The Little Post that Beats the Market

I recently read the book ‘The Little Book that Beats the Market‘ by Joel Greenbalt. The book basically advocates a formula based approach to investing. The approach advocated by the author is rather simple. He talks about forming an index for each stock based on two variables, Price to Earning Ratio (PE) and Return on Capital (RoC), and then ranking them, with the highest rank given to the stock with the highest RoC and the lowest PE. The author calls this index a “magic formula” to deliver superior returns. In layman terms, what the author is asking us to do is to buy into companies which give high returns on invested capital and are available cheap. Makes perfect sense.

So, we did a study as to identify which Indian companies (only large caps) would make the top 20 list according to this criterion and came with the following results-

* Data collected from icicidirect.com

Do remember that the required investment horizon should be at least 3 years and the investor should stick to his decision to stay committed with such a portfolio irrespective of what the markets does. So invest in a mix of the above mentioned companies and stick to them for at least 3 years. And you should comfortably beat the benchmark sensex.

So says Mr. Greenbalt.

In God we trust, so help us God

“At an annual rate, according to Central Statistical Office (CSO), of 26,470.8%, in November, 2007, inflation continues to be arguably the most devastating macroeconomic imbalance in the country……”

Dr. G Gono, Governor

January 2008 Monetary Policy Statement

Reserve Bank of Zimbabwe

Yes, inflation rate of 26,470.8 per cent. And that is the official estimate. Unofficial estimates pegged the inflation rate at anywhere around 150,000 per cent. The Consumer Price Index (CPI) with the year 2001 as base, stood at an index value of 184,101. In lay man terms, an item costing 100 Zimbabwean dollar in the year 2001 would have set you back by 184,101 Zimbabwe dollars (Z$) in the year 2006.

So what happens when you have such modest rates of inflation? The central bank prints currency with denominations such as 10 million Z$. Absurd? Well there are independent reports that a 10 million dollar bill won’t even buy you a hamburger in Harare!

The Zimbabwe dollar has devalued to such an extent on the back of inflation that the on 18^th June 2008, the official exchange rate (as updated on central bank’s website) stood at 5817192485.76 Z$ per US$, i.e., 5.8 billion Z$ per US$. And what is even more interesting is that these are official exchange rates. We haven’t even spoken of what the condition might be in the foreign exchange black market. Phew!!!!

And this is what the January 2008 monetary policy statement of the Reserve Bank of Zimbabwe has to say to the above economic conditions,

“Some would want to simply look at our current high levels of inflation, foreign exchange shortages and other constraints and bay for the blood of the Central Bank Governor, but the substance of the matter is that without innovativeness and thinking and acting outside the box, things could have been worse under the decade-long spell of sanctions.”

Undeterred by the hyperinflationary condition ravaging the country, the monetary policy statement boldly declared that “as monetary authorities, our philosophy on how to successfully destroy the inflation dragon remains that of deploying a combination of demand management policies, supported by structural reforms, as well as deliberate strategies to invigorate the supply side of the economy.” And how does the central bank expect to achieve the above. Its fairly “simple” actually. The Reserve Bank of Zimbabwe has everything under control,

“We need to produce more food to fight inflation… Simple. We need to build more houses for the people to reduce the penal rentals that are fuelling overall inflation… Simple. We need to produce more foreign exchange through higher exports and foreign investment inflows. With more foreign exchange, we will better preserve the external value of our local currency, which in turn minimizes imported inflation… Again Simple.”

Very simple indeed!

Inflation continues to reach astronomical figure on the back of a massive increase in money supply growth and government borrowing. Annual broad money supply (M3) growth continued on an upward trend, increasing from 1 638.4 per cent in January 2007, to 24 463.6 percent in October 2007. During the month of October 2007, the annual growth rate in credit to Government was 16,585.8%, largely attributable to the 3-year Variable Coupon Insurance Industry Bond worth $4.3 trillion, which was issued during the month of October 2007. And if this was not enough credit to public enterprises recorded an annual growth of 19,611.3%, from $10.1 billion in October 2006 to $2 trillion in October 2007.

At the end of Jan 2005, cumulative government domestic debt stood at 175.66 billion Z$. This same figure has escalated to 1619206.763 billion Z$ as of March 2008. The interest rate, as mentioned in the central back website, stands at 1200 per cent for secured credit and 1650 per cent for unsecured credit.

However, such horrifying statistics do not in any manner bog down Dr. G. Gono, the governor of the Reserve Bank of Zimbabwe. The monetary policy statement is littered with inspirational lines like “together as a Nation we can all do it!” And to top it all, he signs off the monetary statement saying, “IN GOD’S HANDS I COMMIT THIS MONETARY POLICY STATEMENT.” (Yes, all in capital letters!!!)

Our Beloved Economics

My friend Karthikeyan from IGIDR had sent me the link (click here) to a very interesting article by Dr. Paul Krugman in which he discusses and refutes criticisms that have crept up against our beloved subject- economics. The criticisms ranges from over dependence on arcane and difficult mathematics (topology anybody?) to loosing practicality and application. Anybody who believes that these criticism hold true ought to go through the article by Krugman for an scintillating treatment of the debate. For people who are too lazy to go through the entire article (tch.. tch…), I have taken some intriguing excerpts from the article for discussion in this post.

Let’s start with an extremely interesting observation Krugman makes with regard to the criticism that economics makes excessive use of equations and complex mathematics. According to Krugman, equations and identities in economics are criticized by critics because they conflict with the opinion that the critic would like to propagate about an economic phenomenon.

To put forward his point, Krugman takes a very simple equation in economics that we are all familiar with: Current Account Balance + Capital Account Balance = Zero, i.e., the balance of payments as a whole must balance. Not difficult to fathom eh? For the unfortunate ones who may question, “hey wait a minute, if the above holds true, then why the hell do you come across terms like ‘balance of payments deficit’”. The deal is that when we say “balance of payments deficit”, we refer to balance of payments excluding the official reserve transaction component. Once such transactions by the central bank of a country have been accounted for there cannot be a deficit (in fact, official reserve transactions being accommodative in nature are undertaken exactly for the purpose of balancing the BOP). Now, with the above enlightenment, read the following excerpt,

While a number of issues motivate outsider critics of the economics profession, surely the most prominent and emotional involves concerns about the impact of globalization. Many people who regard themselves as knowledgeable about economic affairs are convinced that growing international trade and investment are bad things for workers everywhere. The typical story goes like this: Multinational corporations and other investors are massively relocating capital to low-wage countries, undermining traditional employment in the advanced countries. Meanwhile, hopes that these newly industrializing economies will provide export opportunities and thus alternative jobs for the displaced workers are a mirage: wages and hence purchasing power in these countries will remain low, both because of the sheer size of their labor forces and because they need to keep wages low to attract a continuing inflow of capital. Thus workers in the Third World will see no benefit from the process – their economies will achieve high productivity while continuing to pay low wages – while those in advanced countries will find their position undermined both by trade deficits and by capital outflows.

Now, it takes the brilliance of somebody like Krugman to quickly point out a logical inconsistency in the above story. Since the sum of the current and capital account must sum to zero for any country, it cannot be true that in the advanced countries there will be both trade deficits (or current account deficits) and capital account deficits or for the newly industrializing countries, there will be current account surplus accompanied with capital account surplus. Both the above cases are impossible since the balance of payments wont balance. Hmmmm, so there is something wrong with the story.

For the uninitiated who would like to delve more into this concept of balance of payments, kindly refer the appendix in which I have tried to explain the funda of “always balancing” balance of payments account.

So much about equations and the truth they tell. As for the claim that economics has lost its relevance and stands today as an arcane discipline that can neither be understood nor applied, I think the following excerpt will lay to rest all the waggling tongues,

The American Economic Association’s John Bates Clark Medal is a highly coveted award. And because it must be given to an economist under 40, it reflects research undertaken fairly recently. So what do we learn about the values of the profession – the sorts of work that command the highest rewards – by looking at, say, the last ten Clark Medalists? Here is the list: 1979, A. Michael Spence; 1981, Joseph Stiglitz; 1983, James Heckman; 1985, Jerry Hausman; 1987, Sanford Grossman; 1989, David Kreps; 1991, yours truly (i.e. Krugman himself); 1993, Lawrence Summers; 1995, David Card; 1997, Kevin Murphy. In short: two middlebrow theorists whose work on imperfect markets has had major impact both on policy and on corporate strategy; two econometricians whose techniques are widely used in practical applications; two theorists who specialized on issues of information and uncertainty; a trade theorist who focussed on increasing returns and imperfect competition; a macroeconomist with a strong empirical and policy bent; and two very empirically-oriented labor economists. And as far as relevance goes, notice that in their subsequent careers some members of the group have found that businesses and governments are willing to pay large sums for work based on their earlier research; one became Chairman of the Council of Economic Advisers, while another is now a very powerful Deputy Treasury Secretary; and one has been known to write reasonably successfully for non-economists.

For anybody who wants more of such intellectual crumbs to chew on, go ahead and read the article. It will be worth the time I think.

Appendix:

For understanding the concept of zero balance of payments, we take the case of the India balance of payment account from 1990 to 2006.

(all figures in bn USD)

Year (1)	Current Account Balance (2)	Capital Account Balance (wihout official forex transactions) (3)	BOP (without official forex transactions) (4)=(2)+(3)	Capital Account Balance (including official forex transactions) (5)	BOP (6)=(2)+(5) (approx.)
2006	-9.766	45.779	36.013	9.173	NIL
2005	-9.902	25.47	15.568	10.418	NIL
2004	-2.47	28.022	25.552	1.863	NIL
2003	14.083	16.736	30.819	-14.685	NIL
2002	6.345	10.84	17.185	-6.145	NIL
2001	3.4	8.551	11.951	-3.206	NIL
2000	-2.666	8.84	6.174	2.998	NIL

When we say that a country’s balance of payments is in deficit, we are referring to the balance of payments without official forex transactions, i.e., the fourth column. We have computed the fourth column as the sum of the current account balance (column 2) and capital account balance without official forex transactions (column 3). If we add the forex reserves change component to the capital account balance without official forex transaction (column 3), then we get capital account balance including official forex transactions (column 5). At this point the reader will notice that the magnitude of capital account balance including official forex transactions approximately equals the magnitude of the current account balance (approximately since there are errors and omissions relating to statistical discrepancies), i.e., they offset each other and result in a zero final balance of payments (column 6), again approximately since we have omitted errors and statistical discrepancies.

The Raging Interest Rate Debate

On 29th January 2008, Dr. Y Venugopal Reddy, Governor, Reserve Bank of India presented the third quarter review on the monetary policy for the year 2007-08. And then, all hell broke loose. Contrary to market expectations for an across the board interest rate cut, all important policy rates were kept unchanged. A scintillating debate is now raging whether the RBI was right in holding interest rates constant.

The Bank Rate, Reverse Repo Rate, Repo Rate and Cash Reserve Ratio (CRR) were all kept unchanged. The RBI could not have made a more conspicous move to shout aloud its anti-inflationary stance. The monetary policy review has made it aptly clear that for the RBI, domestic inflationary concerns matter more than anything else. The RBi has given clear indication that our monetray policy will not be conducted accrording to what one Dr. Ben Bernanke does in his home country. Dr. Y V Reddy, it seems, is a strong believer of the decoupling theory.

With industrial growth showing signs of weakening and the interest rate differential between OECD countries and India getting more pronounced, a softening of interest rate was widely anticipated. From Jan 2007 to Oct 2007, the the Index of Industrial Production (IIP) showed double digit growth rates (excpet in September 2007 when the growth slid to 7.56 per cent), reaching a peak of 14.77 per cent growth in the general index in Mar 2007. Since then however, there has been considerable slowdown in industrial production with the growth in the IIP index hovering around 5 per cent in the last two months of 2007 (i.e. Nov 2007 and Dec 2007). In Nov 2006, industrial growth stood at 16 per cent.

Though the general index of industrial production shows a declining trend, the capital goods sector still seems strong with maintaing an avergare growth rate of 20 per cent in 2007. Though here too we have some signs of some weakening (with the growth in the capital goods IIP falling from 24.33 per cent in Nov 2007 to 16.55 per cent in Dec 2007), the overall outlook of the capital goods sector still looks strong with sustained double digit growth rates month after month.

The fall in industrial activity is mirrored by the decline in growth of non-food credit. From a peak of about 35 per cent in Sep 2005, the growth in non food credit (year on year) has shown a declining trend since then and presently stands at about 22 per cent for the fortnight ended 7th Dec 2007. The growth rate for total bank credit has followed a similar trend.

The slackening credit offtake is attributed to tightening of interest rates and the cash reserve ratio in recent times. To curb overheating tenndencies in the economy, the RBI has increased the cash reserve ratio from 4.5 per cent in March 2004 to 7.5 per cent now. A similar hardening in rates has been observed in the repo rate. Since March 2004, when the repo rate stood at 6 per cent, it has now increased to a hefty 7.75 per cent. Thus, 2004 onwards, there has been a clear trend towards monetary policy tightening.
Another vehement argument in support of interest rate cuts is the widening interest rate differential between US and Indian interest rates. This problem has only aggrvated in recent times with aggressive rate cutting by the Fed in wake of the unfolding subprime crisis which has brought the US economy to the door step of recessionary tendencies. The high interest rate differential has made foreign inflows into India even more attractive. The sustianed buoyancy of foreign inflows has forced the RBI to intervene in the foreign exchnage market lest the rupee appreciates. To cool down the upward pressure on the rupee in the wake of foreign inflows, the RBI has been aggressively buying US dollars from the market and therefore pumping more liquidity into markets (sterilization has a fiscal cot to it and hence cannot always be matched exactly to the liquidity being released in the economy on account of RBI purchases of USD). Thus, the net result is that high interest rates maintained to fight inflation actually turn out to be the cause rather that the cure for inflation.

According to Ila Patnaik[1], lowering of inflation rates can solve the twin problems of a slowdown in industrial production and liquidity management. A lower interest rate will spur industrial production to its prevoius highs and will also make foreign fund inflows into the economy that much more unattractive. She also contents that since further appreciation of the rupee is politically unacceptable, maintianing a pegged exchange rate with high rates of interest will only make the liquidity problems worse as the Market Stabilization Scheme (MSS) borrowings by the government (consisting of treasury bonds sold by the governemnt to mop up excess liquidity released as a consequence of forex intervention by the RBI) is running into fiscal contraints.

The above graph depicts the sharp fall in the growth of consumer durables. The consumer durables industry is highly susceptible to interest rate changes as this industry is characterized by credit sales in various forms such as the EMIs. The fall in the growth of the consumer durables is a strong indicator of weakening consumer demand and is a reflection of the tight monetary policy being pursued by the RBI over the past few years.

The growth in the global economy is expected to slow down considerably in 2008 because of the subprime mess and the associated credit market conditions. In a globalized economic framework, it is only but natural that a recession in the world’s largest economy, the US, will have repercussions among all its major trading partners, and that inlcudes India. A slowdown in the US will hamper growth in our domestic economy as well. How strong this effect would be is debateable with the adherents of the decoupling theory negating any major impact on our domestic economy because of a slowdown in the the US, while there are others who argue that a slowdown in the domestic growth rates is inevitable in the face of a gloabal slowdown.

Coming back to the point of interest rates, the widening interest rate differential between India and the US necessarily implies increased capital inflows as finance moves from one economy to another to arbitrage the differential in interest rates. There are different methods of measuring interest differentials between two countries. We can compute the differential by observing the spread between two benchmark policy rates, such as between the federal discount rate in the US and the repo rate in India. We can also observe interest differentials by looking at the spread between the risk free return as given by the yield on 90 day government treasury bills in India and the US.

Either which way we approach the issue, as can be seen from the graphs below, the intererst rate differential between the US and India has indeed been widening sharply, specially after the unfolding of the subprime mess.

An immediate consequence of the above has been a sharp rise in FII inflows into India as international finance flows from the rest of the world to arbitrage on the interest differential, as can be seen from the graph below.

Obviosuly, the RBI has its own reasons for not lowering the interest rates. A summary of the third quarter review on monetary policy outlines the reasons given by the RBI for not lowering the interest rates, and the reasons, none the least, are as complelling as the arguments given for lowering the rates. The major reason cited by the RBI in holding interest rates constant was inflationary concerns. After showing a declining trend since the beginning of 2007, the inlfation slowly crawled up from about 3 per cent in November end 2007 to more than 4 per cent now. WPI rose 4.11% in the week ended January 26 up from the previous week’s 3.93% and the highest since 4.24% was recorded in the week ended August 11. The RBI believes that even this figure is “suppressed” as the fuel price hike, as and when it happens, (on account of high crude oil prices) will lead to a further escalation in the inflation index.

Inflation is rearing its ugly head not only in India, but also in global economies like the US, where, headline inflation firmed up to 4.1 per cent in December 2007 from 2.5 per cent a year earlier mainly due to higher food and energy prices. Another case in point would be China, where the inflation rates have shooted up to a staggering 8 per cent in February 2008.

With regard to high interest rate differentials, Rajeev Malik, ED, JP Morgan Chase Bank (Singapore) makes an interesting point. He contends that even with a cut of say 25 basis points in key policy rates in India, the interest differential would still have been high enough to attract capital inflows. Moreover, a rate cut will also not be percieved as a signal from the RBI that it is committed to narrowing down the interest rate differential to the bare minimum, as nobody expects the RBI to lower interest rates in tantum with lowering of interest rates in the US.

A rate cut would also have resulted in an across the board lowering of interest rates which would spell danger for our already heated asset markets like realty. Morover, as on January 4, 2008 money supply (M3) increased by 22.4 per cent on a year-on-year basis which was higher than 20.8 per cent a year ago and well above the projected trajectory of 17.0-17.5 per cent that the RBI would like to maintain. Reserve money increased by 30.6 per cent on a year-on-year basis as on January 18, 2008 as compared with 20.0 per cent a year ago[2]. Considering the rapid growth in money supply (M3), which has consistently hovered above 20 per cent (see graph below), lowering interest rates always seemed like a risky proposition. The RBI also mentioned in its quarterly review that credit supply can be increased with improvement in credit delivery since bank deposits have increased, and not necessarily through interest rate cuts.

For the moment, the scales seem evenly poised. Only time will tell whether the RBI policy chokes growth or is successful in contaning inflationary tendenceis.

Comments awaited….

References:
[1]Patnaik, Ila (2008), “Fewer Degrees of Freedom”, Financial Express, 29th January, http://openlib.org/home/ila/MEDIA/2008/fe_credit_policy_jan08.html
[2] http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=17833

The Indian Economy Since Independence

Indian Economy 1950-1980

At the time of independence, Indian economic thinkers and planners were greatly influenced by the Soviet Union. The Five Year Plan that the Indian government takes out is actually a Soviet concept. Soviet was a socialist economy while Indian adopted the ‘mixed economy’ approach (i.e. a semi-socialist cum semi-capitalist approach), whereby, side by side a large role for the state in the economic decision making, the private sector also had a substantial presence.

The first 15 years of planning (spanning from 1950-1965) basically concentrated on the establishment of heavy and capital good industries. These are industries which require a large investment and since it was assumed the private sector investment would not be forthcoming, the state took a lead in the establishment of such industries (such industries are important from the economy’s point of view as they supply inputs like machines, tools, etc on the basis of which other industries can develop). The planning process in this period was the brainchild of Nehru and Mahalanobis. In fact the 2nd Five Year Plan (1955-60) was called the ‘Nehru-Mahalanobis’ plan.

India also adopted an import substitution industrialization (ISI) strategy. This strategy was vigorously implemented from roughly 1955-1975. For a resource constraint economy like India, foreign exchange was very scarce. We didn’t export much (our industry was hardly developed at the time of independence) and we used to import a lot. This used to create problem in finding foreign exchange to pay for our imports. Also, being dependent on imports meant that India’s economy was not self-dependent. So the government encouraged the setting up of those industries which could produce commodities that we had to import. Since we imported a lot of iron and steel, the government itself set up steel plants or gave subsidies to private investors who were interested in setting up a steel plant. In that way, it was hoped that the need to import iron and steel in the future would be reduced. Also when such industries become fully developed, they will be able to export and hence add to our foreign exchange reserves.

It all looked good on paper. But it didn’t work out so well. When we set up such import substituting industries, they were not competent enough. They didn’t have the capability to use technology and catch up with other industries in the world. Such industries became highly inefficient and the government had to continue subsidizing them and such subsidies became a drain on the government’s resources. The public sector units (PSUs) that were set up by the government were not able to gain the strength to stand up on their legs. Many reasons could be attributed to it. Corruption, red tape, bureaucratic hassles, the vested interests of politicians, bad management in PSUs (appointing politicians and civil servants on the board of directors), bad infrastructure, strict labour laws (where if you have hired a workforce, you cannot fire them), etc.

Another fall out of pursuing ISI was that we could not develop our export industries. When a government pursues ISI, the priorities about who should have a first claim on the country’s resources change. The government gives top priority to those industries which are of an ISI nature, and hence all domestic resources are saved for such kind of industries. For e.g. India had abundant iron ore and the government reserved all such ores for development of domestic iron and steel industries so that they do not face a shortage of inputs. As it takes time for a particular industry to develop and gain competency to supply in the domestic market as well as compete in the international market and export, we lost out on the foreign exchange that we could have got by directly exporting the iron ore to the world market. And since such import substituting industries eventually never developed, they eventually could never export and earn foreign exchange. It was a double whammy. One you lose foreign exchange by not exporting the iron ores directly, and second, since such industries never gained competency, they never contributed anything to the foreign exchange coffers.

Another way ISI stunts the development of export industries is that ISI strategy means that you develop those industries whose products you have to import. India had to import machines, tools, etc at the time of independence since they require high-skill which it did not possess, and so the government took upon itself the role to develop such skills and manufacture its own machines and tools. This meant that resources, this time say capital (which is very scarce in a less developed nation), was channeled to the setting up of heavy industries. Thus the capital that we could have used to develop, say textile industries (India has a comparative advantage in producing textile) and export them in the world market did not happen as a major chunck of capital was diverted to the setting up of heavy industries. India again lost out on its export potential.

Up to the 1980s, the Indian economy showed a lack luster growth. Our GDP growth rate hovered in the range of 3-4 % and this dismal performance came to be termed as ‘the Hindu rate of growth’ by an eminent economist of that time, Prof. Raj Krishna. The government used to interfere too much in the working of the economy and there were strict guidelines and licenses and rules and regulations for the private sector which stifled their growth. The quality of governance was not good enough, and corruption and red tape was widespread.

However, one should always keep in mind that there are always two sides to an economic policy. Everything was not poor during this period. The ISI strategy had some positives also. It led to the establishment of a highly diversified industrial structure which is an achievement in itself. Also, before independence, there was a virtual stagnation in agriculture which was broken after the independence, thanks to the policies of the government. The Green revolution of the mid 1960s increased India’s agri production leaps and bounds, esp. for wheat in Punjab. From a food stuff importing nation we were transformed into a food stuff exporting nation!!

In the next section, we will have a look at the Indian economy from 1980 up to now.

Indian Economy 1980- up to now

In the late seventies, a realization had crept that something was wrong. What the planners had envisioned at the beginning of the planning period was not materializing. It was envisioned that with the state leading in the industrialization process and with the establishment of heavy and capital good industries (e.g. transistors, generators, machines, tools, cranes, etc.), the Indian industry would gain international competitiveness and finally stand on its own legs without the help of subsidies. However, this never happened. Our industrial sector was underdeveloped, exports were terrible and even the agricultural sector was not going great guns.

It became obvious to the government that something needs to be done. It had to undertake major reforms because what was earlier envisioned was not taking place. But the political and social environment was not ready for a full scale reform programme because of some vested interests (by this we mean that because the existing economic and social position of some groups would be adversely affected by the reforms, they opposed it. To take an e.g. reforms would have meant ‘opening up’ of the economy and allowing foreign companies to produce in India, which would have meant that existing Indian companies which were inefficient and had not developed competitiveness would be swept out of business). Hence the government had to undertake ‘reforms by stealth’, i.e., gradual reforms executed in a silent and hidden manner so that people are not taken by surprise.

These reforms included a gradual import liberalization, allowing imports more freely than before (earlier, government had a very negative view about imports and it was controlled tightly because of foreign exchange and dependency considerations). Such import liberalization immensely helped our domestic industry as they could more freely import items such as machinery, technology, raw materials, etc for their growth. Another important reform was the gradual depreciation of our currency to make our exports more cheaper and competitive in the world market, as it was felt that exports have been ignored for long and now they should be encouraged to help the economy grow. With the depreciation, exports started showing good performance after mid-1980s. But the misfortune of the Indian economy was that with import liberalization, our imports grew at a much faster pace than our exports (even though with depreciation, our exports were becoming cheaper and imports costlier).

This resulted in a widening external trade deficit (i.e excess of imports over and above the exports). A pertinent question that comes up is that since India was importing more than what could be financed by its export, how was the deficit being financed? On closer analysis of the period leading up to the 1991 Indian economic crisis, it becomes obvious that short term debt (which was highly unpredictable and costly) was indiscriminately incurred to finance the external deficit. By the late 1980s, we had a huge external debt as a result of such borrowings. Soon, all sources of borrowings started drying up and with the oil price hike during the 1991 Gulf War, the external deficit escalated into a full blown balance of payments crisis. (India’s external dependency for oil is 80 per cent, i.e. 80 per cent of our oil consumption has to be imported).

With huge external debts and import bills to clear, and no dollars for the same, India had to go begging to the World Bank and the International Monetary Fund to give concessionary aid and loans. They did oblige, but with a condition that the government undertake major reforms to correct the macroeconomic imbalances. Hence, with P.V. Narasimha Rao as the Prime Minister and Manmohan Singh as Finance Minister, India undertook major reforms to bring back our economy to normalcy. And this time the reforms were full fledged and open and complete, unlike the ‘reforms by stealth’.

The following are some important reforms that were introduced-

1) The exchange rate was devalued by 18 per cent to make our exports competitive imports costlier.

2) Previously, India’s industrial sector was highly controlled and regulated by the government and the bureaucracy, which stifled its growth. Now, the government interference was reduced and the industrial sector was given a greater free run. This helped immensely in the growth of the industrial sector.

3) Retrograde acts like the Monopolies and Restrictive Trade Practices Act (MRTP Act) where phased out. The MRTP Act had placed serious constraint on the growth of a company. Any plan for expansion had to be sanctioned by the government under this Act, as the government used to argue that such expansion might lead to monopoly control. With the phasing out of this Act, the Indian industry could breathe a sign of relief and scale up its operations.

4) There was the abolition of the ‘license raj’, under which before a private entrepreneur can open a business unit in an industry, it had to get license and permit from the government. With the abolition of such a ‘raj’, except for a few sectors like defense, nuclear energy, and some other strategic and sensitive sectors, the private entrepreneurs did not require a license or permit from the government to start production.

5) There was also ‘dereservation’ of industries, under which, some sectors which were previously reserved for the public sector were now opened to private sector investment. With ‘dereservation’, many new avenues were opened up for private sector investment. And with the private sector also investing in sectors which were previously the monopoly of the public sector, the PSUs (like Bharat Sanchar Nigam Limited-BSNL, National Thermal Power Corporation-NTPC, Bharat Heavy Electricals Limited-BHEL, Oil and Natural Gas Company Limited-ONGC, etc) were forced to pull up their socks.

6) A conscious policy of accumulating foreign exchange reserves and attracting Foreign Direct Investments(FDIs) and Foreign Institutional Investments (FIIs) was followed. Accumulation of foreign exchange reserves was done to act as a buffer against future external shocks. FDI and FII were also attracted to encourage foreign companies to start producing in India so that the domestic industry would face competition and would be forced to improve its performance.

If someone was to summarize the reforms in two words, it would be called ‘liberalization and globalization’. Liberalization refers to a process where the government loosens its grip on the working of the economy and does not intervene in the economic decision making of the markets. The economy is set free from bureaucratic and government regulation (it obviously does not mean that the economy is given complete free run. Some amount of government regulation is there, but it is greatly reduced). Globalization refers to the greater integration of the domestic economy with the world economy through greater capital flows (like FIIs and FDIs) and greater international trade (i.e. imports and exports).

The beneficial impact of the above reforms is for everybody to see. The Indian economy is today the second fastest growing economy in the world. Our industrial sector has come a long way and we have now the confidence and competitiveness to overtake even foreign companies. Our services sector is a miracle story. The macroeconomic picture is also rosy. Our exports have boomed and foreign exchange reserves presently stand at $220 billion (during the time of the June 1991 crisis, it had stooped to a low of $1.5 billion). FDI and FII are all picking up and the world respects us for our growth story.

Our time it seems, has only just begun……

China, Blackstone and 3 billion USD

Sovereign funds are the flavor of the season. After all, something needs to be done with those burgeoning foreign exchange reserves developing countries are accumulating in their backyard right? Sample this, China’s forex reserves at about USD 1.3 trillion exceeds India’s GDP of about a trillion US dollars. Fancy stuff eh? Japan’s forex reserves totals USD 932 million and third in the list of large forex reserves comes India with forex reserves topping USD 270 billion (in 2007 alone, we added USD 75 billion to our forex kitty).

So what do these countries do with such large forex exchange reserves? Obviously, they invest it somewhere. Now the important question is what is the rate of return these funds earn? Since the major part of a country’s forex reserves is invested in US government treasury bonds, they earn a paltry interest of under five per cent per annum. It is this meager rate of return that has compelled many developing nations with large forex reserves to diversify their investment strategies and hence was born the concept of ‘sovereign funds’.

A sovereign fund is a government owned fund carved out of the forex reserves of a country to invest in nontraditional avenues of investment, such as, picking up ownership stake in listed companies, investing in private debt instruments, etc. i.e., basically investing in avenues other that the traditional risk averse OECD government floated bonds. The aim is simple: to earn higher returns (this also implicitly implies taking greater risk).

China’s has its own sovereign fund of about USD 200 billion (nearly the size of India’s entire forex reserves). Recently, it picked up a 10 per cent stake in the IPO of the second largest US private equity firm Blackstone for about USD 3 billion (hmmmm… a communist country picking up a stake in a capitalist business?) The total size of the IPO was fixed at USD 7.5 billion (of which the Chinese were to subscribe 3 billion dollar worth of shares) and it was billed as one of the largest public offering in the financial sector history. The price range for the IPO was fixed at between 29 and 31 dollars. The Chinese state foreign exchange investment company agreed to buy Blackstone shares at a 4.5 per cent discount on the upper band of the IPO price range of 31 dollars (for approx 29.6 dollars per share).

Wang Jianxi, Chairman of the state China Jianyin Investment Limited (which is to be merged with the Chinese state foreign exchange investment body to oversee the management of the Chinese sovereign fund) said that the Chinese government expects to gain profit by investing in Blackstone through a rise in share prices. Cashing out on the private equity boom seemed like a sound investment strategy at that time. Sadly though, it has not worked out as planned. At least not up till now.

In June this year, China was allotted USD 3 billion worth of shares for approximately 29.6 dollars per share. The share opened trading on Friday (22 June 2007) and immediately the share price jacked up to 35 dollar per share. However on Monday (25 June 2007), the next trading session (after closure of markets on the intervening Saturday and Sunday), the share price slumped to 31 dollar per share, or at par with the upper band of the IPO price range. Since then, it has been a sad journey for Blackstone shareholders with the share price continuing its downward trail throughout 2007 and now trades for about 21.94 dollars per share (as on 28 Dec 2007), i.e., 30 per cent below the initial IPO price.

For the Chinese that basically means that their initial investment of USD 3 billion now amounts to only about USD 2 billion, an unrealized capital loss of about a billion dollars. So that’s the scene in the six months that have passed since the launch of the IPO. According to the share transfer agreement, the Chinese will have to hold the shares for at least a year. We do not know the investment horizon the Chinese had in mind while picking up the Blackstone stake. But moving ahead, it seems unlikely that the lackluster Blackstone shares will turn bullish given the subprime woes in the US economy (refer my article titled Demystifying the Subprime Crisis).

Economist Trevor Hauser is of the view that in case China does eventually exit at a loss from Blackstone, the capital loss incurred should be seen as the Chinese government “paying tuition to learn a little bit about how to invest in the rest of the world.” Whatever the perspective to look at this new concept of sovereign funds, the China-Blackstone episode makes one thing aptly clear- the pursuit for higher returns does not come without higher risks. And herein lies an important lesson for countries, including India, which are planning to launch their own sovereign fund.

Demystifying Subprime Crisis

The word ‘subprime’ has perhaps become the most often repeated word in the newspapers lately. It’s there everywhere. And it lends itself to such complexities that many of us average mortals prefer to know as little of it as possible. Yet, the crisis is not as difficult to comprehend as it is made out to be. It is similar to any other crisis in the sense that it too is the result of ‘irrational exuberance’, a term coined by the previous Fed chief Alan Greenspan to describe asset bubbles. In this article, we try and explain in as simple terms as possible what this ugly subprime monster is all about.

The term ‘subprime’ and a little background to the crisis

Subprime credit refers to extension of credit facilities to borrowers who have deficient credit history or inadequate documentation. The interest rate applicable in the subprime market is higher because of the higher risk involved in lending to people who do not show adequate creditworthiness. The subprime mortgage market has expanded rapidly in recent years. A decade ago, five percent of mortgage loan were subprime; by 2005 the figure had jumped to approximately 20 percent. Currently, there are about $1.3 trillion outstanding subprime loans; over $600 billion of which originated in 2006.

The reason for such breakneck expansion of subprime credit is not difficult to fathom. Post 2000, in the aftermath of the dot com bust and the impending recessionary tendencies in the US economy, the Fed had cut interest rates to as low as 1.5 per cent in June 2003, their lowest levels since 1958. Credit was cheaply available and it was scouting for asset markets in which to exhaust itself. It was no surprise that the outlet for deployment of credit came in form of the housing market as home prices had begun to show an uptrend after having bottomed out.

The story from the side of the subprime borrowers

So, the great ‘American’ dream of owning a house found a perfect partner in low interest rates and rising home prices. In early 2003, the rate on a 30-year fixed-rate mortgage was at the lowest levels seen in nearly 40 years. Home loans were being disbursed at a hurried pace as borrowers did not want to miss out on making a fortune for themselves on the back of rising real estate prices. The rationale for taking out a mortgage loan was that with home prices in a secular uptrend, in a few years itself, the market value of a mortgaged house would outstrip both the principal and interest payment liability attached to it. The house can then be sold in the open market and the excess of the market value of the mortgaged house over the liability towards the mortgage would be the potential capital gain to the borrower.

If the subprime borrower does not want to sell off the mortgaged house, he can refinance his existing loan to cash out on home equity. Home equity refers to the difference between the market value of a house and the liability attached to it. Take a case in which a subprime borrower has taken a loan of $20,000 to buy a house. With housing prices rising, the house may be worth $30,000 after 6 months. However, the mortgage liability attached to it is only $20,000. Thus, the borrower now has a positive home equity of $10,000. At this point, he may refinance his existing loan to cash out on his positive home equity by taking another loan of $30,000, out of which, $20,000 can be used to pay off the previous loan, leaving the subprime borrower with a neat sum of $10,000.

Any which way you look at it, taking out a mortgage loan seemed an immensely attractive optionand if the borrowers were gung ho about obtaining a mortgage loan, the mortgage providing companies were not far behind in supporting their exuberance.

The story from the side of the mortgage providing banks and institutions

The mortgage providing institutions cooked up enticing credit instruments like the adjustable rate mortgages to lure borrowers. An adjustable rate mortgage (ARM) is one in which the interest rates for an initial period of 2 years is very low and thereafter, every 6 months, the interest rates are jacked upwards. These mortgages were bundled with very low initial teaser rates, but after the initial period of low rates were over, the interest burden is hiked up significantly. After adjustments, the monthly payments on such adjustable loans could go up anywhere between 20-40 per cent, putting the borrower at risk of foreclosure.

The process of mortgage backed securitization provided a strong incentive to mortgage providing banks and institutions to rampantly make loans, irrespective of how ill conceived they were. Mortgage backed securitization refers to the process of issuing securities on back of loans disbursed by mortgage companies. For example, say XYZ Co. has disbursed mortgage loans of the value $10, 00,000. This loan portfolio of a million dollars can be broken up into 10,000 mortgage backed securities of $ 100 face value, with interest on such securities being paid according to the different risk levels involved in the recovery of the underlying mortgage.

A complex arrangement is made whereby the repayment collections of the disbursed home loans are deployed for the redemption of the mortgage backed securities. The risk of default is borne by the holders of the mortgaged backed securities, with high rates of interest being paid on tranches which will take the first hit in case of mortgage repayment defaults. Collateralized Debt Obligations (or CDOs as commonly referred to) have emerged as a very popular mortgage backed security in the run up to the crisis.

These shaky mortgage backed securities were labeled ‘investment’ grade by various credit rating agencies which ensured that with the higher interest payments that these securities carried, there was always sufficient demand for them in Wall Street. So all a mortgage lending company had to do was to disburse loans (no matter how ill conceived such loans were) at high subprime rates but packaged as ARMs to make the expensive loans look enticing and affordable, securitize such loans through the issue of mortgage backed securities, and pocket the profits to the tune of the difference between the interest received on the subprime loan and the interest paid on the corresponding mortgage backed security. The result: last year subprime loans were 20 per cent of the $ 3 trillion mortgage market.

So, why did the party stop?

Like they say, everything that goes up must come down. So with housing prices. Early 2006, the housing market started showing signs of weakness. No longer could borrowers think of selling their houses and paying off their mortgage liabilities as the price of their houses started to fall below the mortgage liability attached to it. With housing prices crashing, borrowers could also no longer benefit from refinancing. After the initial honeymoon period with low interest rates on ARMs got over, the pinch of higher repayment burdens caused a massive increase in foreclosures. Out of the 10 million subprime borrowers in the US, about 2 million are struggling with their repayments.

The foreclosed houses are sold in the open market leading to further tanking of housing prices. We thus have a vicious circle of falling housing prices causing a rise in foreclosures which tends to further deflate housing prices and more foreclosures. According to Christopher Cagan of First American CoreLogic, a research group, 13% of the 8.4 million adjustable-rate mortgages originated in 2004-2006 will ultimately wind up in foreclosure.

Defaults on subprime loans have overnight transformed risky mortgaged backed securities into junk. On 20 June this year, two large hedge funds controlled by Bear Stearns representing over $ 20 billion in investments were shut down because of losses on account of investing in mortgage related securities. As the crisis is unfolding, funds which have invested in subprime backed securities are painfully realizing that an ‘investment grade’ credit rating stamp isn’t always as dependable as it appears.

Effect on the US economy

Subprime woes has resulted in U.S.’s largest mortgage lender Countrywide Financial to warn that a recovery in the housing sector is not expected to occur at least until 2009 because home prices are falling “almost like never before, with the exception of the Great Depression.” Housing prices play a very important role in an economy. When housing prices are rising, people feel wealthy on account of increased valuations of their homes. This spurs consumer spending and boosts economic growth. This is known as the ‘wealth effect’. Exactly the opposite happens when housing prices show a downturn- it hurts consumer spending. This spooks everybody with fears of an impending recession.

The Fed is trying to ease the recessionary concerns by cutting down on interest rates. It cut discount rate (the rate at which it lends to commercial banks) by half a percentage point to 5.75 per cent on Aug 17 this year. Then again on Sep 19 this year, it further lowered the discount rate to 5.25 per cent along with lowering the benchmark federal funds rate, charged on overnight loans between banks, by half a percentage point to 4.75 per cent. It has also been trying to fight the situation of a credit crunch by injecting liquidity into the markets. The credit crunch is a fallout of indiscriminate and imprudent subprime lending that has resulted in losses for the lending institutions. Such losses in the recovery of loans is followed by a contraction of loan disbursement. Their capacity to disburse loans is also reduced because of the losses in past lending. The above causes a tightening of liquidity. Another factor adding to liquidity crunch is that banks now prefer to sit on cash piles rather than lend to each other as no one knows how much exposure each institution has taken to the subprime woes.

To mitigate this drying up of liquidity, not only the Fed, but the European Central Bank (ECB),
the Bank of Canada, the Bank of Japan and the Reserve Bank of Australia have all injected liquidity into the banking systems to calm jittery markets. As of Aug 10 this year, the Fed had injected $38 billion into the US banking system while global central banks, like the ECB and the Bank of Japan have together injected over $300 billion into their respective banking systems.

The crisis is also expected to result in weakening of the dollar. Reduced risk appetite for US papers (in view of the crisis) given the large US current account deficit will cause the dollar to depreciate against the major currencies of the world. And the recent reduction in interest rates will only add to that effect.

It is perhaps too early to predict the final shape the crisis will take. It is estimated that lenders and the investors who hold securities backed by subprime mortgages will take a hit of $113 billion as $460 billion worth of mortgages default. And then there is the trillion dollar question on everybody’s mind as to whether the present crisis will cause a recession in the world’s largest economy. To answer this question, we need to wait and watch how the plot unfolds. However, one thing is for sure. The crisis has opened a can of worms of contentious issues like predatory lending, the credibility of credit rating agencies and the role of the regulatory bodies. How these issues are debated and acted upon will have far reaching implications on the working of the financial markets.

So much for the biography of the ugly subprime monster.

[comments awaited……. ]

Derivatives and the Story They Tell

Derivatives have emerged as very popular instruments for hedging risks. India was a bit late in catching the fever, but the recent popularity of such instruments has shown that it is slowly getting the hang of it. But even though futures and options are attractive investment and hedging instruments, it is imperative that one has knowledge how to use such instruments prudently.

It is in this regard that interpreting some derivative investment parameters can go a long way in trying to predict the movement in the markets and gauging the existent investor sentiment. One such popular investment parameter is Open Interest (OI). Very simply put, OI is the total number of outstanding contracts held by market participants at the end of a trading day. By ‘outstanding contracts’ we mean contracts which have not been squared off at the close of the trading session.

The OI data is easily available on the stock pages of any pink paper. A rising OI means that the present trend (up, down or flat) will continue. A falling OI generally means that the present trend is going to be reversed as the current direction of the market is not attracting fresh flow of money.

For e.g., when the general stock prices are rising and the OI is also rising, the existing trend is being confirmed by market participants, which will further strengthen the present trend. Similarly, if prices and OI both are falling, the present trend is not attracting money into the market, which will eventually cause a reversal of the downward trend. If prices are rising and the OI is falling, it is a sign that the market is getting weak and the rise in stock prices may get reversed anytime soon. Similarly, if prices are falling and OI rises, the fall in prices is being factored in by the market as the right direction for the market, which will cause the market to weaken further.

So much for Open Interest. Now, let’s have a look at the Put-Call ratio. The ratio is calculated by dividing the number of traded put options by the number of traded call options. If the ratio increases, it means that contracted put options is out pacing the number of call options, meaning that the mood in the market is turning bearish, i.e., people expect the stock prices to fall.

Put-Call ratio is also analyzed for contrarian investment policies. A very high put-call ratio is seen as indication of extreme bearishness, which is looked upon as an opportunity to buy stocks. On the other hand, a very low put-call ratio is an indication of irrational exuberance. Generally, a put-call ratio above 1.75 is considered to be extremely bearish while a value below 1 is thought of as irrational exuberance.

The above two investment parameters are widely tracked by investors to understand the present market sentiment and make predictions about the future course of the market. Knowledge of these two investment parameters can go a long way in helping make better investment decisions.

The Problem of Plenty

A good problem to be in? I am sure the RBI has an interesting answer. From the problem of scarcity at the beginning of the 1990s, to the problem of plenty now, the wheel has come full circle. And whats worse, it’s making the RBI look extremely dumb.

Since about March 2007, the RBI has given up on trying to peg the Indian rupee to the dollar. Dr. Reddy must have been splitting his hair apart (not that he has much, heh heh, oh sorry!!) trying to contain the imminent appreciation of the INR. They just keep flowing, those ‘speculative’ greenbacks, creating appreciation tendencies in the domestic economy. So when the entire developing world seems to be maintaining an undervalued exchange rate (think China) and galloping ahead on the horses of export-led development, we have a 10 per cent appreciation of the Indian rupee to deal with. (tcht… tcht… lets not get into value propositions… whether its for the good or bad, just let it be….) The thing is, these strange macro economic conditions, reminds me of, yes ladies and gentlemen, the much feared, the much dreaded and the daunting problem of the Impossible Trinity.

One things for sure, it sounds real cool. Come to think of it…. the impossible trinity…. now when did economics start having such cool jargons….

Jokes apart…. this trinity thing is hanging like a damocles sword over the RBI’s head.

Very simply put, it says that a country cannot have an open capital account, a fixed exchange rate and yet have control over domestic money supply. So among the trio of an open capital account, fixed exchange rate and independent money supply, a country can achieve any two that it likes, while control over the third will have to be relinquished. Pretty interesting huh? Its actually fun taking different combinations of twos from the trio and then checking whether the impossible trinity holds. Trust me it does. Every single time…… (if you can find a solution to this problem, be assured of a nobel prize home delivered at your doorstep.)

Greater liberalization of the capital account (including burgeoning external commercial borrowings) has resulted in a deluge of foreign investment flowing into the country. RBI intervening in the foreign exchange market countered the resulting tendency for rupee appreciation. However, this intervention has a fiscal cost to, since the corresponding sterilization through the issue of government bonds entails a much higher interest payment than the interest earned on foreign exchange invested in US government securities.

So, much to the RBI’s dismay, there is a limit to how much sterilized intervention can take place. And unsterilized intervention has a very romantic relationship with inflation, and unacceptable in our political system. So whats the option left? If you want a liberalizing capital account and a control over your money supply, you give up trying to peg your currency (yes, you give some, you take some). And that’s exactly what the RBI did when it allowed the rupee to appreciate in March/April 2007.

So now my friends, you know a story that mighty well explains the proverbial ‘problem of plenty’…..

Trek to Sandakphu

Well, this blog obviously deals with Economics. But for a change, this month’s post deals with something else, (just an innoucous change for this month, no need to tear your hair apart)….. Next month, we will be back with what we are good at… Plain Basic Lucid Clear and Simplified Economics…..

So, here goes. This is a true life story about a trek to Sandakhphu with my three other friends. Sandakhphu is near the Indo-Nepal border, and the route we had taken sort of overlaps the porous boundary between India and Nepal. It was a true adventure as you would agree after going through the story….. Until next time then, goodbye.

The ominous clouds were intimidatingly low that night. The darkness was engulfed in silence. A silence broken only by the groan of the pine trees as the strong winds caused them to arch sideways. The moonlight could not make much headway through the dense fog. It was darkness and gloom everywhere.

I looked back and tried to shield my face from the cutting wind. Nisheeth had badly injured his foot. The pain of the shoe bite had sapped his energy. Every step seemed an eternity. Geet continued to egg him forward. It would be three more kilometers I reckoned, or perhaps four, before we finally reached Sandakphu. The trek was spread over two days, and after having covered more than 45 kilometers, the final three kilometers seemed interminable.

Had we miscalculated? Or was our progress too slow? We left Tonglu seven in the morning, and were supposed to cover about 20 steep kilometers to Sandakphu by five in the evening, when it would still be light. And here we were, still a distant three kilometers from our destination, as the darkness, the fog, the cold and the wind mocked our slow progress. We should have left early I think, or perhaps we should not have left at all.

“You guys shove ahead. Give me my sleeping bag, I will lie here until morning…..”

I could barely hear Nisheeth’s voice as he screamed on top of the shrill winds. ‘Lie here until morning’? There would be no morning for him lying there. His hollow fill jackets and sleeping bag would be like a diaphanous nightgown for the ravaging winds and the biting cold. The temperature was barely positive now. And as the night progressed, it would plummet below zero. There was no option. He has to move on. Pain or no pain.

The torch was like a tenuous speck of flare on the canvass of infinite darkness. Its timid beams were no match for the dense fog. It was difficult to even see my own shoes, let alone the road ahead. I switched off the torch and looked up. Amidst the black, I could see some small flickering lights on the silhouette of a distant hill.

“Its there…”, I yelled, pointing in the general direction of the hill. Geet strained his eyes to discern the flickering lights. His pupils dilated as if the lights engaged in a dance to tease him.

Having an estimation of the general direction in which to move, the obstacle now was to fight the wind and the strain of our legs to move ahead. We moved together and in close proximity, as if to preserve our escaped body heat from being devoured by the cold.

I was worried about Ankush. He had made good progress leaving us behind. He should have reached Sandakphu by now, I reckoned. Why then was there no search party. Has he not alerted the people about us being stuck here? I shuddered at the thought of him not making it to the top.

A semi circle mounted on a cuboid, half green and half white, made of concrete, materialized from nowhere. It said “Sandakphu 2 kms”. Just twice the distance from my home to the closest railway station I thought. It seemed to reverberate on the back of my mind…. ‘Just twice the distance from my home to the closest railway station…….’

“We must move faster…. The winds are getting stronger… “, said Geet. “Walk on this side of the road… There’s a free fall on the other side.”

Nisheeth had felt the pain of his shoe bite for so long now that he looked sedated. The pain no longer pained him. It had become a part of him. It no longer seemed external, but as if it was congenital. Now it was not the pain, it was the fatigue.

We breathed heavily, but our energies replenished less than proportionately. It was the thinning of oxygen I guessed. At 12000 feet above sea level, every foot of altitude gained can make you feel the pinch of low oxygen.

Heaving and shifting the load of our rucksack from one shoulder to another, we inched forward. Nisheeth could barely lift his right foot, and was dragging it over the edgy rocks, when he came across another milestone. The inscription on the milestones seemed like the only wonderful thing to greet us in our abyss of gloom. One more kilometer to go.

I felt like throwing my rucksack on the ground and making a run for it. I just wanted it to end. I wanted the shelter of a room, taste of food, softness of a bed, warmth of a thick quilt, and the sleep of a baby. The elevation eased and the visibility cleared a little as we climbed the final stretch, but the wind grew fierce as we approached the top of the hill from the side facing the Himalayas.

Every ounce, every iota of our forte was now spent on negotiating the tenacious winds and moving ahead. But it seemed too much. Can’t we just fall here and wait for someone to find us? We are so close. Surely someone will find us. “But the icy winds might find us before someone else does..”, said Geet in a whisper.

Few more meters and every atom in me broke down. My eyes sagged and I looked down. The torch flickered as the batteries gave way. My spine ached and my feet numbed at every effort to inch forward. My legs were giving way and I lifted my head in one final glance at the huts. It all looked desolate and still, but there was movement….. the chimera of fatigue, I thought initially…. but those flowing locks of hair……… I managed a weak smile as I discerned the lanky figure of Ankush cutting across the winds and making a dash for us..……