INDIA

As predicted global equity markets were choppy in April 2012. Indian macro situation is worsening. FIIs were net sellers of Indian equities in April 2011. S & P downgraded Indian credit rating by a notch but still the Indian equity markets are resilient which is beyond my understanding. Any issue which defies fundamentals – I pause and step back . I advise investors in India to get out of equity markets completely, as it is defying fundamentals.

US economy is “bankrupt” and still ^DJIA is at 13200+ which is highest since 2007. Completely defies logic. I totally understand markets "discount" the future. US economy is perceived to out-perform all global economies in the coming months/quarters ???

Spain is on the verge of “bankruptcy” and still all three main EEC indices are resilient. I cannot digest ?

Let some sanity return to equity markets and I will post accordingly. I do not understand these levels of global equity indices when the whole banking system in USA and EEC is technically insolvent and equity markets are buoyant. Global equity markets will correct – August 2102 through October 2012. I am getting out of all equity investments.

I am still accumulating physical Gold. This asset class will give you the best returns in calendar 2012.

BSE SENSEX closed today Friday 30^th March 2012 at 17404 marginally down from 17584. Today was the last trading day of the current fiscal year in India which on 3/31/2012. BSE SENSEX could not breach our resistance level of R1 18000 on a closing basis in March 2012. Intra-month high was 18040.

FIIs pumped in another US $ 1.00 billion into Indian equity markets in March 2012 and till date FIIs have invested nearly US $ 8.00 billion into Indian equities from January to March 2012. The figure is confirmed by SEBI data and the figure in the last post stands to be corrected.

Indian macro picture is not showing signs of improvement. The official figure estimated for fiscal deficit for the fiscal ending tomorrow by Government of India is 5.9 % of GDP. There is severe liquidity crunch in the Indian financial markets. RBI cut CRR by a surprising 75 bpts to inject liquidity into the Indian banking system. CRR now stands at 4.25 % down from 5.50 %. No cut in Repo rates which stands at a high point of 8.50 %

Budget announcement on 16^th March 2012, for next fiscal year, was given “thumbs down” by the Indian equity markets but FII money continues to pour into Indian equity markets. I think the Union Budget for next fiscal FY 2013 is too ambitious on the fiscal deficit front – 5.10 % of GDP by 3/31/2013. GoI estimates that Indian FD will be 5.9 % of GDP by 3/31/2012 – end of current fiscal. Target was 4.60 %, when the budget was presented to the Indian Parliament in Feb 2011. The Indian macro picture has seriously deteriorated since the past six months of the current fiscal. My estimate is a figure of 6.10 % when the figures are announced by GoI in Mid/End April 2012. In number terms the total subsidy figure could be in excess of US $ 48.00 bn for the end of current fiscal, as per my estimates. Break up – US $ 30 bn for petroleum and $ 18.00 bn for farm sector (includes both food and fertilizer sector) subsidies. In addition – the disinvestment target of PSUs will be well short of targets for the current fiscal ending. This also hits the “revenue” side on the books. The budget for next fiscal FY2013 provides for total subsidies (fuel, food and fertilizer) at Rs 1800 bn ($ 36 bn) only. This is figure is “wishful thinking” by FM. I think it’s a “cruel joke”. This figure is too low ? Lets us wait and see – April 2013 ?

Detail of the Union Budget is available on the website of MoF. Issues concerning our domain are :

a) Across the board hike in excise duty by 2.00 %, from 12 to 14 %. Adds to inflation.

b) Import duty on standard gold increased 2 % to now 4 %. Import duty on “Non-Standard” gold increased from 5 % to now 10 % . This is to curb demand for Indian gold (imported by India). India hardly produces any gold. As per my estimates gold demand will not be impacted much.

c) Cesss on crude oil hiked from Rs. 2500 pmt to Rs. 4525 pmt. This will impact local producers of Crude Oil in India. Major hit to be taken by ONGC followed by CARIN INDIA & OIL.

The Indian FM is seriously constrained on the revenue side for the next fiscal and has capped the total subsidy as 2.00 % of GDP. This figure includes total subsidies for next fiscal @ Rs. 1800 bn ( $ 36 bn ) which I feel is too low and not achievable, unless there is a “complete de-control” of prices of HSD and substantial price increases in SKO and LPG. Also there should be a complete switch to NBS in the fertilizer sector. Failing which as per my estimates – the figure for FD will cross 6.00+ % of GDP for FY2013 also. I think this figure of Rs. 1800 bn only is a “joke”. As per my estimates prices of Crude Oil & Gold are not going to correct significantly during the entire next fiscal. This pushes imports in value terms substantially and swings BoP figures into more negative territory. Crude oil is the single largest commodity imported by India in value terms ( estimated in excess of US $ 110.00 bn for the current fiscal year ending) and Gold imports are also soaring in India inspite of record high prices of gold in international markets. India imported about 969 mt of Gold in FY2011 – largest in the world. The figures for the year ending tomorrow would be slightly lower. Indian BoP was negative $ 105 bn for fiscal ended FY2011. This figure could be as high as $ 160 bn for the current fiscal year ending tomorrow on account of high crude oil and gold prices. BoP negative which reflects on a linear basis the “current account deficit” is not viewed by investors in a positive way and still FIIs are pumping money into India @ US $ 1.00 bn/month. Any issue which defies “fundamentals” does not augur well with me. Also this deficit puts pressure on the Indian Rupee – which will depreciate against major currencies – US Dollar, Pound Sterling, Swiss Franc etc. This weak Rupee is good for exporters but hurts further the BoP situation.

Let us look at the current fiscal year which will ends on 3/31/2012. The initial total subsidy estimate was only Rs. 1340 bn ( $26.80 bn) when the budget was presented by FM in February 2011. It was revised to Rs. 2090 bn ( $ 41.80 bn ) in September 2011, up by whopping 56.00 %. The main reasons - were high crude oil prices, high upstream crude oil subsidies, high down stream petroleum subsidies ( on HSD, SKO & LPG) and Farm sector subsidies going awry. Under the Farm sector – GoI could not switch the subsidy regime on fertilizers to NBS. Urea prices are strictly controlled by GoI and should be completely de-controlled in order that new Urea plants can be set up in India. Phosphatic fertilizers ( basically DAP) and Potassium fertilizers ( basically MoP) are now completely de-controlled and the prices have nearly doubled since the same were de-controlled in 2010. The same should be done with Urea. But farmers are “vote banks” for farmers hence they are pampered by farm sector subsibies viz cheaper Urea, power and seeds and every year higher and higher MSPs for all major Rabi and Kharif crops. The farm sector’s biggest contributor to subsidies is cheaper Urea. GoI should slowly increase Urea prices in phases to import parity levels and thus completely de-control the sector. The prices in the grey market for Urea in India is almost double that of the GoI controlled prices. This leads to rampant corruption. Food sector subsidies thru PDS in India stink of corruption. This subsidy could be given as “cash coupons” to people who are entitled for food subsidy and PDS should be dismantled. But this may never happen in India as PDS is controlled nationwide by cronies of politicians running this corrupt nation. The Government of the day in India must address this issue of “corruption” as this malaise is now getting bigger and bigger – one scam after another is hitting media in India.

We were right in our prediction that global equity markets lead by ^DJIA will be bullish from January through March 2012. ^DJIA is trading around 13000+ levels. The prediction from April to August 2012 was that equity markets globally will be very choppy and volatile. We stick to the same. April 2012 – global equity markets will be choppy. We have to keep a keen eye on US Housing data and Spanish CDS. Till the housing market improves in USA – the economy will not be on a robust growth. If Spain needs a “bail out” – then all bets for bulls are over in the equity markets in EEC and also worldwide. The levels to watch for BSE SENSEX in April 2012 are :

R1 17420 R2 18000 R3 18400 R4 18600

S1 16800 S2 15960

These months are “traders paradise” as during volatile times – smart traders make a killing. We wish them luck. There is only one caveat – if BSE SENSEX cannot hold our pivot of 17420, then it can slide to 15960 levels. So investors and traders should keep a watch on this level. If FIIs continue to pour money into Indian markets then one will not see a breach of pivot 17420.

My views on Gold and Crude remain unchanged, although my target for Gold was not achieved in March 2012 as predicted. It may be tested in April 2012.

As often mentioned – Gold will give best possible returns on investment in 2012, as compared to any other asset class. One has to be patient with Gold.

UPDATE : INSC – part of new great game ? March 2012

This corridor if comes through would be a “game changer” for India-Iran crude oil and natural gas supplies and serve India’s long-term strategic interests in Caspian Sea reserves of oil and gas.

The US and EU sanctions on Iran’s oil sector is making it difficult for India to pay for its oil imports in hard currency. India imports about 12 % of its imported crude in hard currency from Iran with indications being that this figure could go upto 14 % in calendar 2012 subject to solution of “payment issues” for Iranian crude oil. One of the best ways of paying for Iranian crude oil is through infrastructure projects like the proposed – “International North-South Corridor (INSC)” which is lying in cold storage, although signed in the September 2000. This mutli-modal corridor project was signed between Iran, Russia and India in the year 2000 but little progress has been made on this important project which is of great strategic importance to India and now Iran too. In the last article on crude oil and geo-politics it was mentioned by the guest that India is too slow to react to tie up its energy needs as compared to China. Yes it is true that China has spread its tentacles in entire Central Asia since the past decade and is building an extensive road and railway network to tap the Caspian Sea crude oil and natural gas. Chinese infrastructure is already on the ground in Central Asia for strategic reasons for its long-term energy tie ups. China is quick in executing large infrastructure projects be it in power generation or railways or ports and bridges. India is still struggling with red-tape. No wonder China’s FDI for the past one decade or so is at about whopping US $ 60 billion per annum. Indian FDI is not even one-fifth for the same period on per annum basis on an average. Just to give an example – China added 5,00,000 MW of electricity to its national grid in the last five years and India could not even add 75,000 MW ? This is the Chinese way of handling large infrastructure projects which attracts FDI in manufacturing by MNCs based worldwide. In addition to start a “new business” in India is very cumbersome. Too much red-tape. India ranks around 137 in number out of 192 countries in setting up a new business ?

Coming back to the point - the Central Asian leaders are not comfortable with the Chinese policy in their region, as they understand Chinese military might. They trust India more than China, as India has had centuries old historic trade links with Central Asia. In fact the President of Kazakhstan had offered a crude oil block to India in 2003 on strategic considerations. Indian Government of the time in 2003 did not take up the project through ONGC Videsh Ltd. Leaving black gold offered on the platter? It seems India is now realizing the importance of Caspian Sea crude oil and natural gas apart from settling “payment issues” with Iran.

TAPI and IPI pipeline projects are not feasible in Indian context as both Afghanistan and Pakistan are in turmoil. Political instability in Pakistan will never be resolved hence these TAPI and IPI pipeline projects are of no real meaning to India. So far India – Iran is the best bet for gaining access to Central Asian crude oil and natural gas. Since the year 2000 – eleven other Central Asian Republics of CIS have joined this important INSC and now there are total 14 players to develop huge Caspian Sea reserves of crude oil and natural gas. Recently secret negotiations were held between representatives from India, Iran, Russia, Kazakhstan and Turkmenistan regarding giving shape to INSC. It is learnt from the print media in India that energy experts from all the fourteen countries are now officially meeting in New Delhi on 29^th March 2012 to discuss the implementation of INSC. This is good news for all the stake holders but for India it has huge strategic importance – to get access to Central Asian reserves of crude oil and natural gas via Iran and avoiding Pakistan. India must play a “lead role” in the proposed INSC as it has the requisite technology for multi-modal transportation of both crude oil and natural gas – by rail and pipelines over land/sea. In January 2012 – Indian government officials told their counterparts in Tehran officially that India “would take charge” of the project including building missing transport infrastructure in Iran – road, rail and pipelines. Looks like the lazy elephant is awakening from a deep slumber ?

The INSC envisages an undersea pipeline from Bandar Abbas in Iran to main ports on India’s west coast. A land pipeline from the port of Bandar Abbas to Bandar Anzali port on the Caspian Sea. From Bandar Anzali the route will be the town of Rasht in Azerbaijan - Astara (a border town between Azerbaijan Iran) and then onwards to Kazakhstan and finally to Russia. The huge Russian pipeline network already serves Western Europe through the pipelines passing through Ukraine and other eastern block nations for natural gas. Addtional crudeoil pipeline will be laid from Russia to Western European ports under INSC. Once INSC is complete, this would connect Europe and Central Asia in a “unique way” – avoid the Suez Canal and save transportation time. The Iranian and Central Asian crude oil and natural gas from these destinations will reach main European ports in 25 to 30 days as currently it takes 45 to 60 days. As of date the only “functional” pipeline from Caspian Sea is the crude oil pipeline from Kazakhstan to Ceyhan port, Turkey.

This big-ticket infrastructure corridor – INSC, seems like an affirmation on India’s part regarding its commitment to its strategic interests in Caspian Sea hydro-carbon reserves in Central Asia. I feel this is India’s best bet for its long term energy requirements. I hope all other thirteen stakeholders back India in the forthcoming meeting. Indian Government deserves “kudos” on this initiative !

BSE SENSEX closed today 31^st January 2012 at a bullish level of 17194 up 8.36 % from the last reference of 15868. We were bang on our prediction that global markets and Indian equity markets will be bullish in January 2012. This rally was a pure liquidity lead rally as fundamentals have not changed in the Indian economy. In fact the Indian macro level fiscal picture has worsened in January with Indian government finances going haywire. Fiscal deficit as percentage of GDP in India for the current financial year will be in the region of 5.20 and 6.00 % as against the budgeted figure of 4.60 % according to officials in MoF and policymakers. This is bad news as the total shortfall by 3/31/2012 would be in the region of Rs. 1520 billion ( US $ 30.40 billion. Exchange rate : 1 US $ = INR 50.00). This is a “huge hole” in Indian Govt’s finances and it seems the same will not be filled by 3/31/2012 as tax mop-ups are sluggish, subsidies are higher as mentioned in the last month’s post and PSU disinvestment targets are a fraction as compared to budgeted figures. Indian Govt will borrow an additional Rs. 500.00 billion ( US $ 10.00 billion) in February 2012 to keep the economy running. RBI cut the CRR rate by 50 bpts on 1/24/2012 to ease liquidity in the Indian financial markets. The CRR now stands at 5.50 % against 6.00 % earlier. But we must note that RBI is not giving signals of interest rate cuts in the near future due to absence of a credible fiscal consolidation plan from the Govt of India. The Governor of RBI said last week that – “Strong signs of fiscal consolidation, which will shift the balance of aggregate demand from public to private and from consumption to capital formation, are critical to create the space for lowering the policy rate (repo interest rate) without imminent risk of resurgent inflation. In absence of credible fiscal consolidation, RBI will be constrained from lowering the policy rate in response to decelerating private consumption and investment spending”. Governor of RBI has given a credible hint that interest rates in India will not be lowered in the next two months. The Hon Finance Minister of India has a tough task in hand as he has to address this fiscal deficit in the forthcoming Union Budget for the next fiscal in end February 2012. We wish him luck ! But there is no magic wand in Hon Minister’s hands ? Some harsh decisions would have to taken by the Hon Finance Minister of India to tackle the fiscal mess the Indian economy is in.

Inspite of all the above negative news - FIIs pumped in approx US 2.00 billion in Indian equity markets in the month of January 2012. The INR also strengthened from a level of 52.14 to sub 49.00 levels versus the US Dollar due to intervention by RBI and on account of the FII funds flowing into Indian equities as mentioned above. As mentioned above the rally in global and Indian equities in January 2012 was purely liquidity driven. The interest rates are too low in USA, EEC and Japan and hence the rally as above in equity markets. Bull markets ignore fundamentals in the short to medium term and vice versa.

The Indian equity markets are poised very precariously and can see a 7.00 to 8.00 % movement in either direction. The reason being that BSE SENSEX is trading near its 200 DMA level of 17420. The levels to watch for BSE SENSEX for February are as follows :

R1 17420 R2 18000 R3 18400 R4 18600

S1 16800 S2 15960

If BSE SENSEX can close convincingly above its 200 DMA level of 17420 – it will zoom to 18400+ levels in February 2012. But if BSE SENSEX cannot hold above 17420 level, then I expect a sharp cut in BSE SENSEX to 16800 levels. We have to watch this level of 17420 very carefully.

Globally – printing presses are running 24x7. The balance sheets of central banks in USA, EEC, UK and Japan are getting bigger and bigger. As mentioned in my January 2009 post – one will see “hyperinflation” in USA towards the end of 2012. We now add EEC and Japan to this list. Commercial banks in France, Italy and Germany are at huge risk if the Greece “bail out” package is not resolved in the coming two weeks. Greece remains in “technical sovereign default” since 20^th September 2011. The Greek creditors have still not been paid the interest on the Sovereign Greek Bonds they hold, since 9/20/2011. As I have said in the past Greece cannot pay its huge debt and will default eventually ? God save the Euro !

We advise investors in India not to rush and buy equities. Please wait till BSE SENSEX sustains 17420 level. We feel Gold is the best investment in 2012. I predict a very “sharp” up move in the price of Gold in March 2012. The old high of US $ 1920.00 pto will be breached before 3/31/2012. Expect fireworks in Gold prices in February and March 2012. I still maintain my target of Gold at $ 2240.00 pto in Q3 2012 and a level of US $ 3000.00 in December 2012. A lot of analysts are predicting that Gold will test a level of US $ 1410.00 pto in the coming two months. We do not agree with them. The correction in physical Gold is over from US $ 1920.00 to US $ 1522.00 pto.

On Crude Oil – we stick to our target of US $ 180.00 pbbl as mention in our post of January 2009. Iran in most probable situation will trigger a rally in Crude oil prices.

Cheers to Gold !