Obama fears India's rise. Here's why.

In this issue:
» What makes Obama fearful of India's rise
» RBI hikes CRR by 0.75%
» Auto sector to remain robust
» US Fed Chairman Bernanke gets second term
» ...and more!!

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00:00

No matter what the hype and the pedigree; most politicians know how to appease their voters when pushed to a corner. In recent times, US president Barack Obama has faced political setbacks and increasing criticism over his leadership. Hence, the content of his annual State of the Union address does not come as a surprise.

The key takeaway for us here in India is his statement, "To encourage ... businesses to stay within our borders, it is time to finally slash the tax breaks for companies that ship our jobs overseas, and give those tax breaks to companies that create jobs right here in the United States of America." That clearly has implications for the Indian IT industry. Little wonder then, the top losers among the index heavyweights in India today were from the software pack. So far, the mood among the Indian software giants seems optimistic. US tax breaks aside, American companies will continue to need cost effective services. The key question is whether Indian service providers can remain competitive even after taking into account the higher taxes their clients must pay. In our view, Indian IT companies will still get business. They continue to provide compelling value. They have also taken steps like increasing their presence overseas and hiring locals there.

On a broader note, Obama also noted that countries like India were "not standing still... They are putting more emphasis on math and science. They're rebuilding their infrastructure. They're making serious investments in clear energy because they want those jobs." In our view, this is an admission of the progress we have made in the past several years. There is no mistaking that we have years of catching up to do. But we can take heart that things are moving in the right direction.

01:06

Chart of the day

Most economies around the world are recovering from the financial crisis. Of course, the speed of recovery, inflation and risk of further crises differ. As a result, central bankers around the world must respond differently. Especially when it comes to the key question of raising interest rates. Today's chart of the day shows the interest rates prevailing in key economies. Central banks have to ponder as to how their economies are absorbing the unprecedented injection of liquidity. The key indicator to watch out for is interest rates. Of course, countries like Denmark and Japan can't increase interest rates given the weakness in their economies. Most other nations would be comparing notes at the World Economic Forum in Davos.

Note: Interest rates refer to nominal rates, i.e. without taking inflation into account.
Source: Wall Street Journal

01:35

Speaking of central banks, the Reserve Bank of India (RBI) released its third quarter review of the Monetary Policy today. It has hiked the cash reserve ratio (CRR), the ratio at which banks maintain cash with RBI (as a percentage of their deposits) by 0.75%. It is meant to suck out liquidity to the tune of Rs 360 bn. Interesting to note that the RBI believes that its monetary measures will be of little consequence unless the government mends its ways. In our view, this watershed event marks the bottoming out of the easy liquidity scenario which unfolded since late 2008. However, the reversal of accommodative monetary stance cannot be effective unless there is also a roll back of government borrowing.

02:02

We all know what a cracking year 2009 turned out to be for the Indian auto sector. Pickup in economic growth and the government stimulus program emerged as the key demand boosters. So, will the sector be able to do an encore in 2010? Indeed, if a leading daily is to be believed. The Indian auto sector is likely to witness an overall growth of 10%-12% in the current calendar year. Passenger vehicles are expected to log in a growth of 12%-14%, while commercial vehicles are expected to grow at a lower rate of 5%-6%. It should be noted that growth for April-December period for these two segments has come in a lot higher at 25% and 23% respectively on a YoY basis. And hence, to that extent there could be some slowdown in growth. Furthermore, not all segments are expected to rake in similar growth rates, especially amongst CVs. It is the light commercial vehicles and high tonnage vehicles that are likely to steal the show.

So, with a robust growth in volumes, is the performance on the stock markets expected to follow suit? We do not think so. For one, the fight for market share is going to intensify, thus affecting profitability and secondly, the stock prices have run up to such an extent that the upside in volumes seem to be already reflected in the share prices. So, while Main Street will continue to chug along nicely as far as the auto sector is concerned, Dalal Street may just not follow suit.

02:59

The IPO market is indeed a delicate one. That is because the promoters of the companies always attempt to get the best possible price for their issue. To make that possible, market conditions have to be close to perfect. And investors need to be in a happy and optimistic mood. Investors often overlook many negatives like high valuations and shaky fundamentals when in such a mood. Not surprising then that when the optimism wanes, IPOs are the first to get hit.

Well, we are in the midst of something similar currently. Markets have been seeing red for the past week or so. Investors have gotten shaken. Some small IPOs that were unfortunate enough to have opened during this time are now falling flat on their face. As per a leading business daily, the Rs 1.5 bn Aqua Logistics IPO that closed yesterday has been subscribed only 40%. Others like Thangamayil Jewellery , Syncom Healthcare and Vascon Engineers too are seeing a pathetic response. Everything said and done, the wise investor realizes that the odds are stacked against him in an IPO. In short, with 4,000 plus companies already listed on the exchanges, it indeed makes little sense to play the unfavourable IPO game.

03:45

Warren Buffett and Nouriel Roubini have said that this man saved the US economy from going to the dogs. Others like Marc Faber have been against his policies. His critics had a strong case against him - of postponing the pain for the US economy into the future. But most of them still feared that his rejection as the head of US central bank for a second term could make the Fed's policies worse, not better.

So there you are. Ben Bernanke, the Chairman of the US Federal Reserve, has been confirmed for a second term by the US Congress. This vindicates the stand taken by his supporters. They thought that the US economy was badly injured during the crisis and required radical surgery. Hence, it made no sense to change the surgeon now that the patient was starting to recover.

With Bernanke back in the hot seat, and for the next four years, it would be interesting to see how he acts to sustain growth for the US economy. After all, now is the time that he and his team would need to begin reversing a record monetary expansion. And this without undercutting the fledgling recovery in the world's biggest economy.

04:30

Meanwhile, the Indian markets witnessed an extremely volatile session today as alternate bouts of buying and selling were seen throughout the trading session. Despite several attempts to pare their losses, the markets could not manage to rise over the dotted line. At the time of writing, the BSE-Sensex was trading lower by about 132 points or 0.8%. While banking and capital goods stocks were in favour today, those from the IT, telecom and metals spaces bore the brunt of extensive profit booking. Other key Asian markets ended the day on a negative note.

04:51

Today's investing mantra

"Rationality is the only thing that helps you. One thing that could help would be to write down the reason you are buying a stock before your purchase. It clarifies your mind and discipline. This exercise makes you more rational." - Warren Buffett.