I’ve moved to Bangalore, and have achieved one note of significance: Varun’s school admission to a school that we thought would suit him best. To compensate, we now struggle to find a house to rent in the Sarjapur Road area (where the school is closest – my priorities are that the kids need to travel the least amount!) That goes on, so if you know anyone who has a house vacant in the vicinity, please do connect.

Coming to things more sanguine: I have been listed under people to follow in Outlook’s cover story on Twitter, in the Corporate section. I’m not sure how I ended up there, ahead of much better corporate people, such as @agrawalsanjeev (ex-CEO at Big Bazaar) or @anandmahindra (of M&M fame). I will of course take all the credit I can get, so let me not be modest and say I didn’t deserve it, even if I didn’t.

One thing that worries me is the impact of the budget on foreign fund flows. Let’s see what we know:

  • We import a lot more than we export (The trade deficit as of Feb 2012 was $166 billion, much higher than the $115 bn same time last year)
  • Just oil imports are $132 billion till Feb 2012 (figures are from April 2011). This is 41% higher than the $94 bn last year.
  • We can reduce oil usage by increasing the price of fuels (especially diesel) so that people consume less, but there is zero political will for this.
  • In the past, when the trade deficit was high, FDI and FII flows financed it. The dollar remained more or less fixed.
  • Now, there has been FII outflows (though some inflows have come since Jan)
  • FDI will likely slow down even further (it has been really small last year), with the budget increasing taxes, creating uncertainty with GAAR and other rules, and in general adding regulatory burden.
  • This means: we can try to cut the trade deficit by reducing our consumption (imports) or we increase our exports. Both these look very unlikely, as there is no external incentive.
  • That incentive can be provided by a depreciating rupee. Assume the rupee goes to 60 or 65 – that will force the government to increase oil prices somewhat, and will make consumption imports more expensive in rupees, and the higher prices will help cut demand.
  • But the rupee depreciation creates other issues – apart from inflation, there are a number of corporates who have borrowed in dollars and now need to return it, but they now need more rupees to pay their loans back. If they default, that will hurt all Indian corporate borrowing.
  • The RBI has sold dollars from its currency reserve recently to stem the depreciation. To keep reserve money (in rupees) from being affected, the RBI uses the rupees it gets to buy GOI bonds instead.

Here’s one crazy but plausible course of action. The rupee continues to slide. RBI sells dollars to counter, but that doesn’t hold up for too long. Oil prices in rupees keep going up and increasing the government’s own deficit, and the government is forced to up retail prices. This creates a political problem, and more uncertaintly. A few corporates default (they’ll do so anyhow, according to me). Interest rates remain high due to inflation, growth comes down to the point at which RBI can ignore it no more and then it cuts rates.

The next few months are interesting, and if it’s anything to go by, I would stay away from PSU stocks or those that depend on government policy (like infra stocks). I don’t see a trigger for a sudden, deep fall just yet, but there are global issues that dominate such issues, and there are enough problems abroad that can hurt us.

Just penning my thought process, in creating an investing plan for the next financial year.

Now, tell them about it: