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Stocks crash, RBI acts & more...

Oct 16, 2008

Mr. Market is at it again!
And he is sparing no one. He is so depressed that he sees nothing but trouble ahead for both business and the world. Or what would justify the daily crash that we are seeing in stocks and commodities across the world. Take yesterday's case, when the US markets closed with their second largest single day loss (of 733 points) in absolute terms and ninth largest in percentage terms. The index's biggest loss was recorded on September 29 this year, when the index had lost 777 points.

Closely following the Dow are the Asian markets, which are down in a range of 4% (China) to 10% (Japan). The way Indian markets will behave today is anybody's guess, especially considering the RBI's late night move yesterday to counter severe liquidity pressure in the economy.

In an action that speaks volumes of the liquidity crunch facing the Indian financial system, the Reserve Bank of India (RBI) yesterday cut the CRR (cash reserve ratio, or proportion of deposits lenders need to set aside as reserves) by a further 100 basis points (1%) to 6.5% with effect from October 11, 2008. This measure is expected to release additional liquidity into the system of around Rs 400 bn.

This takes the total cut in the CRR in this week alone to 2.5%. Readers would do well to note that the Indian banking system and corporations (especially in the real estate sector) have been severely starved for liquidity on account of the ongoing crisis in the US and Europe. The RBI's moves have also come in on account of the rupee's continued decline (6.3% in the last one month alone) against the US dollar.

  • Also read - RBI acts yet again

    Did we hear nationalisation?
    India may not have escaped the global contagion of strained liquidity. But we certainly have much to cheer about. While central bankers in the European and American continent dole out nearly US$ 250 bn each to save the face of their banking industry and even try to nationalise the same, we can be rest assured that at least we are ahead of the curve.

    Ironically, the current global situation has made India's measured pace of economic reform look wiser than before. At a time when Western countries are frantically nationalising banking assets, the Indian government's reluctance to sell more than 49% of its state in public sector banks seems to be a wise judgement.

    The PSU banks, which control 70% of Indian banking sector assets not just stand well capitalised but also safeguarded from peril of overexposure to risky assets. In addition, the central bank continued to protect the interest of the domestic banking entities while not offering the foreign players significant stakes in them despite repeated requests. A careful control of foreign borrowings by domestic companies limited the dependence of Indian corporates on the global financial system. Thus, once the dust settles, the resilience of India's financial system may continue to draw investors.

    Weak rupee enhances exports, but makes buyouts expensive
    The rupee has depreciated nearly 24% against the US dollar in the past 12 months (6.3% in the last one month alone). While this has burnt a hole in the country's trade deficit, it has also proved to be a saving grace in terms of meeting export targets. This is at a time when international trade is witnessing significant pressure.

    India's trade deficit widened to US$ 49 bn in 1QFY09 with oil import costs US$ 17 bn higher over last year. Nevertheless, as per latest data, India exceeded the export target of US$ 160 bn for FY08 by US$ 3 bn achieving an overall growth rate of about 29%. This is despite the appreciation of the rupee in the initial part of the fiscal by nearly 8%, eroding the profit margins of exporters. In rupee terms, the exports recorded a growth of 14.7%.

    Having said that, the weak rupee has made the negotiations for Indian companies wishing to shop abroad more competitive. The recent examples of HCL Technologies' purchase of UK-based Axon (by outbidding Infosys) and TCS' acquisition of Citigroup's captive Indian BPO have amply displayed the same. While Indian companies try to make the most of their strong balance sheets by cashing in on the discounted valuations, the rupee seems to be spoiling the party.

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