It is merely coincidental that Ben Barnanke’s initials are also those of a big bull, for that is what he became when he gave a rather generous 50 basis points cut in the Federal Funds rate, double the market expectations. That, of course, brought down the US dollar, with the rate falling under Rs 40 to the rupee, though the willingness to pump in funds to avert a credit confidence crisis was viewed positively by investors.
Stock markets rallied globally and in India, as well. The BSE Sensex pole-vaulted over the 16,000 mark, with a whopping 653-point jump on Wednesday, followed by another 216 leap on Friday, ending the week at 16,564, up 960 points. The Nifty ended at 4,837, up 319.
This reminds one of a husband, who has been just operated upon, greeting his wife with a ‘hi gorgeous’. A while later he greets her ‘Hi pretty’, and then just a ‘hi’. When asked, a nurse explained to wife that it was probably the effect of the anaesthesia wearing off. Bernanke has given a monetary injection that has cheered the market but not cured the problem of sub-prime lending. A few more Northern Rocks thrown at investors would spook markets.
The sub-prime problem, as beautifully explained by Deepak Parekh in an article last Monday, was caused due to a lax system. Loan originators, under pressure from investors seeking higher returns, they lent to NINJAs (ie. people with No Income, No Jobs or Assets) with exploding arms (i.e. where there are low initial servicing costs which escalate sharply over time). Given that borrowers had no income and no jobs, the servicing of loans was dependent on rising property prices alone. These loans were then packaged, sliced and diced, with differing credit ratings from rating agencies, including triple A ratings for the juiciest slice. These bits were offloaded to get the default risk off the books of the originating bank. They have not disappeared. The rate cut has made tiding this over easier, in the hope that the risk will somehow vanish.
Domestically, too, the day the BSE pole-vaulted, politicians of different parties increased noise levels over issues like the nuclear deal and the Setusamudran project! Since there is a very short time frame to operationalise the 123 nuclear agreement, and since the Left is threatening to withdraw support if the government does operationalise it, we seem to be headed for an early election. There does seem to be a disconnect here.
Political leaders ought to be paying attention to the myriad problems instead of behaving like spoilt school kids deprived of candy. And there are many, caused by them. Free or subsidised power to farmers, promised electorally, is leading to overuse of pump sets thereby causing depletion of groundwater resources and degradation of soil due to over watering.
There is a looming shortage of fertilisers for the coming rabi season. Subsidy policy of fertilisers is also highly skewed, again thanks to politics, in favour of nitro, which remains subsidized and cheap whilst phosphatic and pottasic are not. Farmers thus use more of the cheaper, subsidised fertiliser, eroding soil quality, and manufacturers are not incentivised enough to produce it as subsidy payments are held up.
The boom is, thus, despite our political leadership and not because of it. The corporate sector is performing well. ONGC plans a stock split and a bonus issue. Along with its wholly owned subsidiary ONGC Videsh Ltd, and its associate, Mangalore Refinery, ONGC plans to invest a whopping Rs 1,21,000 crores in the 11th plan period. Reliance is to team up with GVK to jointly develop the Navi Mumbai airport. Infosys is likely to mount a 4.6 billion euro bid for a London IT group.
IT company stocks are being hit by the strengthening rupee, and during the week when the Sensex behaved like a kangaroo on a trampoline, the three IT stocks, Satyam, Infosys and Wipro, lost.
The rally is fuelled by the monetary infusion, and, with political uncertainty almost a certainty, and the sub-prime cockroach still lurking in the woodwork, getting a bit light would not be a bad idea.
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