Banking reforms can wait - Views on News from Equitymaster

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Banking reforms can wait

Jun 15, 2009

Reforms not a priority
Before the onset of the credit crisis when derivatives and other such arcane and new age instruments flooded the financial system, there was no shortage of criticism for government and RBI for being a conservative lot. Now, that very same conservatism continues to be lauded both globally and in India. When asked for his advice to the banking sector recently, Mr. K.V. Kamath, chairman of ICICI Bank recently said in an interview, "I will tell them (RBI) to continue to be conservative." Interestingly, ICICI Bank itself has been quite aggressive in its lending and has also had to pay the price for it (in terms of rising NPAs). May be Mr. Kamath's conservatism comes on the back of this very bad experience.

But at the end of the day, it was truly a mark of foresight and wisdom on the part of the RBI who saw the need to be conservative and implemented that attitude in the form of right policies when it was needed the most.

Stock market surge calls for caution
After ending last week on a positive note, Asian markets have opened today in the red. This is probably for the fact that participants are selling stocks given the high valuations after last few weeks of sustained rally. Commodity stocks are leading the fall across Asia today after being among the highest gainers over the past few months on the back of surging commodity prices led by increased demand from China.

Source: BSE

As far as Indian markets are concerned, stocks across the board have seen a tremendous rally since March. This has led to the benchmark indices rising for fourteen consecutive weeks. The BSE-Sensex now trades at just around 28% lower than its all time highs, from being 60% lower just three months back. And with the rally seen in the Sensex during this period, the average P/E of the stocks forming part of the index has risen to over 18 times trailing 12-monthe earnings. While we are still not in the bubble territory - given that the Sensex P/E in January 2008 had touched almost 27 times - the sharp rally in stocks despite the overall macro condition remaining weak calls for caution from investors.

This is especially considering the fact that stocks (especially those from the real estate and infrastructure sectors) that have seen the maximum rise since this rally began in March still have weak fundamentals - overextended balance sheets, depleting profitability, and weak demand.

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