The Rupee has been surging against the dollar again (it’s approaching 39:1; see an earlier discussion here), and according to the New York Times, the instability in the U.S. market in recent months has led investors to pour money into Indian corporations:
Fueled in part by overseas investors seeking refuge from America’s subprime mortgage mess, share prices in India’s markets have outpaced other Asian markets in recent weeks. The Bombay Stock Exchange’s Sensex index set records on 10 of the last 11 days, before closing slightly lower on Thursday at 17,777.14.
The Sensex is up 14.6 percent since Sept. 17. That follows months of somewhat slower gains — the index is up 28.9 percent so far this year, according to Bloomberg Data, and up 102 percent (0r more than double) over the past 24 months.
The real estate company DLF, for example, which had a $2.3 billion initial public offering in July, now has market capital of more than $37 billion — making it roughly the size of Marriott International and Hilton Hotels combined. On Thursday, the company said it would consider overseas acquisitions and offshore fund-raising at its next board meeting.
Reliance Industries, the largest publicly traded company in India, reached a market cap of more than $85 billion this week, up from $6.5 billion in January 2003. Reliance, an oil, chemical and manufacturing company, is now about double the size of Dow Chemical. The market cap of Bharti Airtel, a telecommunications giant, nearly reached $46 billion this week, making it triple the size of Qwest and larger than Telecom Italia. (link)
Those are undeniably impressive gains — and it’s interesting to see companies most Americans have never heard of reaching “blue chip” valuation levels (for more on market capitalization, see Wikipedia).
But — am I right to be worried about a possible bubble?
This kind of short-term influx of “hot” money is not a good sign (ask the rulers of Thailand and Malaysia; growth in their markets was almost totally fueled by hot money after the plaza accords, we know the rest). On the positive side though, India has more rigorous capital controls (which IMF does not like, by the way) and the RBI holds a lot of forex reserves for its open market operations. So I’m sure the peeps at RBI and the SBI (state bank of india, one of the largest currency traders in the indian market), are keeping a colse eye on things.
Even if there’s sustained growth to follow? Interested to get the reaction of wiser econ heads than mine.
Amardeep asks: >>But — am I right to be worried about a possible bubble?
Over the short term (1-2 years), there’s bound to be a correction in the Indian markets. But in the medium(3-5 yrs) and long term (5+years), Indian markets can only go up. India is a spring that has been coiled for the last 1000 years. In absence of a major world event, it will do what it did before – contribute to approximately 25% of the world’s GDP.
M. Nam
I forgot to add that the fact that the rupee is not fully convertible is an example of “more rigorous controls” i was talking about above, and that is also partly the reason why the RBI has safety options.
I think Ajay Shah has a couple of articles on convertibility on his blog last few days. Have not had a chance to read it yet. Also, Sigh! said it right that such hot money wont be good but a lot of lessons have hopefully been learnt from the Asian crises of the late 90s. At the same time, the balance sheets of Indian companies have been relatively solid in recent times which makes the chances of a bubble a little less. Also, the dollar falling across the board wrt currencies and has reduced the effective debt which makes the balance sheets better. So hopefully, the companies are not sitting on air and it’s not as big a bubble. Econ pundits please comment…
Wow…all I can say is wow…I know this company, they’ve developed half (if not more) of Gurgaon, with some very nice and stylish apartment buidlings, shopping areas, and malls. It’s amazing that they’re THAT HUGE though.
Anybody know how big Unitech is (and if they’re grown as impressively)? They’re another major real estate development company in northern India.
I think a slight correcting but no real burst. The trend should remain the same.
Let’s not confuse things. 1) The Asian Crisis took place because there were a LOT of US dollar denominated loans held by Thai citizens and companies. When their currency tanked due to Soros & Co it basically meant they ended up owing more money than they originally borrowed. That’s the Asian Crisis in a nutshell.
This NOT the case in India. So let’s not bring the Asian Currency Crisis into this at all.
2) Is this a bubble? Nobody knows for sure. The Economist thinks so, and has been saying so for sometime. But that was the sensex was at 14,000 and the rupee was at 45 to the dollar, and inflation was at 6%
The sensex is waaayyyy past 17, the rupee is at 39, and inflation is down to 3%. None of these figures mean anything btw, but hey why not just throw them in! The Economist pointing to rising house prices (most Metro Indian cities house prices a ridiculously high these days) the usual infrastructural constraints and a high govt. deficit.
These indicators do point to a bubble. The question is how big? Is it something which causes a collapse, or is viewed as a short-term correction? Even the world’s best economist cannot forecast that correctly.
Some things are within our grasp in the short-term however, even that is not entirely true though. The rising rupee may lead to a dent in Corporate India’s profits. May. Even the lesser known Software Companies like HCL Technologies are aware of concepts like currency hedging, considering their exposure to foreign markets. HCL for example actually made a larger profit in the last quarter, despite the shocking rise of the rupee. Furhter, a stronger rupee means cheaper oil for India. This is a Good Thing and will offset inflation. So again – is the economy overheating and heaing for a fall – you cannot entirely say at this point.
The proof will be in the coming numbers – what to watch for:
1) Corporate India’s results for the next 2 quarters 2) House prices 3) Interest rates (these have remained stable, after a sharp rise, then a mild fall) 4) The results of the Economic Survey for 07-08 – is Industrial Output up? The monsoon has been poor this year, so that will dent GDP by some amount – but again by how much – the relevance of agriculture to the Indian Economy is reducing, faster than is assumed because all the publicity that “The Real India” gets.
Ok it’s late, and I have no idea if I’ve even made an iota of sense. But in conclusion I would like to say that no – there isn’t a bubble. The fundamentals are very strong. But, there will be a correction, because most foreign investors expectations are being tested, as are local investors. Everybody has their finger on the sell button, because such an upward swing in all of India’s indicators has not been seen in long, long, long time, and nobody quite knows how to handle it, and 5000 years of history tells you that disasters occur every so often. 🙂
Me? I’m regretting cashing out on my shares way back in 2005, when the f-ing market was at 7000 !#$@#!$@$#@#$@$@ 2)
You should get a prize for this, since economists and political scientists are still debating the causes of the crisis :). But seriously, that is only one of the hypotheses, and a very small part of the story. Also I wouldn’t be too blithe in declaring that the baht collapsed “due to soros and co”. You have to look at the high level of non-performing loans in thai banks and other long-term financial indicators. Also,thai citizens could hold dollar denominated debts because the baht was fully convertible (compare with the capital controls that mahathir imposed in malaysia after locking up his finance minister anwar ibrahim).
The last couple of years have seen a very big surge in asset prices across the globe. So, there is quite a bit of nervousness all around. There’s even talk of DOW 14000 being a mini-bubble considering all the headwinds.
Over the short term, 3 years and in, there might well be a significant correction in India. That said, over a 10 year horizon, India’s story would be dependent on how well it executes its infrastructure projects and attracts a manufacturing base. If that goes as planned, I wouldn’t be surprised by a Rs.25 dollar and BSE 25,000.
Real estate in India is something I just don’t get. It is so out of whack compared to incomes. I have been calling a bubble in Bangalore real estate for the past seven years. One tenacious bubble, one clueless fool.
i hope it isn’t a bubble. the manner many companies in Banglore do contracts with their employees is by giving them small shares of the companies — which i think the times article also mentions. so the india bubble burst, i think, would be way bigger than the internet burst of 2001 and the recent real estate burst combined.
but i don’t think that is the case. as MoorNam said,
i sort of agree with that.
Much like Amrita above, I’d be interested in hearing from a trained economist.
But from what I can gather, it is unlikely that the Fed or the other Central Banks that hold the dollar, will allow the dollar to continue to devalue, a dollar worth $25 will kill China’s (and India’s, incidentally) reserves and will cause rocketing inflation in the US(stemming mostly from higher dollar prices to be paid for fuel – and any other thing not imported from China). Definitely not a likely event — the Fed would much rather force the economy to a controlled slowdown than such a ghastly devaluation of the dollar.
It is precisely because of the low interest rates and the devaluation of the USD that institutional investors are increasingly keen on parking their money in developing economies. For most institutional investors/NRIs, their loans (even in the current “credit-crunch”) are at much lower rates — definitely less than 7%. That is the reason why real estate etc. in India continues to rise, even though interest rates for loans within India are crazily high (11% or so).
Housing is typically a strong economic indicator; that together with India’s sustainable unemployment rate provides much of the assurance required for a bull market. Will that contiue? I have no idea. But it seems that a lot of the BPO/IT Services revenue will dry-up if the American economy flounders. How large a fraction of India’s GDP stems from BPO/IT Services?
DDiA
I don’t think the dollar would continue to broadly devalue. However, the higher growth rates seen in China and India will have to affect their currencies some day. Otherwise, they risk stoking inflation locally. That’s why I think the rupee will continue to appreciate. My comment was on India’s story, not so much the US’s.
India’s BPO/IT sector is only about 7% of its GDP.
The thing about trained economists is that there is no concensus on what will happen. If they could figure it out, they would be very very rich, wouldn’t they?
yeah, this deferring to so-called “trained economists” sorta grates; i would go to a practitioner (currency/bond trader) any day before taking the opinion of “trained economists” (trained in what? i wonder).
12 · DDiA on October 8, 2007 02:22 PM · Direct link
“Much like Amrita above, I’d be interested in hearing from a trained economist.”
Visit http://www.indianeconomy.org. I comment there sometimes, but mostly I learn.
Has India seriously considered pegging the rupee to the dollar?
10 · SkepMod on October 8, 2007 02:06 PM · Direct link
“Real estate in India is something I just don’t get. It is so out of whack compared to incomes.”
It is terribly out of whack by American and European standards where home ownership is not a privilege but an economic right. In Asia, Africa and most of Latin America, people work a lifetime before they can buy.
Amardeep, if Indian economic progress continues even at a more moderate growth rate, I don’t think you’ll see a bubble. What will be interesting is the rising cost of living and its impact on the rupee. I think that what helps keep inflation down is actually the staggering poverty. Sick, yes?
Even if the U.S. (magically) pulls itself out of its sluggish debt-ridden economy it wouldn’t bite substantially into India’s currency gains. At least, I don’t think it would 🙂 [who am I, really to conjecture? Certainly no Alan Greenspan] As for the dollar devaluing. I certainly hope it doesn’t devalue further, but at this point the issue is bigger than the interest rate. The Fed has been screaming for years for correcting our trade and government spending deficits, but it doesn’t look like that’ll happen anytime soon.
TTG, I think your analysis of the Asian financial crisis is a little cursory. It wasn’t just that Thai money was bonded out — there was effectively a run on currency and about eight other things that happened simultaneously. It would be pretty hard for those factors to align for India in the same way given that some of the very basic aspects of the financial market (and its controls) are different, but it’s not an impossibility.
OK, Camille, add me to the list of people who crush on you…is there NOTHING you can’t speak intelligently about? It’s awesome and a little intimidating at the same time…well, I’m still going to disagree with you sometimes! Not here though since this topic is out of my league.
I agree with sigh, I think short term institutional investment has created a lot of volatility in the past, the thing is I don’t think people are only investing in Indian stock markets as the US markets are going down. More on this later.
not sure about a bubble burst, but some stock analysts definitely predict the foreign/emerging market as a whole going a bit sour or correcting itself under the pressure of all these records being set in foreign indices.
I know nothing about finance, but can you invest in currency? Can someone convert, for example, $30,000 into rupees and in a year or whatever convert it back into dollars?
I only thought about this because I had 20 canadian dollars, for some reason, lying around the house and now it is actually worth the same as 20 american dollars. This was the single greatest return on a investment I have every made and that was by accident.
Haha, thanks Amitabh. I think I just sound more knowledgeable than I actually am — please don’t take any of what I’m saying too seriously; I’m just thinking “out loud.” I also don’t tend to post on threads I know nothing about, or I post something uninteresting or superficial. Now I’ve given away my internet-MO 🙂
ST, yes, you can invest in currency (these are “capital markets“, not to be confused with (K) capital). This is generally a securities market. Just for my own understanding, I find it helpful to think about a bond (i.e. buying a government’s debt) as an easy example. Based on who’s buying, the value of the bond, the risk, projected interest rates, etc., you see currencies appreciate and depreciate (just for clarity, I’m assuming the domestic interest rate in country X is the “price” of money at the time).
WGiiA (et al.), I totally think that the market will “self correct” a bit (it certainly will slow down), but I’m not sure if that would lead to a widespread devaluation contra the dollar. Perhaps we’ll see currency devalue more significantly against the Euro or GBP?
Oh, this is a much better intro to financial markets (I think my definition — capital — may have been too limiting).
Skep Mod, thanks for putting it into perspective. It is just that a 25:1 ratio seems too unlikely right now. That kind of ratio will wipe out most of the 7% of the Indian economy stemming from IT/BPO etc. That, and devalue India’s foreign exchange reserves which are almost all in US Treasuries, right? If that happens, how will India finance the huge infrastructure projects that it currently dreams of?
And sigh!, I don’t think all bond traders really understand the markets, not even good bond traders — that is why they typically don’t make directional bets. Infact, a central banker is probably the best person to answer our questions 🙂
If the Indian companies start making acquisitions abroad and use their stock as a way to pay for them, then that is a sign that their stock is over-valued.
Not quite. There are lots of reasons companies are setting up IT/BPO offices in India. I think much of the salary arbitrage will erode, and its possible much if it has already. Given high attrition rates and salary growth, companies have started to outsource to Eastern Europe etc. However, salary is only part of the allure. The net basically “plugged” India into a global talent pool, and companies are setting up development labs, etc simply to tap into this vast source of people.
No bubble. Even 2 years ago no one predicted that the sensex will touch 17K. Earlier this year it was 12K. Do I predict that the sensex will touch 50K in 3 years. Yes but i wont bet my house on it.
Last time I checked India has the second largest internal consumption in the world. The Indian economy has a lot of ‘old economy’ firms and the resources boom has had a major impact on India. IT/BPO are visible but the economy will do well even if that sector were to collapse.
the opposite is true – when the US economy tanks more offshoring occurs.
Amitabh:
Was it something I said?
not sure if anyone else cited this before, but this August article explores how indian businesses should respond to challenges of a strong rupee (although some predict the rupee will weaken somewhat in relation to the dollar by the end of the year as foreign fund money dries up a bit) :
http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4218
^ terminate your pacs. Call me.
Way too much is made of the ‘strong rupee’ phenomenon and how it is going to hurt Indian business. Essentially there is little difference between currency and any other commodity. When the rupee goes up, it is surely harder to sell your good or service outside the country. However it is cheaper to buy inputs, such as manufacturing materials, computer hardware etc, which will allow you to provide cheaper services. Sure it doesn’t add up exactly, but overall it balances out pretty well.
A strong rupee could certainly dent profits in large corporations that sell abroad. However it is also an opportunity for smaller businesses, as they will be able to buy cheaper foreign skills, and acquire foreign capital with more ease.
Problems arise when the government interferes in the value of the rupee. The sooner that they free the rupee, the less they will have to worry about the effects of its fluctuations.
28 · Whose God,
That article by Jitendra Singh makes much sense to me. Twenty years back while filing my application for the GRE, I paid Rs 12.85 to the dollar and I thought it was too much. Yet, at Rs45.00 to the dollar more Indians earning in rupees were traveling abroad and spending lavishly than 20 years back. The Indian economy is doing well and raising many more people to higher worth, than 20 years back. The companies that are using currency arbitrage as their sole competitive advantage will have to adapt to change their model, for the greater good of the Indian economy that comes from a stronger rupee, including cheaper oil.
30 · Roger,
The Indian government should not make the rupee completely convertible, since that will lead to flight of short term money from the Indian stock market and will create big swings, since foreign institutional money is still such a big percentage compared to domestic savings in the stock market.
I guess the FIIs see the Indian Economy as a parking spot for now. The market is definitely overvalued and a correction is overdue (upward of 600 points). You will see this cycle every few months. Sensex zooming and then being corrected. The fundamentals seem strong and a lot of the growth you see is fuelled strongly by domestic demand specially infrastructure related sectors. The market will likely cross 25000 in the next 2 or 3 years. But I hate the fact that the rupee is rising so fast. My savings are beng eroded @ the speed of light. Real Esate prices in Mumbai and Elsewhere are above the roof and unrealistic.
Anways, The growth story is here to stay…
European standards where home ownership is not a privilege but an economic right.
Europe is filled with life time renters. Home Ownership figues for Western Europe are much lower than rest of the world. Germany, France, Denmark, Austria have homeownership rates between 50-60% compared to 80% in India n Mexico.
The bubble is not specific to India. If you look at last two years, BSE chart seems to be almost identical to broader EEM (Morgan Stanley emerging market index) chart. [link] This synchronization probably implies a strong speculative program-traded FII component that is divorced from economic fundamentals of India. Consequently a correction might overshoot and create opportunities.
What? 80% of Indians own their own homes? Whoever made this estimate included dwellings made of clapboard and dried twigs, I presume.
Thats crazy! I’m not much of econ nerd, but how can an ipo rise from $2.3 to $37 billion?
it is a bubble. all this euphoria is misplaced when you have more than 80% of the population living on $1 a day.
@ #8 TTG:
I vaguely remember studying the 1997 Asian crisis in international finance class (my prof. spoke poor English). Well, do you think India could fall into the Argentine crisis of 2001? In one simple sentence, the Argentine crisis was about the middle class of Argentina becoming rich or poor.
1)To begin with, the fundamental equation of international finance says that the currency market is in equilibrium if Currency supply = Currency demand. Currency supply is comprised of exports and capital imports. Currency demand is comprised of imports, capital exports and currency purchases of the country’s central bank (CB). Thus: Exports + Capital imports = Imports + Capital exports + CB; Net exports = Net capital exports + CB. This equation says that if a country has a negative current account balance it must borrow from foreigners to finance this deficit, or the central bank must sell currency reserves.
2)Debt crises are often followed by currency crisis. The huge liquidation of foreign investments creates a very high supply in the domestic currency, which leads to strong pressure on the currency to depreciate. If the country’s currency is pegged to another currency, the central bank is forced to buy domestic currency and sell its currency reserves to avoid depreciation. The reserves are not everlasting, and after a while the peg must be surrendered and the currency depreciates dramatically. This shows why too much foreign debt is dangerous for countries.
-Why? First, liquidation of assets and the self-fulfilling expectations of a debt crisis can cause a debt crisis. Second, an expectation of depreciation of the domestic currency intensifies this development because the longer investors hold their investments the less these investments are worth. Thus foreign investors are eager to pull out their money before it is worthless.
3)Regarding Argentina, whose currency (peso) changed due to the increasing debt as a percentage of GDP. Pesos circulating in Argentina had to be backed by US dollars in reserves in Argentina’s Central Bank. The peso was overvalued because it did not accurately reflect the state of the economy. Therefore, exports became uncompetitive due to cheaper goods from neighbors, such as Brazil, and the overvalued currency encouraged imports. During the 90’s, Argentina had a high inflow of foreign investment and foreign debt began to increase to cover the costs of the increased imports. Economically speaking, Argentina became uncompetitive. They spent more on their imports than they received from their exports, worsening the recession the country had entered in 2001. Because the peso was pegged, the exchange rate couldn’t fall, so prices and wages fell instead.
Sigh All this info, after writing a paper on the Argentine crisis of 2001. Perhaps the Rupee could become overvalued…. increasing imports/foreign investment (primarily, US investors) leading to a recession? :/
I need to take more economic/finance classes beside reading the economist 😉
Wiser heads than mine are not necessarily professional!!!
speaking of asset bubbles.. property prices in mumbai are just out of sync with the incomes.. its got to a stage wherein a 500 sq ft ( :-o) property in central mumbai costs over 100,000 USD .. the middle class ( even the upwardly mobile ones !) are completely priced out.. interesting part is, newspapers report that sales have slumped in the last 6 months but builders have made so much money that they are willing to sit out the slump and not offer flats at cheaper rates !!!!
The real estate market of India is in an ABSOLUTE bubble. There is an artificial shortage of properties (mainly land to be developed) in India, because of old archaic land laws. Ends up in “shortage” of land in the 7th biggest land mass countries in the world.
Even Indian stock markets are becoming toppy. Having said that, I am not surprised by
As early as 2006 Oct. there was a rumor that Reliance Petro was going to buy Dow Chemicals. It didnt happen.
Vinit,
They are sitting on piles of inventory as the carrying cost is not so high, I have a friend who is a builder in Bombay and a lot of his financing is through friends and family through a lot of their undeclared income. RC, reliance is on a dream run, even after the break up between Mukesh and Anil, most of their companies in terms of valuations have crossed the pre break up levels. The companies are doing well due to increased domestic consumtion, that is why if you see the trend, the Indian markets are not moving in sync with American markets. Yesterday the Sensex had the largest single day gain of 788 points where as the DJIA closed marginally down.
User, word! If this is the case, sustainably, imagine how foolish the owners of the company must be feeling for leaving that kind of cash on the table!
And thanks for your second note on Argentina.
can you explain why?
Also, is there a difference between external debt and foreign equity investments. It seems like India doesn’t have as much a debt problem as it has an asset valuation problem. Much of the foreign money going in now is in equity. Could there be a run on equity investments as there was in Argentina?
shallowthinker is funny. love the deadpan delivery 🙂
may it continue inflating…
dipanjan has put up a rather insightful plot, everyone should take a look at it.
Didn’t the professor (with apparently “bad english”) tell you about the relationship between currency markets and the stock market? you should know that currency traders base their decisions also on their evaluation of the stock market. Look not to be snarky, but the relationship between the two markets is beyond finance 101 or international finance 101. I am not a “trained economist”, but have seen plenty of statistical models of asset pricing….
Clearly not just the professor.
Just a small clarification. DLF raised about $2.3Bn for a little over 10% of the company. So the market cap to start off was about $23 Bn. A 60% rise in market cap in 3 months does not seem out of the ordinary.
Absolutely correct barbad, recent example in the US is VMware where the ipo debuted at around $29 and the stock is trading at above $100 right now. On a separate note DLF will replace Dr. Reddy’s labs in the BSE benchmark index.