Are we lucky to have Subbarao vs. Bernanke?

Aug 10, 2011

In this issue:
» Near zero rates may help gold soar higher
» The problem with rating giants
» Indian mutual funds invite foreign investors
» The first trillion dollar company
» ...and more!
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They both shoulder tough responsibilities with a very gentle disposition. But the similarities between the RBI chief Dr Subbarao and his American counterpart Ben Bernanke end there. The former has taken over the reins from one of India's most respected central bankers Dr. Y. V Reddy. The latter has had the misfortune of inheriting a very volatile monetary system from his predecessor Alan Greenspan. It is Greenspan who is believed to have presided over the subprime bubble that eventually led to the debt crisis in the US.

That apart, it seems the RBI Governor, is also blessed with a touch of humility and humour. In an interview with a business daily in 2009, Dr Subbarao was asked whether US Fed chief Ben Bernanke increasingly looked like Abhimanyu, the tragic character in Mahabharata who had entered the Chakravyuha but lacked the knowledge of how to get out of it! Bernanke had then made a statement that his biggest challenge would be how and when to exit the massive monetary stimulus package he had delivered to help the US$ 14 trillion US economy come out of recession. To that Subbarao replied, "We are all Abhimanyus in our own ways." A very honest observation indeed back then! But a lot of water has flowed under the bridge since the subprime crisis. Assets have been revalued to reflect their true worth. Organizations and economies have had to restructure their over leveraged balance sheets. And cheap money has come to be despised especially by the prudent lot. But Bernanke's opinions have not changed.

Once again as the US tries to improve its downgraded sovereign rating with cheap money, we wonder if Bernanke will have a change of heart. Or will he keep printing money in the hope of higher employment in the US? Meanwhile with an extended term of another two years, Dr Subbarao may be better placed to complete his unfinished tasks. Ensuring that the Indian financial system is more robust and resilient to global shocks has been at the top of his agenda. Success in taming the inflation demon may add another feather to his cap!

Do you think allowing an extended term to RBI governor Dr Subbarao has been a wise decision? Share your comments or post them on our Facebook page.

 Chart of the day
Exposure to best rated debt not just ensures safety of money for the investor but also cheapest source of funds for the borrowers. Investors and companies in the US have been the maximum beneficiaries of this. As today's chart shows the US had the maximum exposure to AAA rated debt at the end of 2010. In fact it far outstripped even the likes of Germany, France and the UK. But what that also means is that a subsequent downgrade of the AAA rated debt papers could affect the borrowing costs of the US based companies the most.

Data source: Economist, IMF

The S&P may have sent out a warning signal to the US to mend its profligate ways. However, it looks like the US authorities, most of all the US Fed is in no mood to listen. As per reports doing the rounds, in an action that is akin to thumbing its nose to the S&P, the US Fed took the unprecedented step of promising to keep interest rates near zero for at least two more years. This is not all. The US Fed further proposed that it will not hesitate to take more action if required. Clearly, what shape these additional actions will take is not known. But most likely, it will be another round of quantitative easing, QE3 to be precise. Thus, the biggest question that remains answering is whether this new salvo fired by the US central bank will have any economic impact at all? Perhaps a huge 'no' as far as we are concerned. What the US needs is debt reduction and the purging of the bad assets out of the system. However, the Fed seems to be looking in exactly the opposite direction. It seems hell bent on subjecting the masses to hyperinflation. Little wonder, gold is creating new records every day.

The Standard & Poor's appeared in the headlines of every daily after the rating agency downgraded the AAA rated US debt. And the news was received with shock and panic by the entire world. Global markets melted due to this headline. Then there was another piece of news that S&P had made a US$ 5 trillion mistake in their calculations. People scoffed at this news by stating well S&P has been known to be wrong. Well then why rely so much on the first news if S&P is not really supposed to be 'reliable'? This paradox highlights the dominance that the top 3 rating agencies - S&P, Moody's and Fitch have on investors' minds. And this dominance is caused by the humongous market share that the big 3 have in the ratings market. However, their errors in judgment have become more and more glaring. Especially, since the mistake of allotting high ratings to the subprime loans. Since then several cases have come into light where the Big 3 made either an error in judgment or an error in calculation. Either ways, the only solution to the problem is to encourage more competition. Although rules and laws have been formulated by US to promote competition, it has not actually taken effect. Maybe the current downgrade would be good in a way. At least the US has woken up to the problem of the dominance of rating giants and may make better laws to promote competition. After all the US lawmakers and enforcers would not take this downgrade lightly.

There is an urgent need for stable, long term capital in the Indian equity markets. The sell-off in Indian equities over the past few days helped prove this point. The S&P downgrade of the US economy is not expected to affect India significantly. However with overall pessimism in the markets, the sell-off impacted even the safest blue chips.

India is now allowing qualified foreign investors (QFIs) to invest up to US$ 10 bn in mutual funds. They can also put in US$ 3 bn into debt schemes that invest in bonds issued by infra companies. QFIs are retail investors, insurance firms and trust funds. They usually invest from a longer term perspective. So far only FIIs and NRIs were allowed to invest in domestic mutual funds. This new move is expected to deepen market participation, reduce volatility and boost infra spending in the country. This move will also give a fillip to domestic mutual funds and add to stability in the domestic equity market.

The pace at which Apple's sales and profits are growing, it could very well be the first company to enjoy a market cap of US$ 1 trillion. If that happens, a US$ 1 trillion Apple would mean adding all of Microsoft, Google, Intel and Amazon and more to the firm's current market capitalization which is about US$ 342 bn. What is making Apple such an attractive bet is despite its robust performance, the stock is trading approximately in the line with the US market and at less than half the price-to-earnings multiple it fetched in 2006, when revenue growth was much slower. The iPhone and the iPad have worked wonders for the company. Plus because the smartphone and tablet markets are still young, the scope for growth is more. The company is cash rich too and is sitting on US$ 76 bn of cash and investments. That said, the true test for the company will be its ability to do well even after the departure of Steve Jobs who has been the driving force behind the company. Moreover, its ability to continuously launch innovative products will be the key in sustaining this kind of growth in sales and profits. If it manages to do both then achieving that US$ 1 trillion mark in the future could well be within its reach.

In what has been a reprieve from the sharp selloff in equities seen over the last 2 sessions, the benchmark indices in the Indian stock market maintained a strong momentum since the start of the trade today. At the time of writing, the BSE Sensex was trading higher by 223 points. Most other Asian markets also closed higher. Europe has also opened on a positive note.

 Today's investing mantra
"It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value. If he wants to be shrewd, he can look for the ever present bargain opportunities in individual securities." - Benjamin Graham

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19 Responses to "Are we lucky to have Subbarao vs. Bernanke?"

Joshua Kurien C

Aug 12, 2011

SThe decision is correct. Those who are looking at their personal portfolio an those who are balming the Central bankers without knowing the business and not knowing to suggest an alternatiive should shut their mouth. Let the professional do their work. if the politicians are not interfering, our Central bankers can do a great job. They are doing!



Aug 11, 2011

I don't know about how bad Bernanke would have been but in Subbarao we have

These are necessary if greater insecurity in a shaky world situation is to be avoided. We are coupled in a detached sort of way with larger World markets and we must therefore find home-remedies to our challenges.

Every country is doing what is best for itself. All that happens around us could more often than not, be damaging for us in macro terms. We must therefore repose faith in Subbarao - for his VISION, his EXPERIENCE and his CONVIVTION to navigate India through rough waters.


Balaji J. Deshmukh

Aug 11, 2011

Yes, we should be glad that a worthy, genious and faithful indian is now not only sworned in the proper position but appreciated him by giving extension for more two year as governor of rbi. I am really proud of him. Also I am confident that due his extension our country will difinitely be benefitted.


S N Rao

Aug 10, 2011

Very correct decision. As correctly said, it will ensure continuity. He has proved he can balance between hard & soft limers.



Aug 10, 2011

DEar Sir,
What is important that the decision has been taken. Generally Finance ministry delays till the last, one can say purposely they delay important decisions. Continuing with Shri Subbarao for the next two years, removes a major uncertainty. Peace to Mr. Subbarao, as well as the financail mkts. At least for once this Govt. ahs doen a good job.
And of course, Indian RBI Governors have always been good. Pardon me but A south Indian Governor has always given good results. Shows they are more intelligent. Please those who feel hurt, pardon me, but facts cannot be denied.



Aug 10, 2011

I am not a financial expert but this much I can say the moment Mr. Rao appears on the TV with his one point programme of increasing all the rates that is available to him to increase my portfolio dwindles.My son always shout whenever Mr Rao appears on the TV to sell all my holdings to avoid erosion. Mr.Rao is synonim to 500 points fall in sensex


Ganesh K

Aug 10, 2011

Dr. Bimal Jalan, Dr. Y V Reddy and now Mr. Subba Rao all are brilliant people who could have gone to USA and earned millions of dollars as pay, perks and bonuses (like many other brilliant Indians who head financial institutes in US). But chosen to stay back and serve brilliantly to this country, on comparatively lower remunerations. We should be thankful to them.



Aug 10, 2011

Yes. we are lucky to have Dr. Subbarao as our RBI Governor.



Aug 10, 2011

economist created inflation and now will solve it.though against wish of political masters.
also when usa is doing good they benifit when they fall we bear the brunt as all gates are open for them.
when i sale property i pay ltcg when they sell company(vodaphone buy) of billions no tax comes to india thats policy!!!!!!!




Pankaj Gaur

Aug 10, 2011

Yes, no doubt we are lucky he have shri SUBBARAo on the other hand we are unlucky that we have A RAJA, Kalmani, Kanimodi with long chain of corrupt politicians and bureaucrats. Govt should review their retail policy which is recently open for foreign retailchains

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