Global Marketplace: Contradictions Galore & Policy Jitters

Business in India is increasingly becoming global. Market is abuzz with news about

loads of money flowing in all directions. Each day, newspapers enthusiastically announce yet

another takeover of a foreign entity by yet another Desi company. This is in stark contrast from just

three years back when India's corporate sector feared being gobbled up by the global giants. This

too, is at a time when foreign funds are pouring billions of dollars in buying portfolios of all kinds

of assets in India, the stories of which fill airtime of all TV channels. Globalization has indeed

resulted in increased complexity of the financial markets. Forecasting & policy making in such a

market is a humongous challenge, because yesteryear proverbs & gospels no longer hold true in the

current market.

Now, look at various pieces of news. Economic Times dated Saturday 6th October

2007 , declares that Indian companies invested over 30 Billion dollars in acquiring foreign assets

over last one year. This is quite in contrast with the news reported a few days earlier announcing

that sub-prime crisis is leading to falling asset valuations in US & some other countries. The implies

that at a time when western giants are not feeling confident about the value of their assets, Indian

minnows are confidently making big buy decisions about the same assets. It may be directly

attributed to the survival of the fittest theme of the Globalised world. It only shows that even the

Indian minnows which are competitive have a fair chance to not only survive but also thrive in the

new order. Then, we are informed that there is a surge of investment dollars in India, while our

market seem to be having increasingly lesser appetite for the same(otherwise they might not have

been bulging as the Finance minister seems to hint). The pieces of news leads us to ponder that

while foreign giants are interested in India, our big boys are increasing enamored to acquiring

foreign assets. However this phenomenon can be traced back to globalization which seems to have

come here (in India) to stay.

 We also have the Indian exporter community that is fretting over the steady rise of

the humble Indian Rupee against Dollar & other currencies. Such was the pressure, that the master

of the Indian currency i.e. RBI, had to step in to soak the supply of foreign currencies. It tried doing

so by tightening the norms for raising foreign currency borrowings (by Indian corporates) &

opening the tap of foreign currency investment by Indian companies even further. This was done by

tightening the ECB norms on one hand & raising the Investment ceiling by corporates to 400% of

their net worth & for Mutual funds to 5 Billion Dollars. However, this proved insufficient as INRs

upward march continued unabated. An unkind domestic inflation, somewhat fluid political situation

with the onset of the elections season, high international energy/oil & other commodity prices

threaten to complicate the matter further. If Rupee appreciation continues as it is, it might not be

long when domestic players start crying horse about competition from imports.

Now lets visit the challenge of raising investment in Infrastructure which is creaking

under the pressure of ever rising Indian consumption demand. It is already proving inefficient to

support current growth rate 9 percent & falls much short of expectation to put growth to above 10

percent trajectory as desired by much of the nation. Apart from domestic resources our political

masters seem to be counting hugely on Foreign investments to meet this requirement. Which means

that foreign investments cannot be shunned for much longer without having significant effect on

domestic growth rate.

Also, analysts of all hues & colours of both domestic & foreign origin, predicting

volatile markets for stocks & assets in India. This means that Risk adjusted return might not be

available unless one has been extra cautious in selecting the investment opportunity in India,

meaning that it is no longer a game for common Indian small investor & SMEs. RBI has also

empowered itself to raise MSS bonds to a higher ceiling (by 50,000 Cr.). This signals its intention to

intervene in the Forex market to not only stabilize INR from rising further, but also to soak
increased supply of Rupee to control resulting inflationary effects. The last one shall off course be

at taxpayers cost who shall be made to bear the burden after elections just as he gears up to meet the

pressure of rising global energy costs & associated liability. One must note that the foreign investors

whom our political bosses are trying to attract do not like an interventionist central bank & become

jittery if it deviates much from the stated policy of minimal controls.

However, the point to ponder is: why the novel idea of RBI to liberalize external

investments had minimal impact, if any and what else could be done to make markets more

sensitive to its policies & concerns. It may be noted that already an MSS outstanding of over

1,45,000 Cr. has failed to check the rise of Rupee, which has risen steadily over the past year & a

half. So would some higher ceiling be effective or shall it just been another wasteful burden on the

Indian Taxpayer who would be made to pay for the decision without having any kind of say over

the matter (RBI bosses are not his elected representatives). Also, while the going is good regarding

FDI inflows, not many shall bother about the feelings of foreign investors. However, this shall

necessarily lead to some tough questioning when our policy makers go out to raise long term

foreign money for our creaking infrastructure & might result in somewhat higher cost of such

borrowings.

Though the policy of RBI in itself was quite responsive to the prevailing conditions

like allowing mature Indian players to take more risks & march ahead boldly to acquire even greater

amount of assets, it also allowed smaller investors to invest more of their money abroad through

mutual funds. However the policy failed to elicit adequate response from Indian market for mainly

two reasons. First, the banks won't lend enough money to corporate as higher leverage means more

risk to them which is not advisable to be taken in a volatile market & second, the small investors in

India are yet to accept Mutual Funds as its trusted partner for his Investments. Historically, money

in India has been saved with Banks & Mutual Funds as an Industry do not have the reach to
convince investors about their credibility to lay claim to a greater share of his wallet. Also, there is

nothing much for SMEs in the RBI policy. Although SMEs can technically invest upto 5 million

USD or may be even more to acquire foreign assets, however this investment has to be financed at

high costs that prevail for INR borrowing as many of our SMEs are unable to raise cheaper ECBs.

The FCNR (B) funds which are available to SMEs cannot be used for foreign investments by

SMEs. The same holds for individuals who are allowed to invest upto 2,00,000 USD per year but

neither ECB nor FCNR (B) funds are available. No wonder market has not been very kind to RBI

policy. It may be noted that total FCNR (B) reverses in the country are estimated in access of USD

42 Billion & nearly half of it (may be higher) can be conservatively estimated to be deployed in

funding of domestic business. The RBI can safely direct banks to use all these funds for financing

fresh capital goods imports (which would have pro-growth bias),Overseas acquisition finance &

may be export finance at suitably advised rates as the case with ECBs. The banks can be directed to

pull out FCNB (B) funds from financing domestic trade & investments at the time of renewal of

such loans or at Rollover dates by substituting such loans with MIBOR linked INR demand loan.

While first two options shall result in outflow of foreign currency meaning more demand for INR

funds, the last option shall be to fulfill RBIs commitment towards exporters for funding them at

cheaper rates.

Now in the coming review of monetary policy, RBI has a chance to correct its policy

stance by making FCNR (B) funds available to SMEs & individuals at competitive rates for

acquisition of foreign assets like industrial, commercial as well as reality assets. Individuals should

also be allowed to buy housing & commercial assets as well as for funding foreign education loan,

foreign travel loans etc. The individual banks might be allowed to frame their policy (RBI can keep

a right to review the same if it so desires) for such lending as well as provide all kinds of advisory

services to SMEs & individuals for making such investments. To protect Indian investors it might

ask banks to do necessary due diligence of the foreign assets which shall also be in banks own
interest & they shall be happy to do the same for a fee to the consumer. This shall not only be in

keeping with existing policy stance of RBI but shall also save the burden on taxpayers. In the long

run this shall expose the SMEs to thrive in competitive global environment to boost the confidence

of Indian entrepreneurs even further. Indivuduals shall also have a chance to go for their second

house abroad which might cool domestic real estate a bit. It would also prepare domestic banks to

take up a role in fast globalising marketplace, thus preparing them for the competition ahead.

Amit Bhushan

The author is a Regional Manager at ICICI Bank

Qualification: PG in International Marketing & CAIIB.

Also placed on Hindustan.org Blog.

Address: 1003, Rishikesh Appartments, Subhash Chowk Ahmedabad, Gujarat Ph.0-9909910903

email: amitbhushan@rediffmail.com

The views are personal. (Ref: ET dt 6/10/07;FCNR (B) deposit estimate given by Financial Express

in July2007, RBI ECB policy can be checked at Bank of Baroda website or rbi.org)