Since you seem to frequently mention Healthy Economy= FDI
http://www.newindpress.com/Column.as...20060605115610
Markets on local drives, but with foreign brakes
S Gurumurthy
The uninitiated are bewildered. Experts are intrigued in silence. The issue is the behaviour of the stock and currency markets. India is the second fastest growing economy in the world. Yet its rupee is falling, touching a six-month low. Its stocks are dwindling. It defies the ordinary and the experts alike.
See the contradiction between the economy and the market. For the year 2005-06 India’s GDP grew by 8.4 per cent averaging over 8 per cent for the last three years. The growth was double digit in the last quarter of January-March 2006. Its inflation is under control. Its corporate profits increase year after year. National savings that had flattened for too long has reached an all-time high of over 29 per cent, and is rising still. Its gross capital formation, just 24 per cent a few years back, is over 30 per cent last year. Its exports clock 25 per cent year-on-year growth. Even its sick agriculture has clocked 3.9 per cent growth in the last quarter of 2005-06.
There is optimism about the fiscal deficit for the year that is being reined in as budgeted, at 3.8 per cent. The foreign exchange reserves are rising despite galloping petroleum imports. Thus, the national economic story is all positive, despite oil price concerns.
With its high economic performance, the rupee must rise in value, not fall. That is, we must buy more dollars with less rupees. Yet we pay more, not less, rupees per dollar, now Rs 46 instead of Rs 44 a year ago. On the value of the rupee based on its purchasing power, we should get a dollar at less than Rs 20 per dollar against Rs 46 we are asked to pay! So the rupee already undervalued is falling even further. This is despite India’s rise!
Again, despite the national economy rising, the stocks in BSE dither and fall. The market should mirror the performance of the corporates and national economy. But here in rise or fall, it seems disconnected from both. The national economy did perform well in ‘05-06. But it did not grow by 20 per cent for the stock market to gallop four times that, from 6500 points in January 2005 to 12000 points in April 2006. Why then did it rise? And why then the sudden fall in May 2006, by almost 2000 points in just two weeks?
Certainly the rise of the national economy could not have forced the market to fall! The “fundamentals are strong,” counsels the Finance Minister. That does not explain the fall. On the contrary it leads to one more question: why the fall if the fundamentals are strong?
What then really caused the rise and fall? The surprising rise and the shocking fall are both the work of the global money, the ‘hot money’ as many experts fear it. Today hot money wanders in seconds from one end of the globe to the other through digital networks. It is an orphan. Those who operate it are not its owners, but managers. It has no borders or nationality. It is nomadic. It is in no ordinary numbers.
The global annual trade in goods and services is about 6.5 trillion dollars but the daily global trade in financial derivatives - read speculative money - is over $1.8 to $ 2 trillions. So for every dollar of actual trade speculation is hundred dollars in forex market. This speculated money rushes into a country for small, even day to day, why even hour to hour, gains. It stokes up the currency and stock values where it enters in even for an hour.
And when it moves away, which it can do in minutes, the currency and stocks tumble. In India this money is allowed to operate - and freely! It connects the global forex market where all currencies are bought and sold to the national stock market where local stocks are bought and sold, and destabilises both.
Look at what this money did to our stocks in just nine trading sessions in the second and third week of May. In these nine days, the managers of the hot money, the FIIs, sold stocks at high prices and profits, realised $2.4 billions and the money they realised flew back as hot money elsewhere. But the local Mutual Funds did buy half the stocks they sold, but not match their cheap liquidity power.
We allowed this nomadic money into our markets in the critical years of 1990s as an emergency measure to build forex reserves. But today we are overburdened with dollar reserves, losing by adding more dollars and we do not know what to do with it. Unlike China’s, our economy is growing without high foreign capital induction. That we are growing high more on our own savings and investment has actually surprised the world. We need not allow this dangerous money to have a free run anymore.
Today we can choose our terms to allow it. But to do this calls for guts which is in short supply in the country. So what decisively settles the values in financial and stock markets is not the strength of the national economy but the wandering virtual, speculative money. With the result, the Indian stocks grow on local drives but with global brakes always waiting to apply on them.
http://www.newindpress.com/Column.as...20060605115610
Markets on local drives, but with foreign brakes
S Gurumurthy
The uninitiated are bewildered. Experts are intrigued in silence. The issue is the behaviour of the stock and currency markets. India is the second fastest growing economy in the world. Yet its rupee is falling, touching a six-month low. Its stocks are dwindling. It defies the ordinary and the experts alike.
See the contradiction between the economy and the market. For the year 2005-06 India’s GDP grew by 8.4 per cent averaging over 8 per cent for the last three years. The growth was double digit in the last quarter of January-March 2006. Its inflation is under control. Its corporate profits increase year after year. National savings that had flattened for too long has reached an all-time high of over 29 per cent, and is rising still. Its gross capital formation, just 24 per cent a few years back, is over 30 per cent last year. Its exports clock 25 per cent year-on-year growth. Even its sick agriculture has clocked 3.9 per cent growth in the last quarter of 2005-06.
There is optimism about the fiscal deficit for the year that is being reined in as budgeted, at 3.8 per cent. The foreign exchange reserves are rising despite galloping petroleum imports. Thus, the national economic story is all positive, despite oil price concerns.
With its high economic performance, the rupee must rise in value, not fall. That is, we must buy more dollars with less rupees. Yet we pay more, not less, rupees per dollar, now Rs 46 instead of Rs 44 a year ago. On the value of the rupee based on its purchasing power, we should get a dollar at less than Rs 20 per dollar against Rs 46 we are asked to pay! So the rupee already undervalued is falling even further. This is despite India’s rise!
Again, despite the national economy rising, the stocks in BSE dither and fall. The market should mirror the performance of the corporates and national economy. But here in rise or fall, it seems disconnected from both. The national economy did perform well in ‘05-06. But it did not grow by 20 per cent for the stock market to gallop four times that, from 6500 points in January 2005 to 12000 points in April 2006. Why then did it rise? And why then the sudden fall in May 2006, by almost 2000 points in just two weeks?
Certainly the rise of the national economy could not have forced the market to fall! The “fundamentals are strong,” counsels the Finance Minister. That does not explain the fall. On the contrary it leads to one more question: why the fall if the fundamentals are strong?
What then really caused the rise and fall? The surprising rise and the shocking fall are both the work of the global money, the ‘hot money’ as many experts fear it. Today hot money wanders in seconds from one end of the globe to the other through digital networks. It is an orphan. Those who operate it are not its owners, but managers. It has no borders or nationality. It is nomadic. It is in no ordinary numbers.
The global annual trade in goods and services is about 6.5 trillion dollars but the daily global trade in financial derivatives - read speculative money - is over $1.8 to $ 2 trillions. So for every dollar of actual trade speculation is hundred dollars in forex market. This speculated money rushes into a country for small, even day to day, why even hour to hour, gains. It stokes up the currency and stock values where it enters in even for an hour.
And when it moves away, which it can do in minutes, the currency and stocks tumble. In India this money is allowed to operate - and freely! It connects the global forex market where all currencies are bought and sold to the national stock market where local stocks are bought and sold, and destabilises both.
Look at what this money did to our stocks in just nine trading sessions in the second and third week of May. In these nine days, the managers of the hot money, the FIIs, sold stocks at high prices and profits, realised $2.4 billions and the money they realised flew back as hot money elsewhere. But the local Mutual Funds did buy half the stocks they sold, but not match their cheap liquidity power.
We allowed this nomadic money into our markets in the critical years of 1990s as an emergency measure to build forex reserves. But today we are overburdened with dollar reserves, losing by adding more dollars and we do not know what to do with it. Unlike China’s, our economy is growing without high foreign capital induction. That we are growing high more on our own savings and investment has actually surprised the world. We need not allow this dangerous money to have a free run anymore.
Today we can choose our terms to allow it. But to do this calls for guts which is in short supply in the country. So what decisively settles the values in financial and stock markets is not the strength of the national economy but the wandering virtual, speculative money. With the result, the Indian stocks grow on local drives but with global brakes always waiting to apply on them.
Comment