|»5 Minute Wrap Up by Equitymaster|
On This Day - 8 JULY 2011
Kudos to the RBI!
In this issue:
It's never too late to get rid of 'bad stocks'.
After all, you never know how bad a market crash could get.
But what are these 'bad stocks'? How do you identify them?
For answers to these questions, and more,click here to read on...
So how has the RBI achieved this feat? Simple. It acted in the best interest of the country. Rather than bowing down to the money pressures. A classic example of this is RBI's instructions to the banks to not lend money to the real estate companies. Earlier this month, RBI had issued a directive to the banks cautioning them against lending to the real estate sector. The directive also urged the banks to carefully check the balance sheets of the realty companies as well as their valuations before sanctioning loans. This directive simply reinforced RBI's earlier guidelines of cautioning banks against the realty companies. The result, the banks do not have a large proportion of their loans tied up in the risky realty sector, which has a high probability of defaulting them.
Time and time again, RBI has come out with warnings and directives that have kept the risk exposure of Indian banks at bay. It may not have been very successful at containing inflation in the country. But it has definitely been successful in not letting our banking system go down like we have seen in some other countries. The same banking system that is pivotal to the economic growth and health of a country. Kudos to the RBI!
Profits of the Indian companies would continue to remain under pressure in this quarter as well due to rising interest rates and increasing commodity prices. Although the inflationary concerns have eased out a bit broader macro-economic challenges and global concerns remain an overhang. In such cases, quarterly earnings could prove to be an important trigger for the markets. And the broader picture on the earnings front is not that exciting. While revenue growth of India Inc is expected to remain strong, the bottomline is likely to be impacted by rising input prices and interest rates. We believe that in such a scenario one needs to look out for companies which have adequate pricing power (negates the input cost impact) with return ratios that exceed their cost of capital. Such companies would be in a better position to keep their margin profile intact and also generate wealth for the shareholders in the longer term.
But this is not all. The upstream and downstream regulatory bodies set up by the Government to attract foreign investments and offer a level playing field have been blamed for playing unfair. The upstream regulator has been charged for showing undue favors. The downstream regulator is mostly at loggerheads with oil ministry itself and its decisions face legal challenges.
There are no two ways about the fact that we need foreign investment and technology to realize full potential. With 80% dependence on crude and ongoing gas supply and oil crisis, the last area where we can afford to slip are the policies. Hence, it's time for Government to wake up and go for a regulatory overhaul.
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