|»5 Minute Wrap Up by Equitymaster|
On This Day - 4 AUGUST 2012
Will India learn from this biggest banking scandal?
In this issue:
But this is too trivial compared to what we are just going to tell you about. Imagine a cartel of big global banks manipulating the global financial system. We are referring to the Libor banking scandal. For a lay Indian, this may not be quite a popular term. But in the global financial system, it is a very crucial pivot. For starters, Libor stands for London interbank offered rate, the rate at which banks think they can lend and borrow money themselves. Libor is a globally accepted benchmark interest rate for over US$ 350 trillion in financial products.
Regulators are said to be of the view that the manipulation of the Libor interest rate was the result of "organised fraud". As per news agency Thomson Reuters, Barclays paid a hefty fine of about US$ 453 m to authorities in the US and the UK to settle allegations that some of its traders had colluded with employees at other banks to manipulate Libor. Several other financial institutions are reportedly under the scanner of regulators for their alleged role in the fraud. This comes as another striking evidence of the threat big banks and financial institutions pose to the health of the global economy. But they are not the only ones to be blamed. Such scandals also reflect the negligence of the regulators. What were they doing all this while? Worse still, these are the same too-big-to-fail institutions that the central banks rescue in times of crisis.
What lessons does this financial scandal have for India? It must be noted that in 1998, the Mumbai inter-bank offer rate, referred to as Mibor, was set up on the lines of Libor. The Mibor acts as a benchmark rate for all interest rate swaps, forward rate agreements, floating rate debentures and term deposits. Though most key interest rates in India are benchmarked by the Reserve Bank of India (RBI), the Libor scandal may be a reminder for the Indian central bank to ensure adequate checks and balances to ensure that a similar fraud does not occur in India. Already discussions are underway to switch to an actual screen-based traded price of Mibor as the current system could be susceptible to manipulation. We really hope the Indian bank regulator and the banks initiate appropriate steps to avoid a similar disaster in our country.
The state refiners are forced to sell diesel at subsidized rates in the domestic market. On the other hand, private refiners export most of their output due to the tax implications of selling it in domestic market. Therefore, in case of a huge surge in demand, the government would have to seriously think of how it would meet the needs. It would have two options. One would be to import the fuel, which in turn would lead to a rise in the import bill. This is obviously not a preferred route. Or else the government would have to rationalize its tax and subsidy structure. But will it actually do so?
Well, for one, our policy makers are keen to have such a fund. Even if that means pulling out Rs 10 bn from budgetary resources. But that very idea reeks of imprudence! Most obviously, India does not have a large amount of money from natural resources that it needs to invest. Nor does it have a sustained current account surplus, such as China runs. The budget deficits are everyone's knowledge. The RBI is opposed to the idea of using India's falling forex reserves for capital investments. And rightly so. It has therefore been suggested that alternatively the government would raise money from the market. Or use surplus cash lying with public-sector units. With our government already having destroyed enough investor and tax payers' wealth, this could be the last nail in the coffin!
The optimism in the global markets rubbed off on India as well. The Indian equity markets ended the week on a positive note with gains of 2.1%. Markets welcomed the Statutory Liquidity Ratio (SLR) cut by Reserve Bank of India (RBI) during the week. While the key rates were left unchanged SLR was cut to 23%. SLR cut will inject approximately Rs 620 bn of liquidity into the system. However, worries with respect to delayed monsoon and high inflation continued to plague the markets.
Amongst the other markets, Brazil was up 1.2% while Singapore was up 1.8% during the week. UK was the highest gainer having registered gains of 2.8% while Germany was up 2.7% at the end of the week.
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