|»5 Minute Wrap Up by Equitymaster|
On This Day - 12 AUGUST 2010
We may not see a bubble in India in next 50 years
In this issue:
---------------------------- Exclusively for Serious Investors... ----------------------------
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.
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.
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.
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.
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