Testing Silver's Mettle

By Roshni Jayakar

It was a silver streak. The price of the white metal touched a nine-and-a-half-year high of $7 (Rs 280) an ounce on February 4, 1998, in the international markets on the news that investment guru Warren Buffett had turned into a silver bull, and bought 130 million ounces for his Nebraska (US)-based Berkshire Hathaway financial services and investment company. The amount is almost 20 per cent of the world consumption. Naturally, at home, silver prices have zoomed to an all-time high of Rs 9,350 a kg.

But will India follow the global trend of rising silver prices? Most unlikely, say bullion experts, who see the domestic price remaining at the current levels over the next few weeks. The key ponderable in India--one of the world's biggest consumers of silver--is demand. In calendar 1997, India consumed 3,800 tonnes, or 16 per cent of the global demand. Says Makhanlal Damani, 61, president, Bombay Bullion Association: "If silver prices remain at $7 an ounce (landed cost: Rs 10,500 per kg), India will not make further purchases." In fact, there was buyer resistance in India even as the price crossed $5 (Rs 200) an ounce in the international markets. One-third of the demand for silver comes from photographic film and paper-makers, one-third from jewellery- and silverware-makers, and the rest from a broad range of industrial applications. Most of the industrial demand for silver (including that from film- and paper-makers) is not affected by price variations.

Globally, this is the second time in the last two decades that silver has hit the headlines. The last was in January, 1980, when prices shot up to $50 (Rs 2,000) a troy ounce--from $6 in August, 1979--as the Hunt brothers of the US cornered silver. Later the same year, silver crashed to $10 (Rs 400) an ounce, with commodity speculators unable to meet margin calls. Interestingly, this is the first time in more than 73 years that gold and silver have moved in opposite directions. But the bull run in the white metal is unlikely to be long although global demand may be rising steadily. Which may tarnish the domestic price-line of silver

The Taming Of The Tiger

By Roshni Jayakar

Although the stockmarkets ushered in the Chinese Year Of The Tiger, it was the bear that was on the prowl. On January 28, 1998, the Bombay Stock Exchange Sensitivity Index (Sensex) touched a 52-week low of 3,209.55--the previous low being 3,225.24 on January 2, 1997. Nevertheless, the sentiment was mixed. Even though petroleum stocks, including Bharat Petroleum Corporation Ltd (bpcl), were at their lowest in 52 weeks, pharmaceutical scrips were scaling 52-week highs.

But the markets may well be preparing to test a new low. The recent Reserve Bank of India (RBI) measures, which have pushed up interest rates, have made debt more attractive than equity. Moreover, corporate earnings are unlikely to pan out as forecast earlier, even as the rupee is yet to bottom out. All this has kept the Foreign Institutional Investors (FIIs)--the market movers in the last three years--off the bourses. Naturally, net FII investments were a negative Rs 304.30 crore in January, 1998, for the third month in a row.

Meanwhile, according to the Institute of International Finance, Washington, private sector capital flows to the emerging markets totalled $199.60 billion last year--the lowest since 1994--in sharp contrast to the $295.20 billion recorded in 1996. But in 1998, private sector capital flows, both portfolio and direct, to the emerging markets are expected to total only $171.50 billion. Moreover, given the South-East Asian crisis, portfolio investments in Asian nations will almost certainly be meagre. It is unlikely that domestic investors will push up the market by themselves.

However, given the fact that the primary market is likely to remain subdued at least till April, 1998, the stockmarkets do not require large inflows of foreign funds to provide a reasonable upside from the present levels. The offerings in the offing on the primary market, and beyond Elections 98, are still few, with the preponderance of public sector units (IBP, Numaligarh Refinery, and BPCL), and banks (Indian Overseas Bank, the State Bank of Hyderabad, IDBI Bank, Centurion Bank, TimesBank, and UTI Bank).

Although the post-election scenario might spring a pleasant surprise and provide a strong protection to the market downside in the short term, the markets are expected to trade in the range of 3,700-4,000 for the better part of this year.

Driven By Demat

By Roshni Jayakar

They're trading in virtual paper. Since January 15, 1998, when the Securities & Exchange Board of India (SEBI) made dematerialised trading in eight companies--Reliance Industries, the State Bank of India, Larsen & Toubro, Tata Steel, the Industrial Credit & Investment Corporation of India, Indian Petrochemicals Corporation, the Industrial Development Bank of India, and the Bank of India--compulsory for institutional investors, the depository segment of trading has been marking steady, albeit slow, progress.

The evidence? Try 280 million dematerialised shares of eight companies; 8,000 new accounts with the National Securities Depository; and record Rs 1,400 crore worth of trading.

However, while domestic institutional investors, including the Unit Trust of India, the Life Insurance Corporation, and the General Insurance Corporation, have dematerialised 57.13 per cent of their holdings initially, volumes in this category have been thin, making the sale of otherwise liquid stocks difficult. And this has peeved institutional investors, especially the foreign institutions, although they are in favour of dematerialised trading.

But SEBI has already realised that segregation in trading between the dematerialised and physical segments is affecting liquidity in the market. The stockmarket watchdog has, therefore, decided to permit delivery of dematerialised securities as good delivery in the physical segment from April 6, 1998. However, the solution is clearly a short-term one, and necessary changes will have to be made to the Depositories Act for the long term.

Besides SEBI's measure, dematerialisation could receive a strong push from banks and financial institutions, who are likely to insist that the promoters of companies dematerialise their shareholding before seeking loans. Already, the HDFC Bank has made a beginning in this direction by offering a one per cent concession on the interest charged on loans if the shares are dematerialised. From the moves being made towards dematerialisation, one thing appears certain: the gains won't be just on paper.

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