Coverage for Indian bourses.
For India, the so called ratings by SnP, Moody's does not matter a least bit, just as is the case for the US. Now the fundamental reasons IMHO are different for both the countries. For US, the thing is that the USD is a global reserve currency and standard currency measure; the US T-Bills hence are nothing but indirect form of Dollars that make the ratings as of now meaningless by all measures. The negative ratings will impact US Dollar if and only if suddenly the world wakes up tomorrow and decides that the US Dollar will not be the standard currency.
Now as I say this, if you are thinking that the same logic can be extrapolated to India and since the Indian Rupee is not a global currency, the rating does have an impact, you are wrong. For India, with the Bonds being backed by RBI and a coupon rate of 6% to 8%, the story is different. Simply because India has not leveraged its currency or any reserves that it holds and has consistently been paying the 6% to 8% coupon rates without any challenges. On the population side, yes we are a 1 billion nation with an approximate per capita GDP of less than USD 1200 per annum and that itself shows that things can't get worst for India as a whole. The consumption story is still pretty strong and to the extent our central bank is paying out the coupons on time and also sitting on piles of forex and gold reserves, things are fine. Over the last 10 years, our coupon rates have been fairly consistent ranging between 6% and 8% regardless of the economic cycles.
Whilst a 6% coupon is considered a blemish by western standards, it is not the case for India [and I am not saying this with a bias because I am Indian. I know India has its fair share of challenges in infrastructure and inclusive growth, governance etc but that is not the scope of these notes]. In the western world, central banks lend at near zero rates [thus factored in the yield of the bonds] and hence 6% will imply a credit spread of over 500 bps [Interest earned by Central Banks = Near Zero whilst Interest paid via coupons on Bonds 6% or more]. As far as RBI is concerned, just have a look at the Repo and Reverse Repo rates for banks! Is the spread between what RBI is charging to banks and what it is paying out as interest on coupons more than even 200 bps? No and hence Indian bonds with 6% or 8% interest rates are very safe and the rating agencies mumbo jumbo is worthless. Let us not forget that these were the very rating agencies that stamped the toxic mortage backed securities prior to 2008 as 'AAA'. In case of India, it is unfortunate that we don't have a single leader who can stand up and announce like Obama 'To hoots with the rating agency upgrades and downgrades - we know what we are' [He can do it because of the strength of USD; we can't do it because more than half od our politicians are busy playing partisan games and the ones who know don't have the guts to say it]
As mentioned earlier, India cannot escape the wrath of this double dip recession that is coming. We are dependent on exports, IT and all of these are going to take a strong hit that will have an impact on our stock markets and economic situation as well. So be it, we still are in a position to grow the economy by over 6% on the back of good domestic consumption. So the core story is intact and we will be the first to get out of the mess as things turn around. The challenge for the ordinary Indians is actually to brace up for a temporary phase of hyperinflation that our government cannot handle effectively. 2014-2015 period will be a bonanza for Indian stock markets yet again and the global crisis of 2012-2013 should be used to accumulate stocks for the bull run. The average salary hike won't exceed 6% to 7% for the next 2 years and if IT and Financial Services are hit, we will have a lot of jobs lost in India as well.
In the interim period, there will be some pullback rallies on Nifty but all rises now are illusory. Every rise must be used to get out of mutual funds and stocks as the writing on the wall is very clear - Nifty will plummet below 4k levels next year and this fall is accelerated because the pending high on Nifty did not come through.
Coming up next is the common man's survival guide for the next couple of years.
For India, the so called ratings by SnP, Moody's does not matter a least bit, just as is the case for the US. Now the fundamental reasons IMHO are different for both the countries. For US, the thing is that the USD is a global reserve currency and standard currency measure; the US T-Bills hence are nothing but indirect form of Dollars that make the ratings as of now meaningless by all measures. The negative ratings will impact US Dollar if and only if suddenly the world wakes up tomorrow and decides that the US Dollar will not be the standard currency.
Now as I say this, if you are thinking that the same logic can be extrapolated to India and since the Indian Rupee is not a global currency, the rating does have an impact, you are wrong. For India, with the Bonds being backed by RBI and a coupon rate of 6% to 8%, the story is different. Simply because India has not leveraged its currency or any reserves that it holds and has consistently been paying the 6% to 8% coupon rates without any challenges. On the population side, yes we are a 1 billion nation with an approximate per capita GDP of less than USD 1200 per annum and that itself shows that things can't get worst for India as a whole. The consumption story is still pretty strong and to the extent our central bank is paying out the coupons on time and also sitting on piles of forex and gold reserves, things are fine. Over the last 10 years, our coupon rates have been fairly consistent ranging between 6% and 8% regardless of the economic cycles.
Whilst a 6% coupon is considered a blemish by western standards, it is not the case for India [and I am not saying this with a bias because I am Indian. I know India has its fair share of challenges in infrastructure and inclusive growth, governance etc but that is not the scope of these notes]. In the western world, central banks lend at near zero rates [thus factored in the yield of the bonds] and hence 6% will imply a credit spread of over 500 bps [Interest earned by Central Banks = Near Zero whilst Interest paid via coupons on Bonds 6% or more]. As far as RBI is concerned, just have a look at the Repo and Reverse Repo rates for banks! Is the spread between what RBI is charging to banks and what it is paying out as interest on coupons more than even 200 bps? No and hence Indian bonds with 6% or 8% interest rates are very safe and the rating agencies mumbo jumbo is worthless. Let us not forget that these were the very rating agencies that stamped the toxic mortage backed securities prior to 2008 as 'AAA'. In case of India, it is unfortunate that we don't have a single leader who can stand up and announce like Obama 'To hoots with the rating agency upgrades and downgrades - we know what we are' [He can do it because of the strength of USD; we can't do it because more than half od our politicians are busy playing partisan games and the ones who know don't have the guts to say it]
As mentioned earlier, India cannot escape the wrath of this double dip recession that is coming. We are dependent on exports, IT and all of these are going to take a strong hit that will have an impact on our stock markets and economic situation as well. So be it, we still are in a position to grow the economy by over 6% on the back of good domestic consumption. So the core story is intact and we will be the first to get out of the mess as things turn around. The challenge for the ordinary Indians is actually to brace up for a temporary phase of hyperinflation that our government cannot handle effectively. 2014-2015 period will be a bonanza for Indian stock markets yet again and the global crisis of 2012-2013 should be used to accumulate stocks for the bull run. The average salary hike won't exceed 6% to 7% for the next 2 years and if IT and Financial Services are hit, we will have a lot of jobs lost in India as well.
In the interim period, there will be some pullback rallies on Nifty but all rises now are illusory. Every rise must be used to get out of mutual funds and stocks as the writing on the wall is very clear - Nifty will plummet below 4k levels next year and this fall is accelerated because the pending high on Nifty did not come through.
Coming up next is the common man's survival guide for the next couple of years.
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