Another Tech Bubble?

Looking at the exuberance in the market and aggressive steps that tech companies are taking, one can sense a bubble.

With rising rupee and still existing global imbalance, companies should rationally be little conservative. But a little euphoric sense in the global stability is making companies move the pieces fast in the game. Clients that halted their IT projects during downturn have resumed their assignments giving fillip to the recruitment activities of the companies. But how far is this growth sustainable?

An explanation for the logical part of the performance can be “The low beta or defensive stocks like IT, generally do better under a risky business environment” and an explanation for sentimental part of the performance can be “commendable corporate governance of blue chip IT companies”.

There is obviously some amount of rational exuberance for the stocks but one can sense a bubble too. A portfolio with declining stocks due to various reasons like Scams (2G), Legal verdicts (MFI, SKS), Inflation can be balanced with few tech stocks. IT in India is well spread across the world. I have come across many articles about Tech Bubble in china. So Indian IT can be wary about these macroeconomic threats and prick the bubble sooner possible

The Faulty Lines of credit creating cracks on eggshell

One obvious flaw with the system is that no one has incentive to strictly check the credit worthiness of a borrower. You will be given fee to bring a customer and not to reject one. Right from the broker who brings the customer to the loan approval body, the cracks start. This percolates to the bottom of securitization process and to the rating agencies. Ultimately the risk that is transferred to buyer of the security is offset by one more abetting product Collateral Debt Obligation (Insurance for security).

Understanding the dire importance and different operational motive of rating agencies, it is suggested that the government should regulate them differently. Current norms say that a loan above 5Cr needs a credit rating from a authorized agency. The figure 5 crs might have arrived after many long brain storming sessions, but one reason for such a figure might be the sky rocketing fee charged by rating agencies.

To my little understanding, a rating agency, if gives bad rating to more and more customers, lose them in a long run though they might get an edge on the credibility side. They try to strike a balance between the both. For the same reason, there should not be any competition among rating agencies. In fact they should not be a profit making bodies.

Some regulatory body like RBI, SEBI or IRDA should come up to erase the faulty lines developed by the principal agency problem between the systems.

New Lessons in the Old bottle of Economics

With the surge in inflow of funds, Regulatory authorities have become wary. Ask a question to any optimist, all he needs is

1) Free capital movement in the economy which encourages growth

2) Stable exchange prices, which backs stability

3) An independent monetary policy to control inflation to comfortable levels

Hitting us back to “Impossible Trinity”, only two of the three of the above needs are possible at any point of time. The futile experiments of authorities that are rubbing the corners of the triangle are still going on.

Financial inclusion can be a solution for many problems in ideal conditions. If you give me 1000rs it increases my spending power. If you give 1000rs to 1000 people, the spending power hardly gets affected. So I can fix the variable 3. Now I can possibly control 1 & 2.

On practical grounds, as C.B.Bhave said “India is not ready for financial inclusion in equities market.” It’s a noble goal and a Holy Grail. A poor man’s life time saving of 50000 can’t make him afford to invest in a MF market and sustain the volatility. I agree that, when there is more inclusion in markets, volatility decreases. But things do not happen like rubbing aladin’s lamp and there can be many sufferers in course of journey. Again a “New lesson in the Old bottle of Economics”.

The Hot Money!! Is something smelling fishy?

$600 million pumped into the US economy to improve the liquidity position. I seriously doubt how far this push would increase the employment in the US economy. The money that Fed pumps with open market operations goes into the pockets of the elite group who has excellent market information to catch arbitrage opportunities.

With raising interest rates in India and keeping in mind the recent RBI reactions in liquidity control to tame inflation, if I am the investor, India would be my choice. The reasons being

1) Fast Growing economy and the market

2) Abundance of the dollar might decrease its value

3) The gut feeling and the sentiment on the stable policies (??!! There should be some reason for this)

I have become a big fan of Dr.Subbarao for taking such a proactive measure (There might be many reasons for this) and I hope they should be able to achieve inflation targets on demand side. Supply side is left to the monsoon which is positive, and to the government spending which is again encouraging. The financial end is so far so good. My friend expects the index to cross its all time high. I expect things accelerate without any bubbles.

Oh! Not again an injection with air bubbles! Do we need a regulation on hot money or does this sentiment lasts long?? Lets wait and watch….

Basel III for India! Isnt it too early?

I can vouch and say that Basel III is the best risk management framework till now and that can be suggested for banks....But,the catch here is that "Indian Banks are not ready for such a robust framework"

An international bank that is sitting on a cushion of corpus of funds can implement this overnight which is not case with many new/ weak commercial banks of an EME like India.

Indian banks have a long way. With the pressure of 50% priority sector lending, Other developmental pressures, Indian commercial banks cannot sustain or maintain the huge capital requirements of Basel III.

Indian banks are given deadline till 2014 to implement Basel II. Kudos to the central bank in observing the implementation closely, but again.. it cannot push the banks to do this. Even if the deadlines(I would say time-lines) are met, it takes few more years for the banking system to absorb one more pill.

Last point: I dont know how far I am right here, for a country like India which is looking towards expansion in debt markets and more leverage interms of capital from overseas, Basel III norms will reduce the leverage hence the returns on equity would be less which might impact the growth of banking sector seems a paradox to me...

Stop the Currency War!

Currency Wars:

Post Recession, a strong synergy is expected between various nations. International Institutional Infrastructure like IMF, World Bank Etc.. are expected to bring nations onto a single forum for cooperation. But surprisingly, the synergy amongst nations that has existed before the crisis which though abetted in generating bubbles in the economies and heating up is also fading away.

The crucial move from bodies like financial stability organization, BIS, IMF is to bring the over-leveraged synergy into a controlled and productive manner is missing. My stand on the above arguments is based on the following facts.

1) Floating of Yuan for a beneficial export market and saving glut by “Peoples bank of China”

2) Conservatism in Outsourcing IT projects by US

3) Stimulus package and near zero interest rates by “Bank of Japan” as a move to depreciate YEN to encourage the exports.

Mr. Japan and Ms. China, Enough you guys have saved..!!

Probably it is only India, out of major economies, which is helping for global financial stability. Though Rupee’s continuous appreciation is hurting the exports of the country, no conservative move is taken by RBI. Kudos to the firm stand upon the decision to cooperate the global consumption, welcoming US president on Diwali to give the reins of Indian Consumer to the external world and position India as consuming country.

The growth in developed countries is only marked at 4.7% because of the conservative attitude shown. The crisis has taught lessons to the nations to control the activity and not to be inactive. How long does the rest of the world takes to learn from India? Work for Mutual Benefit. Stop the “CURRENCY WAR!!”

Special Board for Financial Stability: Doesn’t this create more chaos?

Referring to FMs Budget speech on establishment of a special body to look after financial stability, it says “An apex level Financial Stability and Development Council to be set up with a view to strengthen and institutionalize the mechanism for maintaining financial stability. This Council would monitor macro-prudential supervision of the economy, including the functioning of large financial conglomerates, and address inter-regulatory coordination issues.

The statement is so weird to me. What does the FM mean by developing an APEX body?

I understand his concern for the dire need of financial stability which has become a buzz word in the post crisis world in every economy.

Financial stability is a phenomenon which is the result of various decisions taken by different bodies and the reaction of economy to it. It is neither interest rate nor a share price.

Enough of the confusion created by recently introduced interest rate futures, a lack of clarity as to which regulator, the RBI or SEBI, will regulate that are traded on the National Stock Exchange.

Enough of the confusion created over the demarcation of regulatory roles between the IRDA and SEBI exists over the popular unit linked insurance plans (ULIPs).

These are just the products that have created confusion and what if such a body is established? It would create chaos in division of responsibility, something like drawing the boundaries in the darkness and asking the bodies to walk with in.

Rather than creating such a hazy concept, the government of FM can think of redefining or refining the responsibilities of RBI, SEBI, IRDA and PFRDA. No more apex bodies, FM is enough. J