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US recession, Indian IT & more...

Feb 6, 2008

  • Fears of recession in the US were aggravated yesterday as cautionary statements from one of the Federal Reserve officials followed a report showing a big slowdown in the services sector. Following this, the US benchmark indices, Dow and Nasdaq, faced widespread selling pressure, consequently declining by 3% apiece. The Asian markets of today have taken cues from the US, and are down anywhere between 2% and 5%. The biggest losers currently are benchmark indices in Hong Kong (down 6%) and Japan (4%). The services sector performance follows cautionary remarks from some of the leading global experts. A case in point is the fear evoked by Jim Rogers, the commodities guru and the co-founder (alongwith George Soros) of the Quantum Fund. He had said a couple of days ago that "hard times, sliding dollar, inflation, etc." are here to stay, and that "'s going to be much worse."

    The Fed's recent actions of printing huge amounts of money and lowering interest rates to soothe nerves of the financial system have failed to have much impact on the economy that is moving downhill. We believe that while India might be relatively insulated from a US economic recession considering that the dependence on exports in not so large, heightened risks will definitely have an impact on foreign money flows into Indian stocks in the short to medium term. As a matter of fact, the FIIs have sold stocks worth US$ 3 bn (on a net basis) in India during the current calendar year (as compared to US$ 17 bn of equities that they had bought in 2007).

  • In what could be termed as a sign of softening in the Indian technology sector, TCS, which is India's largest software services exporter, has asked around 500 of its employees to resign for their poor performance. This move is following the company's recent decision to reduce salary levels by 1.5% for the January to March 2008 quarter following an underperformance by the company on its EVA metric (economic value added). While this may seem a first of its kind move in the Indian tech sector, TCS had effected a similar attrition for its underperforming employees last year as well.

  • In a strict action against money laundering practices, the RBI has put on hold the award of banking license to the Swiss multinational bank, UBS. As reported by a leading business daily, the RBI's action follows UBS' reluctance to cooperate with Indian authorities to unravel a multinational trail of money transfers, which spans across Switzerland, New York, the British Virgin Islands and Pune. The MNC bank's deal to buy the Indian mutual fund business of Standard Chartered Bank (for US$ 118 m) has also been put on hold. UBS was, in fact, readying itself to open its first banking branch in the country shortly. The RBI's decision has come at a time when MNC banks have been vying to expand into the Indian banking space to be part of the huge opportunity that the sector promises. Currently, UBS is present in India through UBS Securities India Pvt. Ltd, a broking and investment-banking arm. It also runs a private wealth management business and an offshore unit in Hyderabad.

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