Market Maniac

Burning money
Apr 15, 2014

I remember back when I was in school, my closest friend was from what-appeared-to-be a seriously wealthy family. While they lived very well, his father was a prudent and frugal man. One Divali, each of our gang were clamoring for more money for fireworks from our parents. His father, despite, as I said, being seriously wealthy, was the most resistant, but my friend was horrifyingly dogged in his demand. Exasperated one evening, his Dad took out a hundred rupee note and burned it in front of the family, saying, “There you go, there’s your fireworks.”

When we heard about it, we were shocked out of our wits and thought he was nuts – in those days a hundred rupees bought an awful lot of fireworks!

Decades later, older and wiser myself, I know him much better. Far from nuts, he is a wonderful, simple, and genuinely generous man. His objection, which he still holds, is that burning fireworks is wasteful and, in a poor country like India, sinful.
 

However, while I admire and love him, I continue to disagree with him about fireworks. Even though I acknowledge that they are terrible environmentally and, burning them is, indeed, tantamount to burning money, I know that fireworks deliver joy, a commodity which has no price.

Which brings me to the current spree of burning money – reportedly 30,000 cr will be spent on the Lok Sabha election. Unfortunately, it is unlikely to deliver any joy, except, possibly, to the winners and, I assume, their invisible bankrollers. [Incidentally, this expected expenditure is three times the amount spent in 2009 and, while slightly lower in absolute terms than the most expensive election ever – the 2012 US Presidential election, at $ 7 bn – it is by far the most expensive when viewed as a percentage of GDP.]

For most Indians, this grotesque expenditure, amounting to nearly 0.25% of our GDP, far from any joy, will deliver only (1) a modest, temporary boost to GDP, since most of the expenditure is black money which was not in the formal system; and (2) additional inflation pressure, since all of this money is, in fact, being burnt on consumption – booze, gifts, advertising and, of course, plain and simple cash.
 

This will doubtless increase Dr. Rajan’s caution on interest rates. In any case, it is clear that he doesn’t want to make any structural changes in his policy approach till the immediate nodal points are out of the way. Thus, it is near certain that there will be no change in rates till mid-May when the election results are announced, and, at that time, if the currently low-grade concerns about the monsoon get accentuated, things may remain on hold for a further month or two.

Interestingly, and rather surprisingly, markets, which are always looking for easier money, don’t seem to be looking for rate cuts any time soon. This unusual situation may be because sentiment is hopped up right now with the supposed Modi wave, and/or because there may not be a whole lot of investment plans in the hopper right now. Of course, this could change quickly if the opinion polls are correct and Modi is crowned in Delhi. Already BJP officials are muttering in that direction and the spotlight, even before the votes are counted, is already shifting to Mint Street. But Dr. Rajan will, I think, prove to be the immovable object, even more so with global markets getting increasingly volatile. My number one Market Guru has been advising caution on the Dow, fearing a decisive break of 16,000.
 

On the other hand, if the polls turn out to be wrong, and Modi is unable to garner a working majority, there will obviously be some serious fall-out in our equity market. The rupee, too, will wobble and RBI will have to hold on ever tighter. Recent price action – the rupee has faltered twice in trying to pierce the long term resistance just above 60 – suggests it may, in any case, be due a technical correction, which could take it all the way down below 62.

Either way, it may turn out that RBI’s reserve gathering was very timely.

There is also a reasonable likelihood that, either way, we could be looking at another election within a couple of years. Get ready to burn another 0.25% of GDP or more.
 

Unless, of course, the AAP effect spreads rapidly, as it should. In the current election, AAP is likely to spend no more than 50 cr, and most observers believe they will be able to win around 5% of the national vote. At that rate, the entire next election should not cost much more than 1,000 cr, a far, far cry from today’s foolish – indeed, sinful – burning of money.



( 1 People like this )
Archives

Burning money
Apr 15, 2014

How low can it go…
Apr 01, 2014

Stability? What stability?
Mar 18, 2014

Be careful with horses
Mar 03, 2014

Dear Prudence
Feb 17, 2014

Paradigms shifting
Feb 05, 2014

The revolution is being televised
Jan 15, 2014

Volatility is here to stay
Jan 06, 2014

Truly, a new India
Dec 10, 2013

It ain’t the market
Nov 25, 2013

A more Islamic world
Nov 13, 2013

Poker lessons
Oct 30, 2013

The rupee in 2030
Oct 14, 2013

Snakes and Ladders
Sep 30, 2013

Accountability and Governance
Sep 23, 2013

Ideal Boy Rides Again
Sep 10, 2013

Time to thank the "Speculators"
Aug 29, 2013

The only way out
Aug 19, 2013

Why companies don’t hedge
Jul 31, 2013

Circular reasoning
Jul 22, 2013

Vitamin G
Jul 09, 2013

The correct value of the rupee
Jun 24, 2013

Lessons in risk management
Jun 07, 2013

Waltzing Matilda
May 20, 2013

Managing Volatility
May 13, 2013

Selling India in America
Apr 30, 2013

Joy and hope in Cochin
Apr 01, 2013

How bad can it get ?
Mar 18, 2013

Love me tender
Mar 06, 2013

Special More-Than-26
Mar 01, 2013

A Real Currency War
Feb 18, 2013

Controlling Gold Imports
Jan 24, 2013

So, What’s with the Yen
Jan 11, 2013

A New Goa
Jan 04, 2013

As the Year Turns…
Dec 19, 2012

Meaningful Financial Innovation
Dec 10, 2012

To ECB or not to ECB
Nov 26, 2012

On to 2016!
Nov 08, 2012

RBI should Embrace Speculation
Oct 29, 2012

Congratulations, Eurozone
Oct 16, 2012

Havala, Politics and The Rupee
Oct 03, 2012

Champagne and Vada Pao – Again?
Sep 18, 2012

SNAP! CRACKLE! POP!
Sep 15, 2012

Measuring Business Margins Correctly
Sep 12, 2012

Is the Dollar about to weaken ?
Sep 03, 2012

The smart money’s on Obama
Aug 27, 2012

Making Money isn’t Supposed to be Easy
Aug 17, 2012

The Rupee Fan
Jul 31, 2012

I'll Do Anything...
Jul 30, 2012

How did Bankers Become Sexy?
Jul 19, 2012

Has a Serious Dollar Rally Begun ?
Jul 09, 2012

A Car Crash in Slow Motion
Jul 03, 2012

Measuring Sentiment
Jun 26, 2012

47 to 57 in 2012 – ha !
Jun 07, 2012

Who is tomorrow’s Narasimha Rao ?
May 25, 2012

When The Going Gets Tough…
May 21, 2012

Is The Euro Going Down?
Apr 27, 2012

Getting More Out of the FX Market
Apr 11, 2012

Nandan Nilekani ki Jai
Apr 02, 2012

The Conundrum of FX Borrowings
Mar 19, 2012

Those Glittering Assets
Mar 05, 2012

Global Turbulence – More to Come
Feb 17, 2012

A Near-Sure Thing
Feb 09, 2012

What was That Bearded Man Thinking?
Feb 06, 2012

The Anomalous Strength of the Rupee
Jan 23, 2012

Nothing Ideological About It
Jan 09, 2012

The FX Market In 2012
Dec 29, 2011

Party Time!
Dec 26, 2011

ONE CHEER FOR RBI
Dec 19, 2011

India Is Not Going To Hell
Dec 07, 2011

So What’s Happening To The Rupee?
Nov 28, 2011

Intervene Today; Deregulate Tomorrow
Nov 21, 2011

C’mon Mr. Cain
Nov 09, 2011

Keep On Praying
Oct 31, 2011

Acting Lessons for RBI
Oct 17, 2011

A Brave New (Globalized) World
Sep 29, 2011

A Different Kind of Fool
Sep 23, 2011

European Football and a Dollar Rally
Sep 16, 2011

Will The Collapsing Euro Save Itself
Sep 12, 2011

Making Hedging Markets More Effective
Sep 05, 2011

The Anna Effect and Other Joyous Animals
Aug 29, 2011

Betting on a Range-bound Rupee
Aug 22, 2011

Shoot the Messenger
Aug 08, 2011

Benchmarking Treasury Performance
Aug 02, 2011

Betting on a Range-bound Rupee
Aug 01, 2011

Lesson From My Father – Redux
Jul 14, 2011

Welcome to Turkey
Jul 08, 2011

Has RBI Lost Control of the Rupee
Jun 27, 2011

Managing Raw Material Price Risk
Jun 06, 2011

Third Time Lucky?
May 30, 2011

Light Up and the Bus will come
May 09, 2011

Time To Fast-track Full Convertibility
Apr 25, 2011

A Tribute to Sarah Wells
Apr 08, 2011

Three Birds With Two Stones
Mar 18, 2011

Another Step Towards a New Islam
Mar 11, 2011

Bhrabo!
Feb 28, 2011

Another Step Towards a New Islam
Feb 22, 2011

Don’t Arabs Love Gold Any More?
Feb 08, 2011

Thank you, Anish Kapoor
Jan 28, 2011

Faint Heart Never Won Fair Lady
Jan 25, 2011

Beyond the Inflexion Point
Jan 07, 2011

Visibility: Poor
Dec 30, 2010

India 2030: May The God Of Your Choice Bless You
Dec 06, 2010

The New G-7
Nov 26, 2010

Thoughts From Turkey (and Elsewhere)
Nov 16, 2010

Takeaways From the 2nd Quarter Review of Monetary Policy
Nov 03, 2010

The Rise of a New Europe
Oct 25, 2010

(Another) Lesson From the Past
Oct 08, 2010

The OTC FX Market – Falling Behind the Curve
Sep 24, 2010

Unnatural Hedging
Sep 03, 2010

Smile Darlin’, It’s Better Than You Think
Aug 23, 2010

Do You Believe in Empirical Evidence?
Jul 30, 2010

Could the Rupee Hit 50 Again?
Jul 22, 2010

Higher Volatility Ahead?
Jul 14, 2010

A Return to Values?
Jul 01, 2010

Don’t Cry for Me, Maradona
Jun 21, 2010

Could the World Cup Trigger a Correction in the Euro?
Jun 11, 2010

The Next Cycle
Jun 02, 2010

I Hate to Say It, but…
May 24, 2010

W(h)ither the Euro – a Fable
May 05, 2010

Could the Euro Go into Long-term Decline
Apr 09, 2010

Enabling Better Profits for Small Exporters
Apr 05, 2010

Shades of Enron
Mar 22, 2010

Bt or Not To Be
Mar 16, 2010

Post Budget: A New Paradigm
Feb 26, 2010

Budget Ideas for The Financial Sector
Feb 19, 2010

Time For More Aggressive Regulation
Feb 03, 2010

American Breakfast
Jan 25, 2010

The CAG handicap
Jan 11, 2010

Bringing Hedgers to the Futures Market
Dec 30, 2009

The Major Currency Risk In 2010
Dec 16, 2009

God Bless You, Mr. Obama
Dec 11, 2009

Dear Mr. Bhave (and Dr. Subbarao)
Dec 03, 2009

Has RBI been diversifying out of dollars?
Nov 16, 2009

Welcome To Vegas
Nov 02, 2009

Rabbit in the headlights – again
Oct 09, 2009

The calm after the storm
Sep 25, 2009

Sufferin’ Art
Sep 11, 2009

Is it time to hedge your interest rate risk
Aug 31, 2009

Unconventional wisdom
Aug 31, 2009

A gift for the chairman's wife
Aug 17, 2009

Surf’s up!
Aug 01, 2009

Dr. Subbarao As Tiger: 25% Visibility, 75% Ability
Jul 28, 2009

Coming of age
Jul 20, 2009

Thoughts on the budget
Jul 09, 2009

Guinness is good for you
Jul 02, 2009

Will it rain the day after tomorrow?
Jun 08, 2009

Cleaning the Augean Stables
May 19, 2009

Bali Hai
May 14, 2009

Another exotic bet
Apr 27, 2009

Buy US corporate bonds
Apr 24, 2009

Mumbai chi Meera
Apr 13, 2009

Turning around cautiously
Mar 30, 2009

The curious role of the forex committee
Mar 16, 2009

Green shoots
Mar 02, 2009

The Party Party
Feb 16, 2009

Obama is Jamal
Feb 02, 2009

Who do you trust?
Jan 19, 2009

The New American Dream
Jan 05, 2009