Strange things

Rupee weakening despite return of foreign investors, growth without discipline and promoters unwilling to let go

The snap decision of electric vehicle pioneer Elon Musk to take Telsa private and then reverse it after a few days is not the only strange thing that has happened of late. The comeback of foreign portfolio investors since July after being net sellers in four of the first six months of the current calendar year to lift the local equity market to lifetime highs is equally jolting. The BSE benchmark took half the time to amass over 2,800 points that it had accumulated in the three months to end June, gaining 27% in the next two months. Their return was despite trade tensions running high and Brent crude quoting above US$77 a barrel, triggering fears of inflation spiraling and current account deficit widening. The Federal Reserve was sending hawkish clues. The Reserve Bank of India and the Bank of England were yet to meet. The hike in their policy rates coincided with the US central bank pausing from its ramp-up cycle beginning August after raising them for seven times in three years from end 2015. The tariff agreement between US and European Union was still to be reached and signs of thaw between the world’s two largest economies to agree to talk were not visible. The buying by overseas investors continued even as there was a flight of capital from fragile Turkey after the US slapped import duty on steel exports. Not that the Indian market was cheap, with the Sensex quoting at a P/E of around 22 end June. Mid and small caps were tumbling on tighter surveillance by the market regulator. The resumption of foreign fund inflow did not offer any support to the rupee. The Indian currency continued to weaken, breaching the 71 mark, along as with those of emerging markets in reaction to the 17% plunge of the Turkish lira in a day mid August.  

More than being satisfied that India is capable of expanding in double digits, as shown by the revised GDP numbers of the UPA years, the question that investors want to ask is why 2006-07 was an exception, with growth plummeting to 6% over the next five years. Adding to the confusion if the figure of over 10% increase in output in the third year of the then regime should be taken at face value is the admission of the official compilers that there was no reliable data. Assumptions have been made. The trajectory was accompanied by 6% average CPI inflation in 2006 from 4.5% in 2005. The combined Center-states fiscal deficit had deteriorated to 23% of GDP from 15% in 2003-04, when the UPA government took office. The spending spree included 43% higher allocation to eight flagship programs over 2005-06. The target for farm credit was enhanced 15%. Importantly, cheap money from the US and Japan was sloshing around. The accelerating net external flows into India’s capital markets nearly tripled to US$20 billion in 2007-08 from the previous year. The inability to sustain the momentum thereafter is a testimony to the transitory nature in the absence of structural reforms. The asset bubbles burst in the second half of 2008. FIIs pulled out US$ 15 billion in 2008-09. In contrast, the first two years of the NDA government were marked by drought. Disruptions due to recall of high-value notes and the roll-out of the goods and services tax followed.

If the exhilarating thought of what India could have been is enough to depress investors so have certain corporate actions. Though the long-serving former boss of HDFC escaped from being ejected from the board by a whisker, the direction by foreign proxy advisors to vote for his ouster should result in introspection. No doubt even international intermediaries participating directly or indirectly in the domestic capital markets should follow standard operating procedures. Yet the firepower against them appears an attempt to divert attention from the crucial issue if the shareholders’ representatives are performing as per expectation. The scarcity of wise men to offer guidance is not a secret. What is not widely known is the number of boards they grace, raising concern of their capacity to pay full attention to the companies they are counselling. Fixed-term tenures and a gap before re-induction are ideas worth exploring. Two of the long-serving directors took the hint and quit. Hopefully, Deepak Parekh, too, will so as not to tarnish his legacy of being a role model for transparency by making way for professionals to run the mortgage lender. That owners are reluctant to let go off is not something new. What dismays is how those who preach corporate governance fall short. It took the Reserve Bank of India to nip Uday Kotak’s bypassing the spirit of reducing his stake in the private sector bank he founded by issuing preference shares instead of ordinary shares. When it comes to Indian promoters, time and again it has been demonstrated that it is selfishness rather than the interest of the small investors that guides their actions.           

-Mohan Sule