We may not see a bubble in India in next 50 years

Aug 12, 2010

In this issue:
» 4 Indian companies get higher than sovereign rating
» Half of rural India still lives in darkness
» Speculation affecting food prices
» Chinese housing prices may see 60% slump
» ...and more!!

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Rewind back to the year 2006. It was a time when the world was awash with liquidity. Real estate in India was setting new records everyday just as it was doing in the US. Money was flowing into the sector like there was no tomorrow. Yet four years later, banking system in the two countries is perched at two extremes. The banks in US have needed massive capital injections to help them recover from the real estate crash. No Indian bank on the other hand has come even remotely close to failing after the onset of the credit crisis.

Agreed that there are a lot of factors that could be attributed to the extremely healthy state of Indian banking even after such a devastating crisis. We believe the most important of them all could be put down in just three letters, RBI. Yes, that's right. It was indeed the huge preventive measures taken by India's central bank back then that helped us come out of the crisis virtually unscathed. And this is not the first instance that RBI has come to the rescue of India's financial system. Time and again it has ensured that Indian banks do not get too carried away by the bubble mentality.

That the RBI really means business was on display yet again recently when it came out with a discussion paper on new private sector banks. Apparently, the RBI has set some really strict terms for new bank licences. Furthermore, it has also made quite clear its unwillingness to give banking licenses to industrial groups and NBFCs with interest in real estate.

And this is not all. There are a lot of other safeguards in place as well. Clearly, RBI is one institution which starts with the assumption that every entity is guilty until proven innocent. And we firmly believe it should stay this way. For this will make sure that we do not have credit crisis even over the next 50 years.

 Chart of the day
Global economy enjoyed a period of low inflation for most part of the 1980s and 1990s and also a good part of the early 2000s. This could certainly be attributed to a lot of favourable factors. One of the most important was the rise of China as a manufacturing powerhouse. Low wages and a fixed currency peg to the dollar made sure that the dragon nation kept exporting goods on a massive scale and that too at pretty competitive rates. But perhaps not anymore. As today's chart of the day shows, wages for an average Chinese worker is on the rise in real terms and this is likely to put pressure on cost of goods coming out of China in the coming years.

Source: The Economist

The credit profile of the average Indian corporate has gotten better in recent times. Or so opines rating agency Standard & Poor's. According to S&P, this is on the back of higher demand for products and services stemming from good domestic macroeconomic conditions. Not to mention a gradual improvement in the global economy. In fact, it has rated four corporates above even India's sovereign rating. These four companies are Reliance Industries, Wipro, TCS and Infosys Technologies.

S&P feels that these companies would be able to service their obligations even if the sovereign comes under severe stress. In general, debt has increased for some companies but they are also expanding, while others have deleveraged debt. This has led to the overall improvement in the credit profiles of corporate India. Ratings from these agencies need to be taken with a pinch of salt. However, they do have direct implications for Indian companies. This is because it is these ratings that determine the interest rates that companies will have to pay on their borrowings.

Most Indian investors rely a lot on the growth potential of India while making their investment decisions. And you might be no different. But what if the India growth story ends with a whimper? Well, if the country's power woes were to continue unabated, this might become a reality after all. As per a report in Mint, around 57% of rural households and 12% of urban households in India have no access to electricity. That partly explains why our per capita power consumption (700 units a year) is way below the world average (2,600 units).

The power sector is already battling a number of serious issues that have stymied its growth. Fuel and equipment shortages are the norm. Vast tracts of land to set up the plant are hard to come by. Over that, the whole host of regulations makes the project execution very tiresome for companies. All this has resulted in the country consistently falling short on capacity addition targets. If we do not get over these issues fast, which anyways looks very bleak, the day is not far when we will rue our destinies.

The origins of economic activity lies in basic needs. While air and water mostly remain outside formal markets, food and shelter squarely fall in the economic domain. A lot of attention has been paid to the disruption in the housing markets in the last few year and the ensuing financial crisis. Not enough has been said about food though. During the height of the last bubble, food prices shot up to the point where there were food riots in the poorer nations. Think Bangladesh and Haiti. Turns out, food prices are going up so high again that another set of riots may occur soon.

A column in the Financial Times points out how food prices are set by three forces: supply and demand; speculation and the political equations of food producing and consuming countries. Sadly, very little attention has been paid on regulating world food trade. Another worrying trend in the increasing speculative money moving towards food commodity markets. We generally get worried when markets malfunction in any sector or geography. But when it comes to food markets, it has a very high human cost. Especially of poorest of the poor.

Rs 35 bn worth of redemeptions! That is the kind of outflow that the Indian mutual fund industry witnessed in July 2010. Reasons for the same could come from several quarters. Investors being wary of yet another crash, ban on entry loads and regulatory dispute on schemes are just a few of them. But what is certain is that the industry needs to revamp its operations on an urgent basis. In a sector where size was all that mattered, huge outflows could be suicidal. Performance has been the key metric that the mutual fund regulator is emphasizing on these days. And probably that is what even the players should focus on instead of relying on distributors to popularize their schemes.

Property prices in China have soared in recent times to reach unjustifiable levels. And banks have been responsible for the same as they have lent indiscriminately to the sector. So, it hardly comes as a surprise that Chinese banks have been instructed by China's banking regulator to undergo stress tests. This is for the scenario of a 60% plunge in home prices envisaged in Chinese cities where prices have jumped out of control. What happened to the property market in the US is still fresh in the minds of everybody including the Chinese. The mortgage market there collapsed and triggered the biggest global financial crisis since the Great Depression. Little surprise then that the Chinese authorities do not want to find themselves in the same boat. The Chinese government has been doing its bit to ease the housing bubble. It has taken steps such as lifting minimum mortgage rates and down payments for second homes. It has also suspended lending for third homes. This has obviously not satiated the government. And so it wants to take additional measures to prevent the kind of crisis that emanated from the US.

The Indian indices languished in the negative territory for most of the session today, only coming close to the dotted line in the final hour. The benchmark indices shed gains backed by selling pressure in FMCG and IT stocks. Asian markets across the board are trading lower with Australia and South Korea leading the pack of losers. The BSE-Sensex was trading nearly 4 points higher at the time of writing. The European markets have opened on a cautious note.

 Today's investing mantra
"If you're an investor, you're looking on what the asset is going to do, if you're a speculator, you're commonly focusing on what the price of the object is going to do, and that's not our game." - Warren Buffett

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14 Responses to "We may not see a bubble in India in next 50 years"


Aug 25, 2010

Last time bubble was due to real estate sector starting from US.Every body now focusing and tightening on real estate sector including India and China. This time bubble may be due to different sector or crises may come from different form.Any how every bull phase going to end only with scam or crisis. Always only small investors going to burn their fingers.



Aug 13, 2010

Indian capital market is going northward



Aug 13, 2010

I'm glad that RBI is not run by corporate maniacs who's selfish interest in capital simply & mostly only results in loss & dept for larger % people simultaneously accumulating wealth in hands of few.
(The Venus Project) -Answer to a true, civilized & brighter society.


Adi Daruwalla

Aug 12, 2010

1) Well its good that S & P have given a rating for the top Indian Companies, all in the IT sector. (As mentioned take it with a pinch of salt)S & P had also given a rating to Goldman Sachs, and Freddy Mac and Fanny Mae. Now everyone in the US is safeguarding their fannies. Do we want to be in a similar position???
We need the external auditors to tell us if everything is in line with the corporates, genuinely in line, and not S & P
2) Regulator for Mutual Fnds needs to see all annual reports being published that all schemes the dividends paid out are reflected and shown. There sre many schemes that are not doing that. Take DSP Blackrock as an e.g. they have multiple schemes and drives the investor crazy to find out if the dividend they have received matches with the one shown in the report or not???? DSPBREF Regulator must standardize the formats in which all mutual funds must do the reporting. (No variations, no exceptions) If dividend not paid then they should show NIL, to avoid ambiguity.



Aug 12, 2010

Sincere inputs by readers



Aug 12, 2010

Indian economy is like the piscing of the child. The child wets without notice, so also Indian economy. With 100% corruption and 70% money in circulation is unaccounted and highest depositor in Swiss Black Money Banks, no rule of economics play here, a land of fatalists and blind faiths. Even rain God plays truants, making weather predictors cover their face.



Aug 12, 2010

As on date, nobody wants a bubble anymore. If your expectation becomes true, it will be good for all Indians only. LET US ALL HOPE THE SAME.



Aug 12, 2010

However good or honest the RBI is, it couldn't do anything with Harshad Mehta or Ketan Parekh. When bio-tech bubble comes RBI can't do anything either, remember the dot-com bubble?

Sometimes the RBI wins, sometimes the greedy ones out there in the market.




Aug 12, 2010

Though tis is my first time to go through your mail's but it seems to be very informative. i read ur few bk dated mails also. it gave a vision to see hw things are going on but i cld not understand here u write in todays topice we may not see bubble till 50 yrs . but hw. can we predict u urself r writing so many problems going on almost on every front when we are not yet able to provide basic aminities of life to the people and every where economies are changing faces off-n- on so saying 50 yrssss matters a lot.



Aug 12, 2010

To predict for 50 years is ridiculous. With Indian propensity for scams,it may occur within a week.

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