The Hindu Business Line : Major themes for markets this year

There is a paradigm shift in the economic and business environment and one would have to look at India in a new light to get a pulse on the financial markets.

THE Indian stock market rose to an all-time high last year and the foreign exchange reserves also scaled an all-time high.

There is a buzz in the economy and it is evident from anecdotal evidence. In this article, we examine the major themes which would guide the Indian financial markets this year.

Financial consolidation

There is a clear move for financial consolidation in the banking sector. Government recapitalised Industrial Development Bank of India last year by buying Rs 9,000 crore of its long dated non-interest paying bonds.

There is a drive to push the merger of weaker public sector banks with the stronger players. The merger on the cards is that of Bank of India with Union Bank of India and Bank of Baroda with Dena Bank.

There would be more such mergers in the time to come and look like part of a larger blue print.

The Government has shown intention to allow foreign banks to pick up stakes `with voting power' in a measured process. This Bill is currently pending Cabinet approval.

All these bodes well for the financial sector. These reforms would create large strong global institutions. Some large public sector banks such as State Bank of India are looking to buy stake in some overseas banking entity to create a larger global reach. These moves would lead to better international ratings.

The emergence of stronger global banking entities would result in better ratings. This would create access to cheaper overseas funds. These financial institutions would be able to provide Indian corporates with cheaper funds.

This dynamics is already in play. State Bank of India's recent medium term note issue of $400 million was rated `Baa2' by Moody's, which is higher than India's sovereign rating of `Baa3'. This is a second time an Indian issuer has pierced the sovereign rating in the last couple of years.

Government finances

Government finances are looking better than ever as the fiscal deficit has come down. The higher GDP growth rate and the buoyant revenues are resulting in lesser Government's net borrowing from the market.

The Centre has also used the relative benign interest rate environment to reduce the interest cost of the borrowing of the State Governments.

Under these debt swaps, the Central Government has created a fund that buys off the high interest rate debt from the State Government.

These States then access the market to raise monies at the low prevailing interest rates. It is clear that the fiscal deficit is well under control even though crude prices have been ruling high.

The lower fiscal deficit is also prompting the Government to look at the option of using some part of huge $130 billion reserves for infrastructure investments.

The reduction in the borrowing requirement would prevent the Government crowding out the private sector and pushing the yield higher.

The financial consolidation may sooner than later result in a rating upgrade by Standard & Poor's. The S&P long-term foreign currency rating for India is still sub-investment grade at `BB'.

Moody's rates India as `Baa3' puts it in `investment grade'.

The rating upgrade would have a positive impact and allow another swathe of funds to start looking at India as investment option. These are the funds that require two rating agencies to put the destination in investment grade.

Once again an upgrade by S&P would result in borrowing spreads to tighten for Indian entities accessing the overseas market. This would result in cheaper funds access to Indian corporates.

Investment cycle

Credit offtake from the banking sector has hit a four-year high. There is capital demand from the industry for new ventures and acquisition.

The access to overseas market has become easier and spreads are narrowing. Indian corporates can now easily look at acquisition overseas and raise monies overseas for such moves.

Second generation reforms

The second-generation reforms are likely to focus on delivery and creating better business environment. The Government has hinted at administrative and judicial reforms. These new measures would change the way governance is done and take India into a new era.

The intention behind the Government's move to drive in competition and create efficient business environment is visible in small moves such as allowing private aviation players to fly to overseas destination.

There is a move afoot to remove the Press Note 18, which create a bottleneck for foreign direct investments. This note requires any new venture by an overseas entity to seek concurrence from any joint ventures that they might have had in a similar area irrespective of how long back the venture might have been wound up.

The second-generation reforms would be evident when the Finance Minister tables the next Budget in February.

The fiscal tax incentives for certain savings option would be taken away, creating a level-playing field.

A strong move is also afoot towards reforms in the power sector and the Government is trying to implement the Power Reform Bill in the true sense.

Strong external sector

The inflows into India would remain strong and likely to increase further, as the business environment becomes better. India remains one of the youngest countries in the world and the consumer demand is all set to explode.

The intent of all the major businesses to find a foothold in India is visible.

The BRIC report from Goldman Sachs puts the four main centres of growth over the next 4-5 decades as Brazil, Russia, India and China.

The report projects that the Indian GDP would grow a few folds over this period. The continued strength in the commodities would keep the dollar under check.

Indian rupee would continue to remain strong unless there is a sharp rally in dollar.

In a nutshell, there is a paradigm shift in the economic and business environment and one would have to look at India in a new light to get a pulse on the financial markets.

(The author is Senior Manager, Corporate Treasury Sales - Western India for HSBC. The views expressed herein are his own and not necessarily those of his employer.)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Report on Currency and Finance 2003-2004: Reflecting an upbeat business outlook

Laser Soft tool for banks

Major themes for markets this year

Bond traders don't see a bull run

UTI Bank `Remittance Card'

Allahabad Bank's contribution

StanChart gesture

AP Govt announces tap issue

SBI credit outlay in Kerala touches Rs 3,800 crore

LVB offer on deposits