Indian Stock Exchanges Going Global?

I have written previously about how global markets are getting more integrated and showing signs of high correlation.  Regarding this, I had also highlighted the point of imperfect information dissemination and how domestic markets have changed.  The previous article talked about how exchanges and other capital markets, which were earlier domestic in nature, especially of emerging economies such as India have now gone global or have initiated the process of doing so.

A valid concern then arises whether any of our stock exchanges have the ability and necessity to become truly global. Ability? Of course yes. India enjoys a strong technological advantage, thanks to its IT sector. Supplemented with the appropriate investor friendly policy environment, India has better chances in comparison to its competitors. Furthermore, necessity, as economics teaches us, arises from a near inelastic demand curve. And presently, I would say that this inelastic demand is present in the form of the huge investor interest in the growing returns of the securities of Indian capital markets.

As I write, the US short term interest rates are close to zero, and the US long term rates are around 2-3 %. The interest rate prevailing in India is currently around the 6-7 % range. Thus, this vast interest rate differential makes a compelling case for carry trade. But cash- laden investors in the West are looking for even higher returns in the form of equities.

The question we should be asking to ourselves is that, can Indian stock exchanges make it big on the international stage in the next 10-20 years? I say yes.

India is among the many emerging economies that they consider and competing for the same factors of production and markets for its production. The race to fight for these economic resources and markets for sale has only intensified since the economic crisis begun.

The race for other factors of production shall continue, but I would like to focus on capital as the most necessary factor for the coming years. Capital is a very important input for growing economies and if India needs to sustain existing growth levels of 9%, it has to tap external savings and investments. In simple economic terms, investments in an economy are equal to the domestic savings, budget surplus and net imports. Hence increasing capital inflows in the form of foreign investments on the NSE traded stocks will be a great boost to the Indian economy.

Just recently in May, when the government announced plans for compulsory 25% stake sale in all listed public companies, there was a lot of hue and cry over whether the market would have enough liquidity to absorb  so much of stake sale. The estimated amount of equity issuances over the next 3 years is around $30 billion. This amount is trivial in comparison to what large corporations in the US issue. For instance, HP is planning to come out with a $33 billion bond issue in the coming weeks.

Another important factor is competitiveness among the national exchanges itself. NSE is closely followed by BSE and another MCX-SX is waiting in the docks If not NSE then there will be some other exchange. But in my opinion, with its current position in terms of the market position, management and technology advantage, NSE is the most amenable to such expansion.  

NSE has recently signed a cross listing agreement for futures of flagship indices with CME and earlier with SGX, but these listings are just to give foreign investors a feel of Indian markets and assist  in portfolio diversification. The real deal will be when the NSE can convert the volumes and listing numbers the large foreign bourses boast about.

My last argument for having such high hopes of seeing an Indian stock exchange reach the heights of a global exchange is the comparative advantage Indian capital markets have over other emerging economies markets. In the recent World Economic Forum’s Global Competitiveness Index, although India fell two places to 51st rank, its financial markets were rated 17th across the world. This shows how the existing level of competitiveness in the Indian exchanges and the future can be built on this grounding.

The IMF or EMF??

We rise in glory as we sink in pride. This is what I have to say to the EU leaders and ECB officials, as they quickly dismiss any talks of an IMF rescue for Greece. The IMF seems to me the best way out for Greece with all its fiscal mess and politics involved in the matter. Let’s face it, that today no eurozone country is audacious or willing enough to get into this ‘delicate’ issue of sovereign default and debt assurance, specially after grinding through such terrible economic times. What Greece is looking right now is for some generous donor to grant an easy loan with low interest rates and in return it will promise to cut down its fiscal deficit by adopting real disciplinary measures.

Here are a few reasons in a nutshell as to why I feel Greece’s bailout is a ‘delicate’ issue:

ü      Any loan or bailout money provided to Greece would be along with a number of constraints attached to it. Nobody would be willing to give a ‘no-frills’ loan to Greece considering its past record of conceited accounting practices and inexperienced policy makers. It is obvious common sense that any entity would like to protect its investment and make sure it oversees its utilisation.

ü      Secondly, there is an inevitable political angle as well which needs to be looked into. There already massive protests across Greece by its unhappy citizens over the government’s resolute commitment to cut public spending and public sector pay freezes. Already unions have endured enough, and one feels that the tipping point is not far away. Thus, in such a heated political environment, having foreign country or interests dictate control and supervision over its policymaking will further add to the fire.

ü      Thirdly, all hopes of the Euro’s future are hinged on a quick, transparent and stable Greek recovery, as the fear of contagion spreading to Portugal, Italy and Spain is high. As a consequence, any hiccups in the bailout may cause sharp reactions from bond markets. Which leads to my argument that what is required is a patient and calibrated approach, but not many would be looking at long term scenario, except the IMF.

Who will take out the chequebook?

Setting aside the IMF as one major contender for this job, let us examine who are the possible contenders. First on the list is the EU, which cannot explicitly bail Greece out as per the treaty clause which governs its functioning. Second, would be unilateral loans form the rich and prosperous European states, which in its current circumstances narrow down to Germany. Germany is the real powerhouse of Europe, also being one of the main beneficiaries of the introduction of Euro currency. Thus, more than an obligation, the last thing Germans want is a euro collapse in a fragile recovery period of today.

But, the German public is outraged by the idea of bailing out the profligate Greeks with their hard earned savings. To me a German bailout looks less probable than a German supervision. This leaves us with only 2 remaining choices. One is a real institution with more than 60 years experience of handling such cases, none other than the IMF. The other is EMF, which is fictitious and is a yet to be started fund. And so one feels the idea of EMF is promoted purely on pride and less logic.

It drives me nuts to read how EU policy makers are so blindly hopeful on setting up the European Monetary Fund as it is currently named. The IMF is clearly a better alternative even though the setting up of EMF is great for future crises but not the present Greece concern at hand. In simple terms, on having met with an accident does a person go to a experienced and reputed hospital, or does one choose go to a new, inexperienced and a politically correct clinic. Of course one chooses the former over the later. Then why make a distinction here for Greece.

Greece certainly needs help, and IMF for me looks like the safest bet. Disillusioned European leaders and policymakers need to shun their pride and also look at another positive from it. An IMF rescue will set a good example for the rest of the eurozone nations. An EMF rescue even if possible will imply a ‘too big-to fail’ guarantee, which will make future defaults even more dangerous.

Right To Banking??

Yes you read it right, coming shortly to a political theatre near you! After the super successful populist agenda on the Right to Education and the work in progress i.e. Right to Food, here comes the much awaited sequel ‘Right to Banking’!! If you thought two additional rights were enough to send you back to your Civics class in school, well here is another one.

Well I am not this hyper always, but the way the government is selling this in the newspapers does deserve such enthusiasm. Almost every other morning, there are articles by civil servants and the who’s who in the govt. pledging their allegiance to the cause of financial inclusion. The day is not far when ‘financial inclusion’ moves to the more populist and sympathetic name of ‘right to banking’.

The hype surrounding financial inclusion has been influenced our minds so much that we cannot even think beyond what is being presented to us. In a classroom discussion, when I raised my hand to put forward objections to the government’s drive to push and force commercial banks to open up more branches and extend services to rural India, I was told to keep quiet. It was as if I had committed a sin and even the slightest leaning towards capitalism in my speech would be enough for them to brand me an arrogant elitist. It came as a rude shock to me, has the issue become totally one sided? And if yes, what happened to our democratic moral of free speech and opposition.

One has to give some credit to the government for making financial inclusion a buzzword in pink papers. The RBI has tried moral suasion to ask banks to extend their services to the unbanked rural population. But now with the fresh issue of banking licenses to be issued by end of this year, the RBI is going to indirectly force more rural coverage by the prospective bidders as an important prerequisite for the license. This should be a source of worry for the existing commercial banks, especially the foreign banks which already having drawn big plans for urban expansion, might have to rework their strategy.

As a part of Manmohan Singh’s government’s pledge towards inclusive growth, financial inclusion is being seen as a separate issue altogether. Financial inclusion is really just one of the many a component of the overall inclusive growth strategy. Other things such as social inclusion, education, healthcare, infrastructure and energy requirements etc. must go hand in hand to make financial inclusion happen. By just simply opening bank branches will not help the cause.

Account Opened, Now What?

Infrastructure is needed in the form of roads connecting bank branches, security and law& order to protect deposits, communication to connect the banks computer networks and housing for the banks staff. Opening an account is not the last step; the average rural illiterate has to be taught how to operate the account, the details of interest and deposits, rules and nomination policies as well as the procedure for consumer grievance redressal.

Just handing out the money to the farmer is not the end of the story. The farmer also has to be supported and encouraged to improve productivity, has to be given access to electricity and meet his other energy needs, has to be part of holistic community development and most importantly, he has to be feel social included. Only then can the bank expect to receive back the principal with interest. Otherwise it would have to wait a few decades for another populist government to come and waiver off its loans.