FAMS Epxectations on Greek Elections & RBI Policy

June 16, 2012 - PRLog -- What happens tomorrow and on Monday could eventually affect how trading is done or investments are made.

Q: What is your view on the Greek saga?

A: Well first of all, my opinion is that the current situation was inevitable.  The decisions of pumping in more liquidity was not entirely correct as most of this money went to risky assets like equities and commodities.

I have heard many jokes and phrases in the last one year about the situation. I would like to recollect a few and share them. One was about how Germany is now doing what Mr. Hitler couldnt do in the Wars. Germany is practically dictating terms to most European nations currently as their economy is still strong.

Another was about how the US is artificially crushing other economies so that theirs does not look that bad comparatively.

If you look closely the Quantitative easing policy has only fueled the commodities prices which hurt the developing nations the most. Take for example India imports majority of Crude Oil, China imports raw materials like metals and Crude Oil. If you spike up the prices of this which are quoted in dollars, the economy of emerging nations may worsen.

By doing this more focus will shift towards USD. My view when dollar was weakening was that very soon dollar would be very strong and most global investors and traders will go towards USD.

Now coming back to the Greek saga, its actually not a Greek Saga. The Euro, if unsustainable should be broken up.

If the Greek people have to take on austerity measures now and again it is very hard on them. Imagine if your Government says salaries will be reduced, while price of daily goods and services rise. If the government also increases taxes to meet the debt obligations, then the people will revolt.

A simple solution which would be eventually be unavoidable is to break up the Euro and let the countries go back to their currencies. By doing this the individual countries can devalue their currency and try to kick start their economies by pushing cheaper exports. This can be done as they are much developed nations and need to push exports rather than keep imports cheap.

There are talks that a new party which proposes to go against the strict austerity measures and propose to leave the Euro may rise to the occasion and claim to be the new Greek govnt. However they face two other parties who support to remain in the Euro. It remains to be seen how much of a majority the new liberal party gets. We would have to wait till the counting is finally over.

Q: What about your view on RBI policy on Monday?

A: I have two views on this. On the immediate term my view was certainly very hawkish and I wanted RBI to contain the Inflation from the past year or so. However Inflation is not being contained even by raising the rates.

If you compare our economy globally, we have a very high interest rates compared to other nations.

Recently my view has changed to be less hawkish an more dovish. I feel the RBI should cut SLR and the twin rates.

SLR could be cut by as high as 100 bps and Repo and Reverse Repo should be cut by only 25 bps to see its effects.

What this will do is that it will flush the economy with funds from lower SLR requirements. Also the payments towards the SLR by RBI to banks will come down thereby putting less strain on RBI.

The CRR should not be tinkered with immediately as excess liquidity will flush the money into riskier assets like commodities and equities. Also if necessary the CRR can be cut next time.

However knowing that Brazil had kept interst rates beyond 35%+ when their inflation was galloping, I cannot be entirely dovish. Inflation is also a problem.

However currently our economy needs funds to fuel new projects so that employment is generated which will increase the purchasing power and thereby increase demand. We need the interest rates to cool off not for individuals to fuel their demand but for corporates to take on and continue with their expansion plans.

Q: How do you think the markets will play both these events out?

A: As we have seen India Inc and GoI have desperately asked for a rate cut and CRR cut. We may see RBI obliging this time around.

Our view is that RBI may go in for a 50 bps cut in Repo, Reverse Repo rates and CRR each.

This is due to the demand to kick start the economy.

Greek out come depends on the final tally. If Greek decides to exit the Euro, this will be good in the long run as much of the mess will finally start cleaning itself up rather than adding fuel to the fire. What next who knows, Italy, Spain Portugal and Ireland could also go the Greek way.

What they need to keep in mind is that to support the Euro economy, they should not destabilize or threaten the Global economy.

Q: What is your view on Shri Pranab Mukerjee getting nominated as the President Candidate?

A: I am very glad that he has been rewarded for over 5 decades of loyalty and hard work. What I believe is that he could most likely be headed towards the Rashtrapati Bhavan without much hassles or opposition.

Q: Who do you think should be the next FM?

A: I hope the PM, Shri Manmohan Singh, keeps the FM along with Mr. Rangarajan and Mr. Alluwalia assisting him. With his vast economic experience coupled with the fact that he as steered Indian Economy out of disaster in 1991, would make him a top contender for me personally.

I would like that the PM along with the FM portfolio can bring about many changes in the functioning of the UPA Govnt. The govnt should look for new allies in lieu of TMC.

All coalition partners are important and from time to time they will demand certain personal conditions for their party to remain part of the coalition, but not on a every day basis and by embarrassing the ruling govnt. day in and day out and opposing any reforms.

Many reforms are such that even the opposition will back it. Maybe she is playing hardball as she did not get a financial package for WB.

Its about time that UPA2, switched allies reshuffle portfolios at the same time as the FM leaves behind his portfolio and heads towards greater heights.

Wish you the best sir!

Q: Any thing else you have to share with us sir?

A: I would like to add here that if UPA2 consolidates and reshuffles allies and portfolios and the PM keeps Finance ministry along with able advisors, the stock markets could get excited and rally.

This I personally feel could positively affect the markets than only the RBI policy, as many investors and traders along with foreign players will look for more investor friendly environment under the new FM. They would expect more reforms and more liberal investing policies, i.e. less issues on taxation of investments and retrospective taxes.

I also that you to invite me for this interview.

Thank you once again.