Business Economics India Markets

Don’t Believe the Market Hype!


As all of you who’ve been keeping up-to-date on the happenings in the financial markets know, there’s been a good deal of turmoil and volatility continuing. GM and Chrysler, in the US, are begging for bailouts, small, medium, large and extra large companies are laying off people in droves (Citigroup will be laying off 53,000 people). Things are pretty bad in the US right now. We all know that, we all hear about it, and the US stock market shows us daily.

What about India? Well, if you ask the Prime Minister, the Finance Minister, various financial “analysts” on TV, etc. they will tell you that India is very well insulated and the India growth story continues, with a few minor speed bumps along the way. My personal opinion is that the politicians and media are generally telling us what we want to hear. They’re not accurately portraying the severity of the situation in India. The situation is about to get worse in India but, barring any further catastrophic meltdowns, India should see some incredible growth post 2011.

Relative GDP Growth

Let’s look at India’s economy on a relative basis. Relative to the US and other developed, highly deregulated economies, India’s still got a growth story, whereas, the US, the UK, Japan, etc. are all in a recession (negative growth). The talking heads in India tell us that India is still on track for 6.5% to 7% GDP growth in 2009. Assuming that is true and exactly what will happen, it’s huge number (in aggregate terms) compared to other developed and many developing countries! However, India still has roughly 450 million people at or below the poverty line. This is one and a half times the population of the whole US. In order for India to decrease the number of poor and continue to provide for the basic necessities of the economically disenfranchised and cater to the increasing consumption of the middle and upper classes, growth needs to accelerate, considerably. GDP growth in India MUST be at least 10% if India is to continue to grow, relative to other economies. In my opinion, 7% GDP growth is akin to a recession in a developed economy. How can India grow at more than 7% in 2009? It’s a complicated question that the smartest economists from Harvard, Oxford, LSE, etc. are trying to answer. I won’t be pretentious enough to suggest that I know the answer. However, I will say that whatever the answer is, it’s very complicated and it will most likely make a vast amount of people very unhappy. Hence, it won’t be politically viable, especially, in an election year.


On the 20th of November, there was a nice little piece on Livemint that quoted Cabinet Secretary KM Chandrashekhar, “Most of our productions are based on domestic demand. As long as domestic demand remains reasonably strong, I don’t think there would be any large-scale job cuts in India,” he said. Domestic demand for many goods and services is growing but is it growing enough to keep up with supply?

The article also went on to describe how Jet Airways was “asked”, by the government, to take back all of the 1,900 employees that they had laid off in October 2008. As a business, Jet Airways has every right to hire and fire the people they need to in order to stay competitive, and profitable. However, the Indian government, must also do what they can to avoid mass layoffs across large, high profile, Indian companies. Mass layoffs across Indian industry will have a devastating affect on the economy. However, how many additional companies can the Indian government “ask” NOT to layoff people before companies start feeling intense pain?

Smaller companies are laying people off and some are even shutting Indian offices. Zapak, a mobile games company, recently announced that they would be shutting their Bangalore office. In the Business Section of the Hindustan Times (Saturday, November 22, 2008 Edition), HSBC is predicted to layoff approximately 200 employees across India. Dell has decided to scale back their hiring of new employees. These are just large companies.

About ten days ago, I had spoken to an executive at a premium tissue maker in India. They said sales have fallen dramatically. People have switched from using premium tissues and toilet paper to non-premium essentials. If the current sales numbers continue, not drop, they will probably have to layoff some people.

When I told a family business exporter of garments that he must be happy since the USD has climbed dramatically against the INR, he told me that he’s more scared then ever. He told me that orders are being cut by his clients, some of them have begun renegotiating contracts to pay in INR rather than USD because they feel that the Rupee can only depreciate against the US Dollar. I’m not quite in agreement in that statement but it highlights a very important fact – sales are down globally, not just in the West.


The real-estate sector in India has slowed. There’s no questioning that statement even if developers/builders in your neighborhood are still jacking up rates. They generally see the downturn but don’t want to make a loss on their investment. Just wait it out and eventually, they will cave in. How can I say that, well, it’s simple. They made some profits from other deals. Those profits allowed them to get funding from a bank. They have a mortgage to pay and at some point, probably six months, they will feel the excruciating burden of carrying the property and will realize that they have no choice but to cut their losses and run.

Investments in second and third tier cities have dropped dramatically. Indian and foreign investment firms are finally stating the obvious, “The Indian Real Estate market is slowing”. Many projects from large RE developers like DLF and Unitech have been put on hold indefinitely. Indiabulls sees a 15% correction in the real-estate market over the next six months. I’d put the number a bit higher, closer to a national average of 25%. Marriott recently decided to shelve building a 250 room hotel in Pune, by at least two years.

For now, gone are the days when your driver or plumber is quitting his job to become a real-estate broker or a handyman is quitting his job to become a real-estate developer/builder.


The BSE Sensex is at a three year low. Confidence is shaky at best. Corporate earnings look ok (on a relative basis) but earnings growth appears to worrying investors. Most companies are no longer expecting 20% or 30% growth rates for 2009. Info Edge ( has said that they see fiscal Q209 revenues to be half of fiscal Q208. Earnings growth is slowing. The question to ask is, “Is the rate of deceleration increasing?”.

The BSE has failed to rally after two very big days of gains for the Dow. People in India are still bullish on the market and the Indian growth story so why hasn’t the BSE soared like the Dow did on November 21st and November24th? There’s still too much uncertainty and the Indian stock market is telling us that cautious optimism is warranted.


The Rupee is at an all time low against the US Dollar (though a one week high, as of November 25th, 2008). There are a great deal of challenges that India faces in the next two years – much like the whole world. I look at the Rupee relative to the US Dollar and I think that they INR should settle somewhere around INR 49 per USD by the second half of 2009. The US also faces great challenges but the Indian scenario is quite a bit more precarious in many ways. GDP deceleration, inflation (currently at 8.56%), rising import costs, FX reserves are much too low for comfort. Morgan Stanley expects the Rupee to depreciate to 57 before it appreciates. They may be right but the USD is going to be under a great amount of strain considering how much additional debt is going to hit US tax payers in the pockets.

It’s hard to say what will happen. All we know is that many many things can change, very drastically, fairly quickly. I believe the next two years are going to be very difficult, globally, and we should be prepared for it – financially and psychologically.

Business Economics India Markets

The Financial Crisis and India

BarCamp Delhi has been going on this weekend. I don’t think anyone took any video of the presentation but I turned into a bit of a pig and took up three speaking slots.

Sorry to Netra, Sukhdeep and every one else for taking up their slots!

The presentation is available as a download below as well as on Slideshare.

So far, there are posts on BarCampDelhi5 coverage on Webyantra and the BarCampDelhi Blog.

Economics India Markets

Cracks in the Armor?

Back in July, I put up a post about the chinks in the economic armor of India. Since July, the BSE Sensex has dropped to a low of 12,575 and rebounded to a high of 15,503 in August. Today it is trading down 149 to 14,174, mostly because of Infosys lowering its guidance. the people have come to terms with the fact that the credit crisis that began in the US over a year ago, has yet to claim additional casualties, specifically, Lehman Brothers. This has also had an indirect affect on Indian comp

The Rupee has gone from a high of Rs. 39.3252 per USD in January 2008 to a low of 43.29 in July and just a few days ago, it hit an intraday low of 45.885. Today, the Rupee is at 45.57 after hitting an intraday low of 45.785. Rs. 46 to the Dollar isn’t far off as I said back in July. I think the Rupee will not fall much beyond 46. Perhaps touch 47 and then settle down in the 45 to 46 range, unless inflation rises much faster than expected.

Oil has pretty much crashed from a high of USD 147. What has driven the downward trend in oil has also helped keep inflation in check, here in India. The drop in oil and the slight easing of inflation is primarily a result of decreased demand, which implies slowing economic growth worldwide, as every one knows, but also in India. No one wants to openly admit it but inflation, high commodity prices, rising wages, real-estate sticker shock have finally taken a toll on the Indian economy.

Will oil remain at the $100 level or drop? Your guess is as good as mine. However, I think it will probably drop a little in the short-term but OPEC has already decided to cut production and keep the $100 per barrel as the floor. Count on this to keep oil prices relatively stable until mid November. A bad winter in North America and Europe will most likely push oil prices up but it’s unlikely that oil will see the $150 per barrel mark for at least the next 6 months.

I stick with the assessments made back in July. For the short-term be careful where you’re putting your money in India and every where else, for that matter. If you’re in it for the long haul, this is a good time to start dipping your toes in the water and nibbling at various investment opportunities. As things come further south, it’ll be a good time to take small bites and keep increasing your exposure to India.

Business Economics India Markets

Market Turmoil and Basic Economics

It’s been quite some time since I put up a post and I apologize for that. Business matters such as recruiting, product development, and facilities have been taking a considerable amount of time.

However, in the six months since my last post much has happened in the global economy and even more is happening in India.

I’ve been saying for some time (since late 2007) that the valuations of stocks on Indian exchanges didn’t make any sense. The BSE benchmark index hit an intra-day high of 21,206.80 in January. Most people were predicting the BSE would hit 25,000 by March and 30,000 by the end of 2008. I had told many friends and relatives that the economic conditions were such that I saw the BSE hitting the 12,000 to 13,000 range by the end of 2008. I was wrong. 1st July 2008, the BSE has dropped to a 52 week low of 13,263.39. Is this the bottom? Not by a long shot. I believe global economic conditions will continue to drive liquidity out of the Indian market, making credit harder to come by and the BSE dropping to the 8,000 – 9,000 range in the next 9 months.

The Dollar-Rupee exchange rate touched a low of Rs. 39.12 in February of this year. The most pessimistic Indians chose to stay on the fence about where the Rupee was going. However, most people in India were talking about the Rupee going to 36. Could the Dollar at Rs. 36 be justified in this global economy? Absolutely not! Because of the fears of global economic sluggishness, investors are slowly pulling out of emerging markets like India which are perceived to be riskier than markets like the US. Already this year, foreign institutional investors (FIIs) have been selling off investments in the Indian market and moving capital back home and in many cases into US Treasury bonds.

Today (1st of July 2008), the Dollar has touched Rs. 43.40. Will the slide of the Rupee continue? Absolutely! I believe the Rupee will approach 45 to 46 by the end of this year, if not slightly sooner.

Weekly inflation numbers in India have hit 11.42%. Though the Reserve Bank of India (RBI) is working to curb inflation by raising rates and also raising the cash reserve ratios that banks must maintain, it is unlikely that inflation will see single digits for quite a while. I believe inflation in India will hit 15% before the end of the year. Real inflation that customers are facing is far higher. A short auto-rikshaw trip that cost Rs. 30 a year ago is now Rs. 40. Not a big change in real terms but it’s a 33% rise in cost to the consumer. Basic groceries such as milk, fruits, and vegetables that used to cost Rs. 200 per day now cost in the range of Rs.375 and Rs. 500. That’s an increase of 187% to 250% in the last 15 months.

Now I’ll come to my thoughts on the Indian real estate market. The Indian real estate market has seen an unprecedented growth in the last five years. Some locations have seen 10x returns on the sale of property in just five years. Most of the growth in Indian real estate is a result of foreign investors putting capital to use in India and the easy availability of domestic credit. Commercial and residential properties all over India have been doubling roughly every twelve to fourteen months. Sustainable? “Absolutely” remark most real estate brokers and developers/builders. Some anecdotal evidence that I’ve seen:

  • A residential apartment in a relatively upscale section of New Delhi that was on the market approximately 15 months ago at Rs. 2.25 Crore (just under USD 520,00) is still on the market but now at a price of Rs. 3.25 Crore (just under USD 750,000).
  • An office at what I would classify as a C-class building in a popular market place was being quoted at Rs. 100 per square foot per month in December 2007. In early June of 2008, a similar office in the same area was being quoted at Rs. 135 per square foot per month

Generally, residential properties are staying on the market longer than they were a year ago. At the same time, the seller (usually some developer/builder) is raising the price of the property based on the “Time Value of Money” principle. It’s costing him something to hold the property and inflation and credit costs are also rising so he is factoring all those costs into the price of the property. The only problem is that the buyer is in some cases, losing money (or has at least given back some healthy gains) in the stock market, being pressured by higher costs of living due to inflationary pressures, and credit is harder to come by as well as being more expensive to acquire as domestic banks continue to raise mortgage rates.


  • BSE to fall to 8,000 – 9,000 in the next 6 to 9 months
  • The US Dollar will strengthen against the Rupee and hit the Rs. 45 – Rs. 46 in the next six months
  • Indian inflation will continue to rise and reach 15%. Sharp rises in lending rates and reserve ratios are the only thing that can slow down inflation and risk dampening Indian economic growth. Growth could slow to the 5% – 6% range during the next twelve to eighteen months
  • New Delhi and Mumbai were recently listed as two Indian cities with the highest cost of commercial real estate rates in the world. New York City wasn’t even in the top ten. Though both cities will probably remain in the top 10 list, do expect prices to fall dramatically over the next eighteen months. Residential prices will likely fall farther as speculators and buyers will be drying up rapidly with higher borrowing costs
  • If you’re looking to invest in India, put your money in and don’t think about it for 10 years. You will likely see returns that far exceed returns in more mature markets like the US during a 10 or 20 year time horizon.
  • Short-term speculators are going to continue to feel the pain like they haven’t in a long time
  • Amateur stock pickers and real estate “investors” in India are going to exit the market in droves

I’m very bullish on India over the next 10 to 20 years. It’s the next two years that are going to be a time of bringing this market and the people back to the basics. Reminds me a lot like the fall of 1998 and the dot com bust of late 2000 / early 2001. India will be stronger and more stable after the retrenchment.

Please chime in!