market is going nowhere, fixed deposits give negative real returns, debt mutual funds are doing well but for how long? And to add to all that, the Rupee is rapidly losing its value due to high inflation.

To me, the two big factors that are driving gold demand are the rise in gold prices, and lack of alternative investments and raising duty on gold addresses neither. It is better to go back to the lower duty that used to prevail earlier.

Allowing foreign investors to buy government debt

The Finance Minister has recently talked about allowing foreign institutional investors to own $30 billion of government debt, this limit was $5 billion and SEBI has increased the limit to $30 billion now. 

I’m not too sanguine about the efficacy of this step either.

You are allowing FIIs to buy but then are also assuming that they won’t sell during times of stress. How does that make any sense?

It is great that the limit is increased and there will be more participation from FIIs but that in itself won’t do anything to reduce the ease on the Rupee. Is it realistic to think that when there is strain on the Rupee which is usually due to structural problems, FIIs will be queuing up to buy government debt?

I feel that this step can also backfire as the FIIs who do own Indian debt may sell off along with other investors and accelerate Rupee slide when the wave comes next time.


I think we’re mired in short term thinking and the short term measures aren’t doing any good. They may give some immediate relief but that may just be making the situation worse because it takes away the focus from more long term measures that will reverse this trend of continuous depreciation.

Why NRIs shouldn’t rejoice the Rupee fall?

The rupee fell to all time lows yesterday, and while on the face of it — that is great for exporters and people earning in dollars, I don’t think NRIs should be too happy about this recent fall.

A little more than a year ago I wrote a post explaining why the Rupee is falling, and in that I mentioned the Rupee’s fall is more a symptom of underlying problems rather than being the real problem itself.

I had listed down some of the problems in this fish bone diagram, and if you haven’t read my earlier post, then I’d recommend reading that here: Rupee slide is a symptom, not a problem.

I was reminded of that post when I was reading a great op-ed written by  Dr. Shankar Acharya about this. Here is an excerpt from that:

The real cause of the rupee’s weakness is the relentless deterioration in our economic policies in recent years. A falling rupee is simply a symptom of the underlying disease: unsound economic policies. After hovering around one per cent of GDP or less since 1991-92, the current account deficit in our balance of payments exceeded 2.5 per cent of GDP in 2009-10 and 2010-11 and is likely to have swelled to a new high of four per cent in 2011-12.

If you are a NRI and send money to India periodically, the lower Rupee might make you feel good, and make you feel that you are richer, but this feeling is pointless not because of the daily movement, but the direction that this Rupee fall has taken. It has been depreciating steadily, and the depreciation is both the effect and cause of several problems that make living in India that much more expensive.

I’ve spoken about the causes earlier, and you can read them again, but on the other hand, with the Rupee fall — the oil bill will increase, gold import bill will increase, and it will fuel our trade deficit, which is already in very bad shape.

Bad economic policies are already leading to lower growth, lower stock market and a high inflation, and more of these policies are likely to continue this situation. If you ever plan to come back to India then these conditions are not good for you. Of course, if the current government starts fixing the problems, and the Rupee goes back to 45 – 50 range, then the current rate would’ve been great. I don’t see a situation where the economy improves and the exchange rate continues to depreciate.

What if you were just buying real estate or assets in India and just intended to own them as assets? In that case, when you convert them back to USD eventually – Rupee depreciation is even worse. Just ask the people who opened NRE fixed deposits. The interest they get is lower than the depreciation so they are net losers.

The current context of Rupee depreciation is bad economics, and there is nothing to rejoice in that.

Which countries does India import oil from?

A friend of mine asked me this question today, and I didn’t remember the answer but I did remember that I had written about this subject some time ago.

I had written a post back in September 2010 comparing the sources of crude oil for India and the US. However, there has been a major development since then which is US forcing all countries to reduce trade with Iran and imposing sanctions.

The problem was that India was using USD to pay Iran and that would no longer be possible under new US rules.  There were several alternatives that were discussed at the time but finally the solution that was accepted by both Iran and India was partial payment for Iran’s crude in INR.  This is not a perfect solution because Iran exports a lot more to India than it imports, and there is not much use fo the INR in international trade.

This and other political factors reduced in India’s oil trade with Iran and from the third position, Iran fell to the 7th position.

I wanted to see more recent data and the WSJ had a good article on the top 7 countries that India imports oil from.

Here is a chart that is created with data from that article.

Countries that India Imports Oil From
Countries that India Imports Oil From

If you know of another source that has the complete list, please leave a comment, and I’ll update the post. I wasn’t able to find the source myself.