Blog Posts by Deepak Shenoy

  • Maid Economics

    The luck of the draw has allowed me to live in various cities — most recently, Gurgaon and Bangalore. In every single instance, residents of the apartment associations have complained of how maids or drivers or household help in general have raised their prices.

    Or that they leave to take up another job for a marginally higher pay. Or that they become "arrogant", demand advances and bonuses. The response of the employers is to attempt to create rules for the "society" such as:

    a) Provide a chart of pay for activity and tell every household to pay only that much.

    b) Ask for "no-objection certificates" from past employers if any household help attempts to move elsewhere.

    In my opinion, this is the possibly worst response to rising wages. Let me replace the word "maid" by "software engineer". Would we be happy if companies got together and said we'll only pay this much for this job — and no other employer can offer you more? If this actually happens, it could be construed as an attempt to

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  • The Kiss of Simplicity

    Imagine a world in which you had very easy-to-understand financial products. I'll detail a few below.

    Simple Life Insurance: You pay us non-refundable premium every year. If you die we pay your family money. This much money. If you live, your family is happier. Over and out.

    Simple Mutual Funds: They come in three varieties:

    a) Simple Equity Funds: We invest in the stock market. Forget Large cap or mid cap, forget this sector or that. We know what to buy, and we'll give you the fund manager's resume and past performance. We benchmark to the NSE Nifty. We don't pay dividends. We don't give bonuses. If you want to sell, you sell.

    b) Simple Debt Funds: We buy debt. We know we can buy short term, long term, gilt, corporate, CDs, CPs and all that. But we decide what to buy. You just park your money with us. We are risky.

    c) Simple liquid funds: We're better than fixed deposits for tax treatment. We only invest in bank CDs which are like fixed deposits except they pay us more than they'll

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  • A Blunt Regulatory Knife

    Imagine criminals that have sophisticated guns, satellite radios, bombs, strong armour, GPS trackers and fancy cars. And imagine someone has been given the task of "policing" them from a bullock cart, with only bows, arrows, and a sign that says "Stop, or I'll say stop again".

    In the civilized world, it would be entirely unnecessary to kill the regulator. As long as you have the technology, you just have to get away in your car when a bullock cart chases you, and let your armour take the brunt of any bow or arrow that's fired.

    This is how our regulatory system is.

    Bernie Madoff was "discovered" at about the same time that Satyam founder Ramalinga Raju admitted he fudged accounted. Mr. Madoff is now cooling his heels in jail, where he will be for the rest of his life. Ramalinga Raju's only relation with heels is that he's probably getting a pedicure - he is out on bail and the cops haven't even been able to cobble together a case.

    That story isn't the only one. The 2G scandal involving

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  • Is the Indian Consumption Boom Over?

    Things are changing, ever so slightly. The story of the last 10 years has been that of an incredibly shining India and much of that shine has had to do with factors that aren't Indian. But the result has been a rapid increase in consumption that has made for very profitable consumer facing industries like motorbikes, cars, FMCG, retail, mobile phones, pressure cookers and so on.

    But is this growth stalling? There is both evidence and reasons to suspect that we might be headed in the other direction.

    Much of the rapid boom in consumption over the last 10 years has been on the back of low interest rates (relative to inflation). Credit growth has been as high as 30% year on year, and people have borrowed to pay for consumer durables - from fridges to TVs to mobiles to what not. Manufacturers have been happy to provide interest rate subventions if people would actually buy - you might remember the days of "zero interest EMI" payments to buy TVs, and I've personally benefited from them.


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  • The Internet of Finance

    20 years ago, you had very limited choices when it came to knowing, analyzing or buying financial products. You went to a bank for a fixed deposit and nothing else. A stock broker would sell you stocks. To get information about companies, you would either buy a (hopefully unbiased) magazine, or go through the cumbersome process of requesting physical annual reports for analysis. You wouldn't know about competitive products or better rates unless you were willing to toil and wait forever.

    Everything has changed today. Fixed income no longer means just a fixed deposit; it could mean a fixed income mutual fund, a bond traded on a stock exchange, a government security bought at an auction. Banks and stock brokers and nearly every financial advisor will sell you all these products, mostly at the same time. Stock exchanges and the regulator (SEBI) have tightened disclosure requirements, making it mandatory for listed companies to provide information to everyone on a regular basis. We have

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  • Making Sense of Dividend Announcements

    "1860% dividend announced", goes the headline. You're excited. But the question isn't, "Where do I sign?", but "1860% is great, but a percentage of what?"

    The number is a percentage of "face value" which is as relevant today as a rotary-dial telephone. When a company is created, the founders distribute the initial capital into shares. A company started with Rs. 100,000 could be split into 10,000 shares of Rs. 10 each (the "face value" per share).

    This company can, over time, earn enormous profits without any further capital requirements. Or, it might borrow money from a bank to fuel expansion and as it profits from growth. The capital could remain unchanged, with the original shares changing hands in a stock market. If the company grows to earn, say, Rs. 10 crore (Rs. 100 million) in profits, and decides to distribute half of it as profit, what happens?

    You have a distribution of Rs. 5 crore (50 million) divided over 10,000 shares, or a dividend of Rs. 5,000 per share. The "face value"

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  • India’s Broken Interest Rate Transmission

    Growth is slowing. At the 5.3% official growth rate, India has grown the slowest in the March quarter in 8 years. Even that is considered suspiciously high, since we are shown a massive growth in exports and subdued imports that no other data point seems to corroborate. The Reserve Bank of India needs to cut rates, say many observers, while fighting for an armchair with yours truly.

    RBI controls the rate at which banks can borrow from it, overnight, called the "repo" rate. If they do cut interest rates, how does it impact growth? The traditional answer — when banks can borrow at lower rates from the RBI, they will cut rates for industry and consumers, who will find their loans cheaper and thus make more profits, which will fuel investment and consumption and overall, more growth.

    Let us pause for the realists to stop laughing.

    In India, this "transmission" of interest rates is broken when rates go down. Bank loans can be at fixed or floating rates — for a fixed rate borrower (such as a

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  • Diversification: The Pluses and Minuses

    A lot has been said about diversification, where you spread your investments across various avenues. The plus point is that you don't have all your eggs in one basket, and that if one of your investments falters, another will balance it out.

    Diversification in stocks means you buy many stocks, in many sectors. While that exposes you to a stock market crash, a fall in one sector doesn't usually hurt another. However you must be careful that these sectors don't impact each other; for instance, buying a steel maker and then a car manufacturer is not really diversification — a fall in car demand will hurt both sectors. Diversification is also employed by those that either have no time or skill to handle investing decisions themselves; often, it's known as a tool for the ignorant.

    You could buy multiple asset-classes. Like Gold, real —estate, stocks, bonds, commodities and rare stamps. These asset classes, while providing a layer of diversification, often have varying liquidity problems.

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  • The Macro Trumps the Micro

    You can't buy stocks on merit anymore. You can do the most beautiful analysis about a company that owns a toll bridge, and how many cars pass through it every day, and how they can increase the toll fees every year by 10%. And how there is this airport proposal which, when cleared, will dramatically increase toll fee collections. Finally that the contract with the government guarantees a 20% return on investment.

    And all of this analysis tells you that the stock should be worth five times the current value in a few years. Yet, it all amounts to nothing when suddenly, the government decides not to allow any toll fee increases because of the bad political mileage they are getting for not keeping onion prices in check. And then the government runs out of money because of profligate spending on random other causes, and investment flows into the country stop because no one in power can take a decision anymore, and the powers decide to tax everyone they earlier hadn't taxed. To gather more

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  • Why the petrol price hike is a good thing

    Petrol prices were raised again recently, by Rs. 7.5 and the hike leaves the country seething, except those that drive diesel cars. And to make the diesel owners wince a little, the government will decide the fate of that fuel too, in a meeting soon. While there is outrage about this "unprecedented" price hike, let me play devil's advocate and temper down some of the most vehement arguments against this increase.

    Petrol Prices

    With a tax of Rs. 26 per litre, can they not reduce taxes? Goa, for instance, has cut state taxes to zero; this gives the Goan petrol pump the ability to sell petrol at Rs. 61, a good Rs. 12 less than the Delhi price of Rs. 73. How, though did the brand new Chief Minister, Mr. Manohar Parrikar do it?

    He replaced the lost revenue on petrol by increasing taxes and fees everywhere else. After the monsoon session, you will have pay a toll tax just to enter Goa. Alcohol will be more expensive. A power of attorney that used to cost Rs. 25 will now cost Rs. 500. A 10% luxury tax now

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