Ben Bernanke in his recent speech highlighted that speculation
may be playing a large role in rise in price of nearly everything. Now a hint
that free and easy cash might not last till infinity a great rush is seen
globally to hoard cash. Historically, it has meant a vertical crash in asset
prices. We do not yet know if it is different this time.
However, in domestic context we dare to think a few things that
could make our worst case ugly. It is not that nobody has spoken about these
things anytime. It is just that only a few are willing to believe what they
know. We would like the readers to consider the following:
Rate hike: US yields are moving fast towards 3% mark. Presently
INR hedging cost is close to 5%. Meaning soon it will be un-remunerative to put
money in Indian debt yielding ~8%. We know but not willing to believe that the
current account problem may soon become a balance of payment of problem just
like 1991. Rate hike is perhaps the only option RBI has to avoid such situation
till our parliamentarians could find some time to sort out the economic mess.
Investors who are relieved in their debt portfolios may have something to worry
here.
Banking sector crisis: The current power and road sector
situation appears much worse than the 1990’s steel and cement sector situation
which led development institutions like ICICI, IDBI, IFCI and UTI to the verge
of bankruptcy. An illusion is sought to be created about “value” in PSU banks
where window dressing is rampant. The bad loans are being refinanced at higher
rates giving an impression of sustained profitability. In our view, poor asset
quality and improved profitability is a definite indicator of imminent crisis,
nothing else.
Public sector: We are inclined to entertain the thought of
dismantling of FIPB and entire multitude of rules and regulations governing
foreign investments in the country. The speed with which we are heading towards
crisis would inevitably bring our audacious government on knees in front of
foreign investors and most of the economy will be opened up to them for
attracting capital flows. No one will remember that we almost sacrificed the
government over trivial issue of opening few Wal-Mart stores
Under these circumstances, most public sector undertakings
should crumble. Many like BHEL may not be able to withstand the increased
global competitive intensity. The rest like Coal India will be sacrificed at
the altar much like BSNL, MTNL and Air India (all coveted monopolies at one
time). The nightmare would be LIC going the UTI way, given that it is being
made to scavenge all the government s#$t every morning.
Gold Ponzy: One of the easy ways to stem current account slide
is to initiate a gold ponzy scheme at the government level. Leveraging the
~600tonne gold held by RBI, the government may issue up to 10x gold
certificates to unsuspecting gold buyers, who would flock the markets after a
good crop this year. This 6000tonne gold ponzy will have greater impact if
combined with gold bonds (like early 1990’s). But imagine if the ponzy runs out
before the government could sustainably cure the structural current account/BoP
problem. Did you get some jitter down your spine!
Thought for the day
Telling the unassimilated thoughts to go away could is deadly to quality.
- Robert Pirsig
Word of the day
Fen (n):
Low land covered wholly or partially with water.
Low land covered wholly or partially with water.
(Source: Dictionary.com)
Shri Nārada Uvāca
Reports suggest that partial reduction in LPG subsidies has probably led to some rise in efficiency of use.
The issue needs to be scientifically examined. If true, there is a strong case for extending the experiment to power, diesel etc. also.
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