Monday, April 03, 2006

MSN Strategy lab

Interesting take on ICICI

As for Suntech Power Holdings (STP, news, msgs), which I hold, and ICICI Bank (IBN, news, msgs) which I dropped, the outlook is mixed. Suntech is involved in the planned floatation later this year of a second Chinese solar company, this one a power generator. The full details of how the future initial public offering on the New York Stock Exchange will be structured, and what the price will be, are unknown. But the assumption that Suntech will be hurt if one of its customers goes public is just silly.

ICICI will be affected by the Reserve Bank of India (the central bank) examination, slated by the end of July, to decide whether to lift all exchange controls on rupee capital exports. Currently, India allows some modest capital exports to invest outside the country. But, to date, most of the liberalization has involved current-account capital exports -- sending or spending money outside India for trade-related transactions.

If the capital-account liberalization goes forward (it did not the last time the New Delhi central bank toyed with the idea), the effect may be to enhance the fees going to Indian banks like ICICI. But ICICI may also face increased foreign competition as the ceiling on foreign ownership of Indian banks will probably also be lifted from the present 5%. India intends to turn Bombay (Mumbai) into a regional financial center; to do this, the silly rubber-stamp raj has to be got rid of.

The country has foreign-exchange reserves equal to 13 months' worth of imports. Its booming stock markets can grow even higher if foreign money can come in without the cockroach trap (that it cannot go out again).

Emerging-market funds, non-resident Indians, institutional investors and Indian funds -- are all waiting for the Reserve Bank of India to move. Then, there will be more inflows, a stronger currency and a better stock market. But right now, the Sensex (The Bombay Stock Exchange's 30-stock benchmark sensitive index) is the best in the world.


Blogger chompi said...

Rajesh, nice find. Its true. Indian Fin ministry is widely expected to float the rupee. If not right away, the baby steps will begin to be taken this summer. Both Chidambaram and PM Manmohan Singh have indicated in many speeches and interviews - but always adding caution. There are a lot of critics of this strategy as it is largely viewed that the tight controls on Rupee convertibility is what prevented India from being swept away in the 1999 Asian Crisis. But this time - they say - its different. The time has come. Anyways, if you look at a Purchasing Power Parity basis (slightly outdated data from CIA factbook), Indian Rupee's FMV is 10 Rs to 1 US Dollar. I doubt if Rupee will rise that much but once the floodgates are open, watch out for Rupee value increases. Combine that with the well anticipated (with bated breath that too) US Dollar meltdown and you have a potential for a Rupee Bonanza. Alas it may finally be true - Sabse badaa rupaiyaa!

9:45 PM  
Blogger chompi said...

One more comment on the effect of rising currency value - on Banking. Think of it, when the underlying value of the currency falls, what you hold in the bank is worth less than what it was before the fall. Conversely, what you owe to the bank is worth a lot more to you (when its time to pay the installment) than it was before the fall. Similarly, when currency rates go up, what you hold in the bank is worth more. Hence even at constant interest rates the interest you earn on existing deposits is worth more. Conversely, what you owe to the bank seems cheaper, because the installments are "affordable" (on a relative basis). When it comes to banks, their lending rates of return fall under rising currency environment. To compensate, they are forced to raise interest rates (including the Central banks). Rising interest rates (eventually) hurt rising markets. So be careful when you see the potential for a Rising dollar. There is a lot more to it than meets the eye. Also, the caution I am providing may not be enough, or it may be overblown. For example, such interest rate cycles fuelled by currency value changes may last over several years.

9:58 PM  
Blogger chompi said...

Sorry i meant Rising Rupee not Rising Dollar when i said "So be careful when you see the potential for a Rising dollar"

10:01 PM  
Anonymous Anonymous said...

very good posting for reader and investor
Gold Trade

3:33 AM  

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