Forget Greece, US. There are ample debt worries at home! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

Forget Greece, US. There are ample debt worries at home! 

A  A  A
In this issue:
» Outward FDI has grown much faster than inward FDI
» Cost of foreign funds goes up due to Eurozone crisis
» Govt considering holding company structure for PSU banks
» Will new AIF norms be a boon for the mutual fund industry?
» ...and more!


00:00
 
India has been facing the wrath of high inflation for quite some time. The Reserve Bank of India (RBI) has tried to reign the inflationary monster by raising key lending rates 12 times in the last 18 months. There was hope that the rate hikes would show some impact in the second half of the financial year 2011-12 as growth would slow down. But is seems that there is going to be hardly any relief on that front.

The Indian government, which is the biggest borrower in the economy, has announced that it would borrow an additional Rs 529 bn from the market. This would take the total government borrowing for the fiscal year higher by almost 13% from the budgeted Rs 4.17 trillion to Rs 4.7 trillion. Lower government cash balances and a lower pool of small savings have been cited as the main reasons for the higher borrowing requirement. To further add to the trouble, the second half of the year is also the time when Indians borrow and spend. With the government set to corner a major chunk of the debt market, private borrowers are going to have tough time raising money.

You may ask how does higher government borrowing translates into high interest rates. Well, think of debt as a scarce good. Elementary economics suggests that with other things being constant, when the demand for a good is higher than its supply, the price of the good will go up. Ditto for debt! When demand for funds shoots up, interest rates go up in tandem. So high interest rates coupled tight liquidity are set to severely distress the investment climate.

There are other concerns too. Higher government borrowings mean a threat to the fiscal deficit target. Though the government has assured that the increased borrowing would not affect the central government's fiscal deficit target of 4.6% of GDP (Gross Domestic Product) for 2011-12, we are not willing to buy this argument. Additionally, the higher yields resulting from higher interest rates would have an adverse impact of the value of the bond portfolios of banks, forcing them to take mark-to-market losses.

At a time when India Inc was hoping for some relief on the interest rate front, the government's announcement has come as a rude shock. Investors should note that persistent high interest rates would restrain growth and profitability of Indian businesses in the medium term.

Do you think interest rates in India will go still higher? Share your comments with us or post your views on our Facebook page

---------------------------------------------------------- Free Video ----------------------------------------------------------

Recently we recorded a short video with Asad Dossani discussing among other things prospects for Gold, Silver, Crude Oil...

In the video, Asad also reveals two derivative trading ideas that you could profit from.

Remember, this video is absolutely free to view!

Quick! Be among the first to view this video! Click Here!

----------------------------------------------------------------------------------------------------------------------

01:10  Chart of the day
 
Today's chart of the day shows that over the past decade outward foreign direct investment (FDI) has grown at a much faster pace than inward FDI. While outward FDI was just about 19% of inward FDI in 2000-01, the same has now grown up to 69%. Outward FDI has grown as Indian business houses have expanded their global footprint. On the other hand, inward FDI in India has been lacklustre compared to other Asian emerging economies mainly on account of policy issues, environmental hurdles, land acquisition problems and other such hindrances.

Data source: Reserve Bank of India

01:39
 
Indian companies wanting to take on debt to fund operations are in a quandary. Borrowing back home has become expensive as the RBI has undertaken a series of rate hikes to tame inflation. Thus, the only option left to companies was to borrow overseas. This was not a problem last year since recessionary conditions led to governments of the developed world bringing the interest rates close to zero. This made borrowing abroad a rather cheap option. And the RBI also made it easier for companies to raise money abroad by relaxing some norms. But all does not appear to be hunky dory now. For starters, because of the worsening debt crisis in Europe and the downgrade of US' credit rating, overseas lenders have been compelled to seek higher spreads on loans. Prior to July, top corporates were able to access foreign loans at 2.5% over the Libor. This has shot up to about 4.5% above Libor. The problem is that such a high spread means even top companies will not be able to raise such loans as they breach the cost or price ceiling set by the government and RBI. In view of these developments, the central bank might consider relaxing this ceiling as well and allow companies to borrow at high rates. But for India Inc either way, debt has become a very expensive option indeed!

02:14
 
Trust our government to come out with innovative solutions when at the brink of financial distress. If you don't believe this, at least the ingenuity in safekeeping of financial health of PSU banks will assure you. At a time when fiscal risks are running high, funding PSU entities is coming at a huge cost to the government. The latest Basel norm requires the government to pump in even more capital into PSU banks to help them achieve adequate capital adequacy. In August 2011, the government had sanctioned capital infusion of around Rs 20 bn in some public sector banks, to increase its stake to 58%. Rs 60 bn was earmarked for capital infusion in public sector banks in the Union Budget 2011. But the government has realised the fact that going forward it may get increasingly difficult to keep funding PSUs from government coffers. Also, any reluctance to do so may impact the fortunes of the companies and the government's own tax collections. Hence, it has decided to have a holding company structure at least for PSU banks. While this will allow the government to retain a majority stake in the holding company, the PSUs will be able to raise funds from capital markets as and when required. Certainly some good thinking here!

02:53
 
India's mutual fund industry is going through tough times. The sector has not been successful in attracting significant inflows from investors. In fact, the fund industry has been trying to source inflows from tier I and tier II cities but that has not been successful. The Securities and Exchange Board of India (SEBI) has recently released a concept paper on proposed alternative investment funds (AIF) norms. It covers venture capital funds, private equity funds, debt funds, real estate funds and PIPE (private investment in public equity) funds, among others. SEBI has proposed a minimum investment size of Rs 10 m for participating in such funds.

The current norms allow a high net worth individual (HNI) to invest in a portfolio management scheme with a minimum size as low as Rs 5 lakh. As a result of the new norms, those HNIs with investment corpus of less than Rs 10 m will have no choice but to invest in mutual fund. This could result in more inflows to the mutual fund industry. Thus the new AIF norms might just be the right thing that the ailing mutual fund industry needs to come out of the slump.

03:28
 
As the takeover code is getting rewritten, the Indian corporate landscape may witness some significant changes. To meet the growing and diverse needs of corporates while keeping a check on malpractices, the threshold limit to trigger an open offer has been changed from 15% to 25% of the voting rights of the target company stake. Besides, the open offer requirement has been changed from 20% to 26%. So what does it imply for Corporate India and other stakeholders? As per the new code, only entities already holding a minimum of 25 % in a target company can make voluntary offers for 10% or more. This comes along with the condition that shareholders cannot make voluntary offers if they had purchased shares from the market in the preceding one year. This will insert time and shareholding restrictions on such offers, thus keeping raiders at bay. The companies will be able to raise capital for expansion at lesser costs (without triggering open offer till 25% stake). With all these positive implications, we believe the new code deserves a warm welcome.

04:09
 
The Indian stock markets were volatile during today's session and were trading in the negative for most part of the day. But, the midcaps showed some resistance (up by 0.1%). At the time of writing, the benchmark BSE Sensex was down by 100 points (0.6%). Barring consumer durables and IT stocks, all sectoral indices were in the red. Asian stock markets were trading mixed. Hong Kong (down by 2.7%) and Singapore (down by 1.4%) led the losses. However, Taiwan and Indonesia (each up by 0.6%) were the top gainers.

04:40  Today's investing mantra
"The generally accepted view is that markets are always right -- that is, market prices tend to discount future developments accurately even when it is unclear what those developments are. I start with the opposite view. I believe the market prices are always wrong in the sense that they present a biased view of the future." - George Soros
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
Why Hasn't Warren Buffett Rung the Bell Yet?
August 22, 2017
It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.
How Unique Are the Companies You Invest In?
August 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.

Equitymaster requests your view! Post a comment on "Forget Greece, US. There are ample debt worries at home!". Click here!

4 Responses to "Forget Greece, US. There are ample debt worries at home!"

Sonny Jacob

Oct 2, 2011

Jayaraman's view that India can go the Greece way is baseless. Over the years, Greece revenue started drying out as their main source of income- shipping started finding safer havens. Like US pumping millions each year into Pakistan for using their strategic soil to fight the Afgans and terrorists, Greece was used by the Brits and US for fighting countries like Turkey, Russia etc and got bulk money. Now that business is over. Tourism in Greece will not add to main stream revenue in a big way. These are the problems in Greece whereas India has a strong domestic production and consumption story. Global slow down can affect our economy in a negative way, but it cannot be punished the Greece way.

Like 

R.jayaraman

Sep 30, 2011

Dear Sir,
Unless the Government of India takes very strong measures to curb excessive Governmental expenditure, avoid wasteful expenditure and get good value for money spent, demand increase in productivity from Government employees, sooner than later it will go the way Greece and other South European Countries are going.

Like 

Nadir Godrej

Sep 30, 2011

The deficit number has very little relevance. The number to watch is the debt to GDP ratio. This ratio is around .6 (very manageable and declining!). As long as defficit percent is less than Nominal GDP growth x Debt to GDP the Debt/Gdp will decline. Since India's nominal GDP growth is about 16% we should stop complaining. We should spend more on the poor not in stupid subsidies but cash hand outs. Cash hand outs stimulate the econmy and are largely free of cost. We should also realise that the governments assets (stocks in listed and unlisted companies, land, forex reserves, govt. departments, spectrum etc.)are very large compared to the debt. we should have larger defficits, lower taxes and more rapid growth. The lower the corporate tax rate the higher the compliance and the value of govt. companies will be greater.

We should also complain about the RBI's senseless policy of raising interests which can't reduce inflation caused by high global commodity prices. We should patiently wait for commodity prices to fall which they will eventually do.

Like 

Pankaj Gaur

Sep 30, 2011

In present scenario common man looking helplessly because 32 rupee is sufficient for a man affidavit filed before the Hon'ble Supreme Court by Planning commsion headed by shri Manmohan singh prime minister of India can common comes out after spent 32 rupee below poverty line,This is big joke of AAm AADMI KI SARKAR of UPA. On the other interestrate hike
making situatution bad to worst day by day. Big question still unanswered HOW CAN WE SURVIVE?????

Like 
  
Equitymaster requests your view! Post a comment on "Forget Greece, US. There are ample debt worries at home!". Click here!

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407