INDIAN ECONOMY TO CRY

DOWN FALL CONTINUES.

Well it seems that S&P is now very stringent in terms of rating after the debacle of its rating mistake in 2008 of US economy and its financial system. Today S&P has slashed the outlook on 21 Indian companies comprising of top banks, software exporters and public sector undertakings. It was in line with yesterdays call on Indian economic outlook. Don’t misunderstand that S&P is angry on Indian economy and that’s why slamming up one after another blows on Indian economy. According to S&P it has cuts its rating outlook to negative from stable of the following companies

1. State Bank of India,

2. ICICI Bank,

3. HDFC,

4. NTPC,

5. SAIL,

6. TCS,

7. Infosys,

8. Wipro and

9. IIFCL

10. Export-Import Bank of India,

11. Indian Railway Finance Corp,

12. Power Finance Corp,

13. NHPC,

14. Axis Bank,

15. Bank of India,

16. IDBI Bank,

17. Indian Overseas Bank,

18. Indian Bank,

19. Syndicate Bank,

20. Union Bank of India and

21. IDFC.

S&P has also affirmed the 'BBB-' long- term issuer credit ratings of all the 21 entities. The focus of S&P was mainly towards India’s banks due to its huge NPA in its books of accounts. This recent rate of RBI will help the banking system to restructure many NPA.I have already made comments on this very particular matter in my previous writings that RBI will only act for its banking system and less for the corporate India. RBI is mainly focused to keep its banking system to reasonable level where NPA doesn’t become similar to US banking system failure.

COLLATERAL DAMAGE OF DOWNGRADE.

The downgrade rating will create a collateral affect for the Indian economy in coming quarters. Borrowing cost will spook up which will make difficult for the Indian companies to raise overseas capital. This rating will degrade the confidence of investors, making the fragile financial market even worse. It will increases the global risk premium level by making the global market more sensitive to the Indian market investments. The biggest risk will be that it will damage the interests of Indian debt holders such as China, Japan and Russia as Indian treasury bonds lose their superior international status. Bond market will face the toughest times as Indian bonds will face difficulty in searching bond buyers from overseas market. Corporate bonds will also face similar hurdles.

PAINS OF RUPEE  DEPRECIATION

Among all these the most powerful affect this rating of S&P on Indian economic outlook will be on rupee. The dollar will gain its fundamental strength which would mean a weaker rupee. There may be concern in FX markets that Official and private investors instinctively may want to sell rupee and buy dollar. The rupee might propel up to Rs.54 to 57 ranges within this quarter. This, in turn, would put a pressure on the balance of payments of the country as we import 70-80% of crude oil followed with imports of edible oil, pulses & Capital goods becomes more expensive. If the rupee depreciates, we will have to pay more rupees to pay off the dollar-denominated imports. Demand for dollar would also increase, which would make the rupee weaker. This will also widen the gap of fiscal deficit. The depreciation also hurts Indian companies that have taken out loans in dollars. The interest on those loans, which is valued in dollars, effectively becomes more expensive as the rupee weakens.

In simple words I don’t find trust in the words of affirmation from the Indian government. Proof of the pudding is that Indian has about $270 billion foreign reserves in dollar terms with the Reserve Bank of India, which is enough to fund imports for the next six to eight months. But after this downgrade the when will rupee depreciate this reserve would start depleting fast, so hence India will face tough times.

ADVANTAGES OF DOWNGRADE
This will be advantageous for gold as an asset class and IT sector. Historically we have found that when currency turbulence begins gold shines brighter. Depreciating Rupee means gold price will increase in terms of rupee terms as Gold price (In Rs.) is directly proportional to Dollar Strengthening, Gold price(in $) & inversely proportional to Indian Rupee Strengthening. The depreciating rupee is the only positive sign for the Indian IT industry amidst the shadow cast due to global financial meltdown. This a welcome signs for the companies which are exporting out of India. A dip in the rupee helps Industry; particularly exporters, to meet the cost & wage bill better. In the times of global slowdown, the exports get the edge.

At a time when GDP growth rate has exhibited a slowing trend and also when the Reserve Bank does not mind a growth-inflation trade-off. Interest rates are the most interesting point here - higher interest rates, at a time of higher borrowing, would likely mean higher expenditure in terms of debt servicing. Flow of capital will head towards China and US economy. Foreign investors invest in an economy depending upon its ratings. This rating of S&P will spook a massive shift of minds of investors at times when the global economy is rattling. The international funding for ECB (external commercial borrowing), FCCB (foreign currency convertible bonds) will also get affected, which will ultimately affect Indian GDP, China and U.S will be the biggest gainers from this downgrade.

Well the situation is very intense and we should not vouch on the words of the government. Business strategies needs to be revamped to fight out these tough convoluted times. It seems 2012-13 will be another painful year for Indian markets unless government really presses the trigger of policy reforms. We need policy from government and not RBI actions.