Deepak Shenoy's blog

RBI Keeps Rates Unchanged; Liquidity Tight

RBI keeps rates unchanged at 6.25% (repo) and 5.25% (reverse repo). 

The Statutory Liquidity Ratio (SLR) is down to 24% (down 1%). There’s also a relaxation of another 1% of assets under a temporary liquidity facility until Jan 28, 2011.

Inflation: November 2010

WPI monthly inflation for Nov 2010 was announced at 7.48% – substantially lower than the last month’s 8.58%.

At Yahoo: Free Money

I write on arbitrage at Yahoo: Free Money

The story goes: an economist was walking on the road with a friend, who said:

"Look, there's a 100 dollar bill lying on the ground, Professor"

"It can't be. If it was, someone would have taken it already", the economist replied.

While that sounds absurd, there still needs to be someone picking up those bills. In market parlance, the act of buying something and selling it almost immediately at a higher price is arbitrage — what might seem to be "risk-free" money.  Let's just look at the field, from an Indian market context.

Inter-exchange arbitrage

The BSE and NSE are the two most popular exchanges in India, and many stocks trade on both of them . If there is a price difference in a stock's quoted prices in each, you can buy on one exchange and sell on the other. You should theoretically not lose any money regardless of which way the market goes. As more people do this, the prices on the two exchanges should converge.

That's technically true, but there are many reasons why there is a gap in the prices, and no one is picking up the free money. Transaction costs can be too high — apart from brokerage, you have clearing costs, exchange fees, stamp duty and securities transaction tax — sometimes high enough to have a healthy gap. And then you have execution risk — what if you get one trade but not the other because prices moved?

In India, you must square off an inter-exchange arb trade within the day for structural reasons. With a T+2 rolling settlement system in India, you need to deliver stock that you sell on the next day of the trade, but you only receive what you buy two days after — so it's perilous to hold this trade through the end of the day. (If you reverse the trade within the day, it doesn't need to be settled) But then, an intra-day "square-off" means that prices must converge within the day — and if that doesn't happen, you might have to square off at a loss at 3:25 p.m.

Power Surplus? Lowest Power Deficit in a While

Moneylife provides for really interesting reading, and their latest is an article asking if demand for power is slipping sooner than expected. Research reports have suggested that there could be a fall in power demand, resulting in a surplus power scenario in India in a few years from now. But is this happening sooner than expected?

Readings: Bank Elite, MFI, MoneyLife, 99ers

A Secretive Banking Elite Rules Trading in Derivatives by NYT. How the big bankers won’t let in the small guys into the market they control and keep opaque.

At Forbes, In India, Size Does Matter. On how the MFI industry has screwed itself by going national, rather than local. Yeah, that’s true of countries too – when they’ve borrowed from foreigners, it’s that much more palatable to say “let’s default”. And bankers, who only originated credit and packaged the loans they gave to other people. When you don’t know the person who lent you money it’s much more morally acceptable to default in a crisis.

Short Takes: The P/E Ratio


The What, How and Why of the P/E ratio in the context of Indian listed shares. The Price to Earnings Ratio is a way to value companies, instead of depending on purely their share prices. 

Deepak Shenoy talks about what the ratio is, how you can obtain it in India or calculate it yourself, and finally, why it is used. A quick introduction to the concept, and will be followed by more short takes on the P/E ratio's use.

(Click here to watch the video)

(6 minutes)

Mahindra Holidays: Too many members, Too few rooms

A quick note on Club Mahindra (MHRIL) .

Rooms: Where?

On September 30, 2010, they have 117,993 members. And 1,473 apartments.

Even if they use them 100% for members, with one week per member and 52 weeks a year, they can only accomodate about 77,000 numbers. 35% of their members can’t be accomodated – 1 in 3 won’t get a chance. Given that holidays are usually taken in bunches (not spread out evenly across the year), there are likely to be even more disappointments.

Their response…

The standard reply is that listen, people don’t qualify to take holidays immediately on membership. In a mail I was forwarded, the statement made was:

…members avail of financing plans from us for their membership purchase. In light of that a certain no. of EMIs would need to realized before the member becomes “Eligible” to holiday

Oh, that way.


IB Report Takes 3 Stocks Down

Three stocks – KS Oils, Ruchi Soya and Karuturi Global have been hit hard by an Intelligence Bureau report that says these stocks were manipulated. An operator, Vimal Rathod, is suspected to have rigged prices, in some cases in collusions with promoters (allegedly).

Rathod bought shares to push prices up, it seems, and involved the money of C. Sivasankaran, the investor with some kind of midas touch. All these companies have been in the news at various times for fund raising or expansion. While Ruchi Soya and Karuturi Global denied having any links with these guys, KS Oils said an investor CVC sold shares to Sivasankaran.

All three companies have seen an EPS drop in the first half compared to last year

UFlex Dives 20%, Promoter Gets 4 Years Jail

Promoter of UFlex Limited, Ashok Chaturvedi was sentenced to four years in prison by a special CBI court, in a case of bungled land allotment in Noida. Former UP chief secretary Neera Yadav was also sentenced similarly.

UFlex is a packaging company and has recently benefited from the massive upsurge in polyester film prices, taking their profits up to 202 cr. in the Sep quarter, and 263 cr. for the half year. With the diluted EPS at Rs. 37 for the half year, they even projected an 800 cr. profit figure for the full year.

Short Takes: What are Bond Yields?

When they say "The 10 year bond is at 8.19%" what do they really mean? Deepak Shenoy takes you through:

(Watch the Short Take, 9 Minutes)

  • The ultra basics of bonds
  • The concept of Yields - it's simply a way to indicate what bonds return.
  • Current Yields and Yield to Maturity (YTM)
  • The Price, Yield/YTM and Time relation
  • How to use Excel to calculate Yields
  • Why Yields and Prices change in the Bond Market.
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