Investing Reflections On India

Investors around the world were greeted today with larger-than-usual headline news about S&P’s downgrade of the US sovereign credit rating from its gold-standard ‘AAA’ status to ‘AA+’. Although the fundamental drivers of this decision have been in play for a while now, the S&P report does serve as a trigger to contemplate the implications for Indian business and financial markets in general. The factors driving the decline in value of the US$ were accelerated when the QE programs were initiated by the US Federal Reserve as a response to the economic crisis of 2008.  This downgrade may further speed up the process as capital is pulled out of US Treasuries and perhaps, the US altogether.  This would result in wholesale selling of US$ and declines in its exchange rates. Let’s think about some of the longer-term implications for India: BUSINESS IMPLICATIONS The implications mentioned below are likely to play out IF the US$ weakens substantially relative to the INR (a...

Let me preface this note by stating emphatically that I am an economics novice.   But I’m going to take a stab at this problem because it’s crucial for the individual investor.   Please let me know if I’ve made glaring errors in the facts. The theoretical definition for intrinsic value = present value of all future cash flows. For this we need the amount and timing of all future cash flows, and the long-term risk-free interest rate. We can assume the long-term risk-free interest rate to be the rate on 10-year Indian government bonds since they’re free from risk of default (the government just needs to turn on the printing press) and the 10-year are reasonably well-traded implying a closer approximation to the actual cost of money. This rate stands at about 8.3% (27 th June, 2011) and can be plugged in our present value calculations. But the other two variables – amount and timing of future cash flows are the difficult items. So, how can we, as individual investors get ...