Why do asset bubbles occur? Normally because of widespread denial and not due to a lack of clear indications. Thinking back to the times of the dotcom crash, the Standard &Poor'S&P 500 was trading at almost 30x trailing earnings, slightly less than double its historic mean. Back then, experts explained it with the fast penetration of Internet in all sectors of life, which led to the slight misinterpretation that cash burn rates and revenue/share price multiples are better indicators of a company´s well-being than profitability ratios. In late 2006, before the 40+ per cent decline in US housing prices, the ratio of prices to rents was double the 'old normal', well reasoned again by experts who claimed that it occurred due to Fanny and Freddie´s generous financing (mal-)practices, governmental subsidies and, thanks to Alan Greenspan, low interest rates.This time is different? Well, Rogoff´s and Reinhart´s publication in late 2009 should have disillusioned our hopes of paradigm shifts in the avoidance of bubble/bust cycles in economies and markets. It is still not different. Why? Let´s take a closer look at the V-shape recoveries of western stock markets and if they show signs of overheating. In filtering the most impacting factors on global stock market performances, the US consumer´s recovery and the sustainability of China´s growth path need to be top ranked. Let us examine the pulse of the US consumer. Listening to financial heads talk on big media channels, one would believe that the spin of "reasonably valued stocks" is due to an impressive turnaround in margins and earnings of, in particular, larger corporations. Even if a new equity bubble is arising at the horizon, the signs for it are less obvious.However, going beyond main stream sentiment, is always worth the effort. Taking the S&P 500 current price-to-earnings ratio (PER), trailing earnings, of 15x, we now trade at levels slightly above the 14.6x of its historic mean. Reasonably priced? Applying the more realistic Shiller PER (based on average inflation-adjusted earnings from the previous 10 years), we find a fundamentally different picture. The current Shiller PER of 24x, has only been higher twice; before the Great Depression and at the peak of the dotcom boom. A statistical outlier? Let´s dig deeper. An economy with a GDP still relying on consumption at close to 70 per cent requires a consumer that participates in the creation of wealth. Otherwise the equation is not satisfied. The 'real median household income' doesn´t mince the message: no increase in over 14 years. Is the consumer at least deleveraged, after the roller-coaster real-estate ride during the last cycle? No, not even mean reverted. CoreLogic´s latest release for Q4/2010 sees more than 23 per cent of all mortgages in negative equity!How can we expect the US consumer leading the economy out of the muddle through periods of sluggish growth, turning around the housing market and, as a consequence, justifying higher equity prices, when neither the participation rate in the US job market, nor the wages paid for work are supporting a sustainable recovery?No wonder, Ben Bernanke felt pressurised in August 2010 to announce QE II, compensating for President Obama´s lack of political capital for a second stimulus (Bush tax cut extensions in late 2010 had a marginal effect on the economy). Did the soon to end QE II at least work? Bernanke´s goal to stimulate Main Street activities expanded the central bank´s balance sheet to $ 2.72 trn (or about 18 per cent of US GDP). In the official M3 money supply was shrinking until spring 2011 since the outbreak of financial crisis. The Fed´s activities might not have helped the Main Street recover (US GDP growth in Q1/11 has been marginal at +0.4 per cent QoQ (quarter on quarter), compared to Germany´s +1.5 per cent QoQ), but successfully fought deflationary pressure. We can call it consolation money. In short, the current state of the US consumer doesn´t justify the market´s assumption of a sustainable economic recovery. The 'Sustainable' Chinese Growth PathIs China the last man standing? Not so much. Since the Chinese Vice Prime Minister Li Keqiang admitted that "man-made" GDP numbers that are "for reference only" (WikiLeaks, 2007 cable, published Jan11), we now officially know what to do with those numbers; ignore them. He himself recommended that it is better to measure the country's economic health via electricity consumption and similar second and third row indicators. How can we refuse the advice of a high ranked party member? Electricity consumption increased in 2010 by 14 per cent, indicating stronger growth of the economy than the GDP numbers tell. Interestingly, the quarterly growth pattern has shown a significant slowdown during 2010. Starting with +22.7 per cent in Q1, the year ended with only +5.5 per cent. China´s gross fixed capital formation was close to 50 per cent towards the end of 2010, which indicated significant overcapacity not only in real estate but sectors as well. Also, the rise of inflation is clearly not under control yet. Instead, the National Bureau of Statistics has reduced the weighting of food prices in the CPI basket as per 1January 2011, to lower the official inflation numbers. Statistical tricks might do the job for some time to keep the public quiet. Global investors should however be warned by these red flags. ConclusionEquity investors beware of the market´s confidence in the US consumer and Chinese short term strength. Emerging market indices are down 20+ per cent from their post-crisis highs. The flow of funds for Q1/11 reports an outflow from emerging economies, back to the old world´s equity markets. But even this assumption is built on sand. We are bearish on global equity for the second half of 2011. Markus Schuller is a professor of Finance at International University of Monaco. He is the founder of Panthera Solutions , an alternative investment consultancy in the Principality of Monaco
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The Reserve Bank of India has not intervened in a big way in the currency markets, unlike most of its emerging Asian peers, because it can ill-afford to expend a limited and fragile holding of foreign exchange reserves, RBI sources say.The rupee gained on Friday, recovering sharply from a more-than-28-month low, aided by a firm euro and suspected intervention by the central bank, traders said.The RBI is likely to have sold dollars from around 49.60 per dollar, traders said, taking the rupee to the day's high of 49.10, at which point it recovered 1.6 per cent from the day's low.That reluctance to intervene is just one of the factors that sets the RBI apart. It also is currently the most hawkish in the region, waging an expensive and tough war against inflation, while most of the world frets about slowing US growth and a European debt crisis.A persistent current account deficit and realisation that an uncertain global environment is bound to keep markets volatile are reasons the RBI is loath to intervene in a big way, spending its small pool of dollar reserves, sources with direct knowledge of the matter told Reuters.While many Asian central banks including South Korea, Indonesia and Philippines have been spotted selling dollars to protect their currencies, the RBI has put up only a token show, with some minor intervention in recent weeks.India's partially convertible rupee has been the worst performer among major Asian currencies -- so far in 2011, losing nearly 12 percent of its value since touching its 2011 high of 43.855 against the dollar on July 27."Intervention depends upon the pace of volatility. But the threshold for volatility also changes with the situation," an official familiar with the matter told Reuters."Look at how the euro has been behaving, how gold, U.S. Treasuries have been moving. If all asset classes are so volatile, then the tolerance level will also rise."The rupee has weakened nearly 7.2 percent against the dollar since late August, on heightened concerns over European sovereign debt and a likely Greece default. The euro has fallen on most days since Aug. 29, 7.3 per cent down in the period and touched a seven-month low of $1.3499 on Sept. 12.In the same period, the key Asian currencies -- Korean won, Indonesian rupiah, Philippine peso have fallen between 1 percent and 10 per cent.UndervaluedThe RBI's modest approach would be understandable if they were keeping the rupee stable in trade-weighted terms, but that is not the case. The rupee has been increasingly undervalued in nominal trade-weighted terms.However, this approach is not new. Its forex policy has by definition been hands off.Asia's third largest economy has reserves that are merely a tenth of the size of mighty neighbour China's. Because India runs a trade deficit, the reserves also comprise a pool of borrowed money that can dwindle quickly should foreigners pull short-term investments away from the country.Still, many traders and economists are now questioning the wisdom of sticking to that practice amid high inflation, a large trade deficit and heightened uncertainty across currency markets."Downside pressure remains strong, and one-off intervention may not be enough in an environment of growing contagion risks. This begs the question of whether an increase in the frequency and magnitude of RBI intervention is likely," Standard Chartered said in a report.The RBI was last a net seller of dollars in April 2009, when the Lehman crisis weakened the rupee, and any intervention since then has always been aimed at checking a rise in the local unit.But the biggest impediment to dollar sales is the country's current account deficit , a stark contrast with its Asian peers such as Indonesia, South Korea and Taiwan, all of whom are running current account surpluses."There is an asymmetry when a central bank buys dollars to intervene and when it sells dollars to intervene," the official familiar with the matter said."When you are selling dollars, you are losing the country's FX reserves, which is not a very comfortable thought given that we are a current account deficit country."In the face of foreign fund outflows and India's trade deficit, the RBI's absence from the FX market has only fuelled investor pessimism towards the rupee, the Standard Chartered economists noted.India's current account deficit in January-March narrowed to $5.4 billion from $12.8 billion deficit a year earlier, but the global slowdown could hurt exports, widening the deficit again.A wider current account deficit would put pressure on the country's ability to buy oil which is by far the largest component in India's import bill.Inflation & InterventionThough the RBI maintains that it will never use the foreign exchange rate to contain inflation, selling dollars to arrest the rupee's current sharp drop has the added attraction of helping to ease imported inflation.India's big state oil companies last week raised the price of petrol by nearly 5 per cent."Yes, the petrol prices were raised because of the rupee depreciation and not due to any rise in global oil prices and that will have an impact on inflation," said another official senior official, directly involved in the matter."But any impact on inflation due to intervention will be incidental and not our objective," the official added.India's inflation has stayed over 9 percent for the last four months and persistently above the central bank's comfort zone of 4.0-4.5 percent despite the RBI's aggressive 18-month rate tightening cycle."It is a sentiment spiral that started in August and I don't think the rupee will turn around unless there is some positive development globally," he added.(Reuters)
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Stock markets turned a sea of red on Thursday, with the BSE Sensex plunging the most in 26 months -- down 704 points to 16,361.15 -- as investors dumped equities globally on US Fed warning on the American economy, triggering fresh fears of worldwide slowdown.All the 13 sectoral indices closed with sharp losses of up to 6 per cent, while all 30 Sensex-scrips closed in red.Investors lost over Rs 2 lakh crore in the meltdown.Besides, fall of the rupee to over 2-year lows against the US dollar -- Rs 49.36 per USD in intra-day trade -- weakest level since July 13, 2009, added to investor worries.A sputtering US economy and headwinds from a European debt crisis could crimp foreign portfolio investments, while a sharp fall in the rupee will accelerate inflation pressures, traders said.Asian and European markets tumbled, following drubbing of the Wall Street as funds pulled out of risky assets on worries over slowing global economy.The selloff picked up pace after European stocks tumbled nearly 4 per cent, with export-driven software services exporters such as Infosys, energy major Reliance Industires and banks among the big losers."We are mimicking what is happening globally. Our markets will remain weak unless there is some recovery (in Europe)," Sailav Kaji, director of institutional equities at Padmakshi Financial Services, said.Analysts said the US Federal Reserve disappointed investors with its stimulus plan yesterday, while warning of serious downside risks to American growth amid severe euro zone debt crisis.The US indices, Dow Jones and Nasdaq tanked 2.49 per cent and 2.01 per cent respectively, weighing heavily on other global markets today.The Hong Kong's Heng Seng dropped 4.85 per cent, Japan's Nikkei by 2.07 per cent, Indonesia?s index by 8.88 per cent.Markets fell more than 3 per cent in Taiwan, Russia and Poland. The European indices, led by London' FTSE plunged 4.55 per cent, followed by Paris - 4.65 per cent - in early trade.The 30-share BSE index, Sensex, opened 230 points lower and plunged to 16,361.15, a fall of 704.00 points or 4.13 per cent. It had plunged by 869.65 points or 5.83 per cent on July 6, 2009.Shares in Reliance Industries, which has the maximum weight on the main index, fell 6.1 percent in their biggest one-day fall since June 2009, after media reports the oil ministry may lower the company's cost recovery at its key gas blocks off India's east coast.A company spokesman declined to comment when contacted by Reuters.Earlier this month, India's federal auditor had criticised the energy major and the government over development of natural gas field in the Krishna Godavari basin and called for revamping profit sharing arrangements from oil and gas blocks.Software services bellwether Infosys shed 3.4 percent and bigger rival Tata Consultancy Services dropped 4.7 percent.State Bank of India, the country's largest lender, lost 3.6 percent and rival ICICI Bank fell 4.3 percent.Other big losers included realty major DLF, which fell 7.2 percent, while infrastructure firm Jaiprakash Associates tumbled 9.3 percent on growth concerns.Similarly, the broad-based NSE index Nifty plunged 209.60 points, or 4.08 per cent to close below 5K mark at 4,923.65.The 50-share NSE index closed down 4.08 percent at 4,923.65 points. There were 10 losers for every gainer in the broader section on heavy volume of 625.4 million shares.World Stocks TumbleWorld stocks as measured by MSCI fell more than 2.4 percent to a new year low, making for a 14 per cent year-to-date loss.The more volatile emerging markets stock index was down nearly 5 percent for a 22 percent 2011 loss.The stocks slide sent the rupee skidding to its weakest in more than 26 months and triggered concerns about more pressure on inflation that has been running at more than 9 percent for months."We are net importers of crude and rupee-fall will bring in imported-inflation as all our crude imports are in dollar terms," Kaji said.The Reserve Bank of India had raised rates last week for the 12th time in 18 months and warned fighting stubbornly high inflation remained its priority even as economic growth was slowing.Stocks That Moved* Astral Poly Technik rose as much as 20 percent after the company said it was in preliminary talks with U.S. based Lubrizol Corp to set up a chlorinated poly vinyl chloride making plant.* Videocon Industries closed down 1 percent after initially rallying 3 percent following an oil and gas discovery in Brazil announced by the energy unit of the consumer electronics maker.Top 3 By Volume* KS Oil on 36.77 million shares* Unitech on 29.42 million shares(Agencies)
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Think of it as reinvestment with a twist. HDFC Mutual Fund has launched a debt fund for cancer cure, which lets investors donate a part of or the full dividend to the Indian Cancer Society. After a decade of profitability and steadily growing assets under management (AUM), the latest offering is an innovative way of espousing philanthropy from this year's winner of the Best Fund House in BW-Value Research survey of the mutual fund industry. But Milind Barve, managing director of the fund's asset management company (AMC), says this is not a one-off thing; the AMC will continue its focus on philanthropy and investor education, activities that investors will remember it for, besides its record of quality performance.In the year of its launch, HDFC AMC, an offspring of HDFC Bank, collected Rs 1,238.13 crore (as on 31 March 2001) of average assets under management (AAUM); by December 2010 this figure was Rs 87,883 crore, a 71-fold increase in 10 years. Its profits for the year ended 31 March 2010, were Rs 208.36 crore, compared to Rs 129.11 crore in the previous year. The first year was the only year in which it missed paying a dividend. The performance speaks for itself: in 2010, the AMC had 22 top-rated funds, seven of which were 5-star rated (HDFC Top 200, HDFC Equity, to name two), and 15 were rated 4-star by Value Research. Franklin Templeton AMC and Birla Sun Life AMC are the next best performers. Barve attributes this success to the AMC's focus on the retail investor (much like the parent bank's focus on the retail customer) and not spending too much resources developing new products. He believes in keeping his funds simple in order to make them investor friendly. Says Barve: "We believe passionately that the Indian market needs products that are not too innovative, or they become too complex for our investors." The AMC has added only two new products in past five years and around 60 per cent of its assets come from retail investors. Top 3 Mutual Fund Houses 1 HDFC Mutual Fund2 Franklin Templeton AMC3 Birla Sun Life Mutual Fund So, besides the consistently high performance, what is it that helped the fund outshine other players in the business? "The focus was to build the retail business instead of going after the low hanging fruit of getting large amounts of money from a few corporate and large institutions," says Barve. So much for the customer; but what about investments by the funds? The story there is pretty much the same: buyvaluable companies, look at potential growth, and take a good look at management. Simple, perhaps boring, but very effective. But Barve is going global: he will allow overseas investors to put money into his existing funds, using Credit Suisse's marketing network. But he is also concerned about the low penetration of MFs in India. "All of us relatively large players in the industry have a role in building the market," says Barve, who may be wearing his hat as chairman of the Association of Mutual Funds of India when he says this. "It's not about market share, or about being No. 1 or 2. Unless the market itself grows, we cannot." His AMC has the resources to achieve some of that: a system of 111 service centres and nearly 36,500 distributors to further the cause. shrutika(dot)verma(at)abp(dot)in (This story was published in Businessworld Issue Dated 28-03-2011)'
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ICICI Bank's takeover of a stake in a debt-laden telecom tower firm is an ominous sign of things to come as India's slowing economy and slumping shares erode the value of collateral on loans that companies are struggling to repay.Weak markets, the global debt crisis and surging interest rates will further cripple Indian companies' ability to raise funds and manage borrowings and could worsen banks' credit quality.State-run lenders, which account for 70 per cent of the country's total advances, have voiced concerns over loan-repayment capabilities of borrowers after a rise in bad debts.Compounding the problem, founders of several companies have pledged their shares for loans, meaning that as stocks fall, banks are demanding a top-up in security.More than $33 billion worth of shares have been pledged with banks as collateral, with founders of as many as 17 companies pledging over 90 per cent of their holdings, Bank of America-Merrill Lynch said in a June report."This is over-leveraging. It's like a fire. It will hit both the corporates and the banks," said Jagannadham Thunuguntla, equity head at brokerage SMC Capitals."There are some companies where the founders have pledged almost 100 per cent of their shareholding. It could backfire."Crisil, majority owned by Standard & Poor's, expects more credit downgrades and defaults for Indian companies in the coming months, Director Ramraj Pai told Reuters.Bad loans at Indian banks are expected to rise to about 2.6 per cent of their total assets in the year to March 2012 from 2.3 per cent a year ago, ratings agency Crisil said. They have remained at the 2.3-2.4 per cent levels since 2008.A total of 43 accounts have defaulted in the June quarter, more than a third in the year to March 2011, Crisil said.Investors have dumped bank shares on concerns of credit quality, slowing growth and lower profitability in a rising interest rate environment.Shares of Indian lenders including No.1 State Bank of India, ICICI, Bank of India and Union Bank of India have fallen 18-22 per cent so far this year, compared with a 13 per cent fall in the BSE Bank index.Sinking FeelingAbout 17 per cent of Indian banks' outstanding credit could be stressed, IDFC Securities said in a recent research note titled 'Asset Quality - That sinking feeling.'"Stubborn inflation, a spurt in interest rates and slower economy are straining India Inc's debt-servicing capacity. Ongoing infrastructure projects are at risk due to policy paralysis and a plethora of scams," it said.Infrastructure assets including telecom, construction and power, which account for about 25 per cent of total corporate credit, are a key concern for banks."Real estate will be more vulnerable to slippages, and infrastructure as well," said Alok Mishra, chairman and managing director of state-run Bank of India.Banks are also keeping a close eye on India's No. 2 mobile carrier Reliance Communication, which is struggling to reduce a $7 billion mountain of debt, after posting a seventh straight quarterly profit decline in January-March.Reliance has said that "strategic initiatives" were underway to reduce its debt. It had said in May it was looking to sell its tower arm to raise funds to lower borrowings but is yet to announce a deal.The telecom sector is under pressure due to the ongoing investigations over irregularities in the 2G spectrum allocation that state auditors say cost the government $39 billion in lost revenues, higher interest rates and low average revenue per user."Some companies in the infrastructure sector specifically have extended themselves beyond their capabilities. If these projects don't go through or there is a change in fundamentals, they can be in trouble," said J Venkatesan, fund manager at Sundaram BNP Paribas Asset Management."Project finance loans are a problem too, specially when projects don't happen as scheduled."He expects impact of these loans to show in banks' books in two years as most infrastructure projects have a long gestation period. Sundaram BNP Paribas owns stakes in India's top lenders.A Rough PatchICICI Bank, India's No.2 lender, assumed a 29 per cent stake in GTL Ltd in July, taking over shares pledged by its founder. The bank recovered nearly 2 billion rupees ($44.2 million) of the 5 billion rupees it loaned to GTL.GTL shares had fallen more than 60 per cent in just one day in June on market talk it may have fallen behind the debt-repayment schedule or a stakeholder could have sold shares in the open market.Lenders to another group firm, GTL Infrastructure, plan to meet on Aug. 12 to consider terms and conditions for its debt-recast proposal, three bankers involved in the restructuring told Reuters.They declined to be identified as they were not allowed to talk about their clients.Earlier this year, liquor baron Vijay Mallya's Kingfisher Airline ceded a more than 29 per cent stake to a group of 14 banks including top lender State Bank of India as part of a debt restructuring.Cases referred for corporate debt restructuring (CDR) are also rising, banks said.In July, nine new cases worth 170 billion rupees were referred to CDR, a bulk of it for GTL Infrastructure's nearly $2.5 billion of debt involving more than 20 banks, the bankers said."As interest rates rise and there is a slowdown there will be some companies that might want to go for debt restructuring," said B Ravindranath, chairman of the Corporate Debt Restructuring cell, which assesses and approves CDR proposals by banks.The cell, a voluntary forum of Indian banks, said it is currently working to recast 131 loans worth nearly 700 billion rupees for sugar mills, textile units and micro lenders, among others.Companies that turned to lenders to get their loans restructured in the past months include Oudh Sugar Mills, which was hit by soaring input costs in a highly regulated Indian sugar industry, and microfinance firms such as Asmitha Microfin and Future Financial Services.Analysts have cautioned against investing in the banking sector. Their top-picks are ICICI, HDFC Bank and Axis Bank, but they have a unanimous "avoid" rating on several state-run banks.The RBI, one of the most aggressive globally, has raised interest rates 11 times since March 2010 by a total 3.25 percentage points to tame inflation, but at the cost of growth, pushing corporate loan rates up to more than 10.25 per cent.The country's January-March growth was a worse-than-expected 7.8 per cent, with economists expecting India to grow at 7.9 per cent in the fiscal year that began in April, according to a Reuters poll, less than the 8.5 per cent in the fiscal year ended in March."Signs of slowdown are undeniable. We are heading into a rough patch," SMC's Thunuguntla said."Banks' asset quality should come under pressure, there is no doubt about that." (Reuters)
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When the Securities and Exchange Board of India (Sebi) banned entry loads in June 2009, it heralded a new era for the mutual fund industry. Here are the key changes, which impact the industry as a whole: Exposure To Derivatives: With effect from 1 October 2010, Sebi has barred funds from writing Options (and selling) and buying instruments with embedded Options. Mutual funds have been told to have cumulative gross exposure through equity, debt and derivative positions of not more than 100 per cent of the scheme's asset size. Also, mutual funds should restrict the Options exposure to 20 per cent of the scheme's net assets. Debt And Money Market Valuation: All money market and debt securities, including floating rate securities, with residual maturity of up to 91 days, will be valued at the weighted average price at which they are traded on the valuation day. When such securities are not traded, they shall be valued on the amortisation basis. Sebi wants to preserve the liquid nature of the schemes and protect them from mismatches or pressure in the case of redemptions. Speedy Dividend Dispatch: Asset management companies (AMCs) must dispatch dividend warrants within 30 days of the declaration of the dividend. If not, they will have to pay 15 per cent interest per annum to the unit holder. No NOC For Changing Distributor: AMCs have been asked not to insist on the investor procuring an NOC (no objection certificate) from the existing distributor when switching distributors. Investor Complaints: AMCs must disclose the details of investor complaints on their website, the Association of Mutual Funds in India (AMFI) website, and their annual reports. All Investors At The Same Level: To stop AMCs from conceding too much to large institutional investors at the expense of small investors, uniform exit loads across all categories of investors have been levied. Reducing NFO Period And Extending ASBA: New fund offering (NFO) limit has been brought down from 30-45 days to 15 days, barring ELSS (equity-linked saving schemes). AMCs should allot units or refund money and dispatch statement of accounts within five business days from the closure of the NFO. They should also provide applications supported by blocked amount (ASBA) to mutual fund investors of NFOs launched after 1 July 2010. Unit Premium Reserve: Unit premium reserve, which is part of the sales price of units that is not attributable to realised gains, can no longer be used to pay dividend. Transacting On Stock Exchanges: To end the dominance of existing distributors in sale of mutual funds; mutual fund units are permitted to be transacted through registered stock brokers of recognised stock exchanges. No Third-Party Cheques: AMCs can no longer accept third-party payments, barring a few exceptions. Maintaining Unit-holders Documents: AMCs should ensure that distributors submit all investor-related documents to them. And they should hold back commissions / fees of distributors who don't furnish the details. Commission Disclosure: Distributors must disclose all commissions paid to them by competing mutual fund schemes. This curbs mis-selling by distributors. Certification Programme: Since 1 June 2010, the National Institute of Securities Markets (NISM), and not AMFI, is conducting certification examination for distributors and agents and those employed in the sale of mutual funds. Curb on Liquid Funds to Ensure Fair Play: The new rules ensure investors can't get their units allotted till their money actually reaches the fund. This is to check those investors who made it a practice of getting an extra day's return from their investments in such funds. The author is CEO of Value Research (This story was published in Businessworld Issue Dated 28-03-2011)
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With all eyes on the global situation, Finance Minister Pranab Mukherjee on Tuesday said India's macro-economy was moving in a positive direction and hoped international commodity prices would decline, helping the government tame inflation and cut subsidies.Mukherjee maintained that India's economic fundamentals were strong and capable of meeting any challenge posed by the downgrade of the US economy and the crisis in some eurozone nations."I would like to emphasis that some of the investment banks have upgraded India to market weight, that means the basic fundamentals are strong and macroeconomy recovery is moving toward a positive direction," he told reporters, referring to Monday's Goldman Sachs report.The minister said the US downgrade has created some problems for India, but the country could handle any situation arising out of international developments."The challenge is there, but we have the capabilities of facing these challenges," Mukherjee said. "... Collectively, with the efforts of all concerned, particularly with the cooperation of the RBI, we will be able to face the challenges," he added.Expressing happiness over the quick recovery shown by the Indian stock market, which was much better than other Asian countries, he said, however, it was too early to say how the markets would behave in future.The downgrade of the US economy by Standard and Poor's last week has created havoc in stock markets worldwide, but led to a decline in commodity prices, including crude oil.Talking about the decline in crude prices, Mukherjee said he was not fully satisfied with the downward movement from USD 107 per barrel to USD 102 per barrel, as it is still "reasonably high". Mukherjee hoped that prices of oil and other commodities will come down further, "which will help us to manage inflation and also help in reducing subsidy on oil".Referring to the movements in the Indian stock market today, Mukherjee said "it has recovered from the loss in the morning... if you compare it with Asian markets... the average going down of various Asian markets are varying from 2-4 per cent."The BSE benchmark Sensex plunged deep into the red today after suffering an early morning loss of 558 points, but staged a smart recovery to regain the 17,000 points level by early afternoon.(PTI)
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The global economy edged closer to calamity as stock markets slumped further in Asia on Tuesday, with investors losing confidence that the United States and Europe can rein in their debt burdens quickly and avert a double-dip recession.The worsening market trauma has piled pressure on the US Federal Reserve to announce fresh measures of support for the US economy at a policy meeting on Tuesday, but analysts said its options were limited."The current situation could be seen as a fast, complete and unexpected loss of confidence that has been building up over the past few weeks," BNP Paribas said in a note published as Asian stock markets swooned, losing between two and seven percent."Given that the global economic recovery remains fragile, this fast disappearance of confidence is worrying, which puts us back in a vicious circle where the market drop feeds pessimism."As of Monday, stock losses had wiped more than $3.8 trillion from investor wealth globally over eight days and sent investors rushing for safety in the Swiss franc, the Japanese yen and gold.China Inflation Dashes Stimulus HopesAs the flight from risk continued in Asia on Tuesday, there was more bad news, this time from China, the stuttering global economy's main engine room.Official data showed China's annual inflation rate quickening to 6.5 per cent in July, putting the country's central bank in a bind as it tries to keep prices in check without dragging down an economy facing increasing threats from abroad.With inflation at that level, China may not be in a position to reprise its 2008 role of lifting the global economy, although some analysts called on Beijing to act.When the Lehman Brothers bankruptcy triggered a worldwide slump, China implemented a stimulus package that helped buffer its own economy and buoy the world."It's time for Beijing to announce to the whole world that it will try to stimulate domestic demand again," said Tang Yunfei, an analyst with Founder Securities in Beijing.Global leaders failed to reverse sliding markets on Monday after the blow dealt to investor confidence by Standard and Poor's downgrade of the US sovereign credit rating.The downgrade heightened concerns that the twin-pronged crisis of a worsening euro-zone debt crisis and a faltering US economy raised the risks of a double-dip recession.The European Central Bank (ECB) swept into the bond market to buy up Italian and Spanish debt and sling a safety net under the euro zone's third- and fourth-largest economies. But bickering persisted in Europe over a longer-term rescue plan.In the United States, President Barack Obama called for urgent action on the U.S. budget deficit, but his proposal on taxes was promptly rebuffed by Republicans.A pledge by G7 finance ministers and central banks on Sunday to provide extra cash if markets seize up also provided little solace as the authorities' credibility wore thin."Four years into the financial crisis, it is becoming increasingly clear that the biggest deficit is not in credit, but credibility," Harvard University economist Kenneth Rogoff wrote in the Financial Times."Markets can adjust to a downgrade of global growth, but they cannot cope with a spiralling loss of confidence in leadership and a growing sense that policymakers are disconnected from reality."Markets Pricing 'For A Crisis'In the United States the broad Standard and Poor's 500 index plunged 6.7 per cent to close at 1,119.46 on Monday, its worst sell-off since Dec. 1, 2008. The Dow Jones shed 634.76 points to 10,809.85.Particularly worrisome was a more than 20 percent plunge in the shares of Bank of America, the largest US bank. AIG sued it for $10 billion for allegedly deceiving investors, on top of mounting concerns about the size of its potential losses from mortgages litigation and questions about management.In Asia concern mounted that the region would inevitably feel the cold wind of the West's slowdown.Japan's Nikkei share average fell 3.2 per cent and MSCI's broadest index of Asia Pacific shares outside Japan shed 4.1 per cent, taking its losses over six trading days to 18.5 per cent.South Korea's KOSPI slid 9 percent at one stage. A stock exchange official in Seoul said the bourse may ban short selling of shares to stabilise markets."The speed and degree of deterioration in the situation is akin to what we saw during the failure of Lehman Bros, through the dot.com burst ... and during the 1982 recession," said Warren Hogan, chief economist at ANZ Banking Corp in Australia."We are looking at markets pricing for some sort of financial crisis. I think we are at a critical period now."ECB To The RescueOn the political front, Obama said he hoped the loss of the prized AAA credit rating would add urgency to U.S. budget cutting plans.Standard and Poor's cut the ratings of credits tied to US sovereign debt to AA-plus, namely government mortgage agencies, clearing houses and insurers. The Treasury market soared on Monday despite the downgrade as investors fled stocks.Obama called for both tax hikes and cuts to welfare programmes as part of the $1.5 trillion in deficit reduction that a special committee would deliver in late November. But Republican House Speaker John Boehner once again rejected the call, saying tax hikes were "simply the wrong approach."Obama also spoke with Italian Prime Minister Silvio Berlusconi and Spanish Prime Minister Jose Luis Rodriguez Zapatero, welcoming measures by their governments to address the economic turmoil in Europe.Traders estimated the ECB bought about 2 billion euros in Italian and Spanish debt after it agreed on Sunday to broaden its bond-buying program for the first time to halt an attack on the Mediterranean countries. Italian and Spanish yields declined sharply.The ECB move was seen as only a temporary solution however, due to the sheer size of Italy's bond market -- $1.6 trillion -- and there are doubts in the market it can be sustained."What the market is demanding is the assurance either from Europe or the G7 or the G20 that ... there will be someone who can lend to Italy and Spain," said Takuji Okubo, chief economist for Japan at Societe Generale.(Reuters)
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