|»5 Minute Wrap Up by Equitymaster|
On This Day - 14 MAY 2010
Has SEBI gone completely wrong here?
In this issue:
---------------------------- Crash Proof Your Portfolio Now! ----------------------------
Stock markets are integral to a capitalist economy. And we admire India's stock market regulator, SEBI's initiatives in promoting transparency and competition. SEBI is now proposing higher capital requirements for mutual funds, investment banks and brokers. The minimum net worth requirement for mutual funds used to be Rs 100 m. It has now been increased five times to Rs 500 m.
The apparent reason is that mutual funds will be able to absorb more losses if they have higher capital. But we think SEBI has got it completely wrong this time. Quantity does not always assure quality. After all, weren't all the firms that caused the global financial crisis, very large? We think, by hiking the net worth requirement, SEBI will create a high entry barrier. One that only the wealthy can cross. Not necessarily the most talented. It will end up promoting a rich boys' club beyond the reach of many. But this is just our view. Tell us what you think of this move by SEBI.
But isn't the difference in the two economic zones baffling? After all, even the developed world unleashed stimuli just as quickly as the Asian economies. The difference perhaps lies in the manner in which the consumers of the two zones behaved. Developed economies had overleveraged consumers and overleveraged governments. However, these concerns are not anywhere close to being equally big in emerging Asia. Thus, when either the governments or the consumers or both loosened their purse strings, growth followed.
Furthermore, even penetration levels of a lot of goods and services are abysmally low in emerging Asia. This provides a further fillip to growth. However, things are gradually beginning to heat up. Supply is failing to catch up with demand at the same time the Asian central banks are adopting a loose monetary policy approach. They may have to tighten up a bit more or else inflation and asset bubbles could rear up their heads yet again. From a long term though, Asia's future does look as bright as ever, especially in China and India.
The BRIC-originated banks are seen as the engines of growth for global economy. At the same time, the crisis in the West has done a lot of good to their reputation. Primarily, because they are gatherers of large savings rather than givers of large loans like their peers in the West. But they are also expected to face as much resistance in establishing a global presence as did the American and European banks. As it is, globalization of banking is no more a sought-after model as it once used to be.
Various other macroeconomic indicators have also begun to form the basis for RBI's intervention. These are the dollar's performance against global majors and movement of Asian currencies. India's monetary policy when assessing rupee volatility would also have a bearing. Thus, it appears that the central bank's tolerance for volatility in the rupee has increased. This means that Indian corporates may have to brace themselves for possibly more fluctuations in the forex market. The RBI certainly does not want to participate as actively as it once did.
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