One of the most awaited events of the Indian Economy is around the corner.
The Budget – FY10. All eyes are on Mr. Mukherjee’s briefcase at the
moment…what lies within? Only he knows!

Overall I think the budget will be disappointing for those who feel this
will be the biggest budget ever etc. There is not much that the government
can do right now with concerns over long term fiscal sustainability. The
budget – as always – be one of the most predictable yet most sought after
event for the markets. And post budget the market may not move beyond +/-
3%.

Here are only a few things that I would look out for

Fiscal Deficit – The interim budget had budgeted the fiscal deficit as
5.5% of GDP. There could be an upward revision to this number. Market is
expecting 6% of GDP to be budgeted as Fiscal deficit for FY10. This is
after taking into account the fiscal support coming from PSU
disinvestments and 3G auction. A revision to 6% will additional borrowing
requirement of Rs 25,000 Cr.

Fiscal Stimulus – It looks quite unlikely that there would be any more
fiscal stimuls packages announced. Purely because there would be a greater
chance of a rating downgrade if the deficit grows any further.

Infrastructure spending – Market is estimating India’s infrastructure at
$500 bn by 2012. Expenditure on roads and Power will be on cards of FM.

Taxes – Unlikely that any rebates would be announced on indirect taxes/FBT
to the corporates but there is a possibility of playing with the direct
tax slabs and increasing Housing loan interest limit/Equity investment
limit (80C) to encourage investments in housing and equity markets.

WPI headline number that was printed last week was a mild 1.4% (revised to -0.8%) which implies that inflation is no problem for us. But a closer look tells us that we’re heading into a Déjà Vu situation. The headline number has its own problems when reported year-on-year. If every week you see that the WPI is flattish that means there hasn’t been much price increase as compared to same week last year. And if we’ve forgotten already, last year the Inflation was at its all time peak during the same time of the year and the inflation index was rising at a crazy speed! A flat number being printed each week this year means the prices are accelarating again.

WPI – which moves very closely with the Crude Oil prices peaked during Jul-08 – about the same time when Crude peaked (see chart). And then, post LEH, as the crude started its decsend WPI followed the track. For a common man in India crude oil prices don’t really matter *directly*. What we care about most is the Food prices.

As we see in the chart, the food prices never really came down when Crude or WPI descended. Food price index was flat for some time Oct’08-Feb’09 but since then it has been rising at quite a pace! YTD as on the month ended May’09 the food prices have risen by more than 5%. And there is more to come!

Why inflation will be the new buzz word?

Have you met Fed? – In past few months we have seen the central banks coming to the rescue of economies by injecting the dreadly required liquidity. Trillions of dollars by the Fed, Asset purchase programme by BoE and ofcourse the Zero Interest Rate Policy (ZIRP) by many central banks across the globe. RBI themseleves injected liquidity into the system not just by easing the rates but also by announcing those stimulus packages. So there is cash in the markets. Even the global liquidity makes a way in India through FDI, FII etc.

That oily inflation spiral! – When there is inflation commodities rally as its better to buy now than later (didn’t we see China building oil inventories lately?) And as we see in chart, with the increase in oil prices WPI and other prices are bound to increase. And when the inflation is on rise what do you do? Buy oil now than later! err

Central Banks may refrain from hiking rates too early – Of course we can expect central banks to the rescue yet again! To curb the inflation CBs can simply hike the rate but they are going to be caught in the same growth-inflation conundrum once again as they did when the rate cuts were needed and the inflation was already on a rise everywhere. This time the story we need growth (low rates) but need to control inflation as well (rate hikes)

As someone said we’ve reached the valley…but we still need to walk through it.

(Chart Data Source : Ministry of Commerce and Industry, Bloomberg)

A lot has moved in past few months to the north! Post March the Indian equity indices have almost doubled from their lows outperfoming most of the major indices across the globe. Elections mandate has acted as a fuel to propel the Indian markets. There have been talks about the green shoots, the magical second derivative of the economic data turning less negative and everything that testifies that the worst is perhaps over. But is the good in the near vicinity to justify so this rally in risky assets?

To me this rally seems to be much of an over optimism, over exuberance and it look quite over bought at these levels. Where does it go from here? – If not down, it certainly needs to be range bound for a sizable number of months to come.

Why did the markets rally at all?
The risk appetite which was at historic lows during Oct-Mar should rise to acceptable levels as ofcourse the liquidity/credit problems have been successfully(?) addressed by the central banks. The BRIC countries should well trade at premium over developed economies not only for their strong domestic demand but also as the world recognizes their strong contribution to global growth in coming years as and when the economy recovers. Indian voters after decades have given a strong mandate in Elections’09 something which definitely reduces the political risks that were assumed by the investors.

And why is it not enough? Here are a few thoughts-

1) The Government is yet to deliver – One of the first thing that the new government needs to address immediately is a huge fiscal deficit thanks to the farmer loan waivers and the stimulus package(s) announced last fiscal year. With such a deficit it would certainly be a tough task to control the economy in case there is more bad news in the offing.

2) Less bad is better but not good! – Economic indicators have started improving and are less bad than what we’re seen before. But they still are far from positives. Some may argue the equity markets are a leading indicators and tend to price the future data that will be printed. I appreciate. But the rallies *must* lose steam if the economic data takes longer time to turn green quarter on quarter! And if the economies have indeed started reviving it will be good to invest when you see the green than to lose your capital when the market gives up. I think it is ok to lose out on first 20% of the gains to avoid that 50% loss, no?

3) Debatable over the direction – There isn’t a consensus over where the markets should go from here. That obviously brings in more volatility in the markets. The indecision quotient must be at historical highs. And my logic says when you’re not sure stay out.

4) All the good news is priced in – Somehow Indian markets have absorbed all the good news already and have shown great optimism during last 3 months pricing all the local good news and rejecting all the ugly global news. Decoupling theory beats me. A higher premium is acceptable but lower correlation with SPX is still far fetched for Indian or any other equity index for that matter. Period.

All this in my opinion would keep the markets range bound. If you look back at charts we have been trading in a range since october now. Election verdict moved the level of the range up which is acceptable. Expectations of good governance rallied the markets and a good budget is priced in. A good budget hence, in my opinion, may not lead to further rally…if it does it will come down. A bad budget (which does not address the fiscal deficit) however may lead to a fall and the Sensex may trace back to 12k range. So the budget is what will define the range for next few quarters.

And lastly there are ofcourse a few risks that I see to my view:-

1) Across the world if the economic data slowly and steadily improves a rally is justified look out for them
2) Disinvestment announcement in upcoming budget – any signs of bridging the fiscal deficit through disinvestment of state owned units (much required!) would be welcomed by the markets.

Look out for the budget on July 6. May be buy some OTM calls/strangles or something.

India Govt bond markets are undergoing through the phase of extreme uncertainty. With two fiscal stimulus packages already announced it is widely known that the fiscal deficit for FY09 has already exceeded the limits planned in budget. The government had announced that it will borrow 700bn Rupees over the 1.45 trln estimated in budget for the year 2008-09. The announcement of 700bn had factored in the inflow of 200bn Rupees which was to come through 3G auction…which is now unlikely to come in this Fiscal year.

Its certain that Governement will have to borrow more than 700bn but no one is sure how much more is it going to borrow and more importantly when? There were announcements yesterday that government would detail its borrowing plans for FY09 in the interim budget. It was also noted that government has various means to bridge the fiscal deficit, including issuance of treasury bills.

Rate cut expectations are fuelling to the uncertainty. It won’t be a surprise if RBI cuts CRR by another 50bps by feb end. If you try to time the RBI you’ll face the heat!

8.24% 2018 paper has been falling ever since the RBI announcement of no rate change. Partly because people were buying in the anticipation of another rate cut and partly due to people now moving to 6.05% 2019 paper. The latter will definitely become the most actively traded paper in the gilts markets as soon as goverment issues some more of 6.05% 2019 paper.

Its clear – Gilts are going to keep selling off untill issuances are over…or atleast the market is clear about borrowing plans of the government. Post these worries (which should not last in March) the gilts are set to rally…to price in further cuts…may be atleast a 50bp to 100bp from here.

This is one of the biggest fraud in India. It was worse than anyone could have expected from Satyam.
A shame on India’s Corporate Governance. Pathetic….Please go short on markets

Below is the confession by the man himself!

Satyam_Computer_Services – Ramalinga Raju Confession to the Board

Right from the start 2008 had cruel intentions but the mayhem that we’ve witnessed throughout the year was least expected. The world was well aware of the problems with sub-prime loans and other mortgage based assets. Yet there was hope of this ending soon and seen as a small speed breaker in the strong momentum that global markets were fueled with. With the benefit of hindsight that hope seems to be a false sense of security. Growth estimates, economic targets were continuously revised down throughout the year. Somewhere mid-way into the year after a couple of massive “corrections” in the equity markets there was seen a consensus that global economy is indeed under huge pile of $hit, thanks to the side-effects of having a huge risk appetite and high leverage that we all got so used to.

The year saw sad demise of Lehman Brothers, Bear Sterns and of course the curtains were drawn upon the famous Investment Banking model where leverage was bread and butter. Hundreds of thousands took those pink slips. With the downfall of Lehman it was pretty clear that underlying problem now was of credit crunch that corporates were facing, all of a sudden cash was gone missing from the world. Overnight lending rates climbed to levels never ever seen. Central Banks started infusing loads of cash into the system…which finally worked and lending rates did come back to sane levels. Then there was a phase ruled completely by rumour based trading! Every week one financial institution was targeted and its stock price was brought down by 30-40% for 2-3 sessions in a row. Morgan Stanley, Citibank, ICICI Bank…all will remember those traumatic days they have gone through.

And towards the end Madoff episode was a perfect one to end that cruel year! I wonder if Hedge Funds will ever be the same? Will they be regulated and taxed? Will investors stop believing in alpha? Will Hedge Fund be a taboo word? Will the global economy strike back? Will the confidence come back?

2009 may answer some of those questions!

…it was a long year…we’ve left the slaughter, the bloodbath, the history behind us...Sacres the shit out of me!

We’re in the middle of the worse that will be seen by the generations alive!

Chinup – keep looking forward, keep the cool…

Yuvraj Singh was awarded Crores of Indian Rupees on hitting 6 sixes in an over.

Martyr Policeman’s families are being rewarded with 5L each for stepping up for the citizens.
This is announced by the same government which rewarded Ajit Agarkar and Rahul Sharma with 10L each for playing an integral part in India’s T20 victory…

Bastards…

Yesterday was the worst day ever in Investment Banking history.

Feel sad about all Leh employees. God forbid I would never like to be in that position.

Merrill did the right thing in the form of a merger and at a premium is perfect for them…

Yesterday…noted in the book!

I’ve had a number of encounters with blogging and I’ve realized that I’m pretty bad at it. In spite of putting n blogs in trash I thought…why not another one…

This time I call it Bank Holiday. This popped up in my head because for (4.4 pi) time of the week I just wait for them!

Anyway, moving on…since my readers were updated last, my life has undergone quite a few significant changes.

Personal front: I got married (I was disappointed as well!)…and ironically ever since then I’m enjoying bachelorhood again (as my better half thought doing an MBA is better than living with me! )
Meanwhile, MBA and I were running in different directions it seems, each year I comfortably convince myself to apply next year.

Professionally: I decided to move from Managing of Risk to Risk Taking (?) of interest rate exotics…it’s fun…is all I can say! There are quite a few things that a trading floor can teach you in life…albeit in a very sophisticated way…no mincing of words, nothing personal yet so blunt and of course swear words work like a charm.

Generally: the usual stuff…

Hopefully more later!