Global Financial Crisis 2011

[Pintu]

Downrating of US Economy: can India's gain or will it affect India in long term ?

As we all know Economy of United States is facing a crisis for down rating of it by S&P.

Please see : http://defenceforumindia.com/united...61-us-loses-aaa-credit-rating-first-time.html now there are some talks of subsequent down grading of India's rating by S&P & upgrading by Goldman Sachs, there lies a question can India gain or will the change of rating affect India in long term? Or is it the time for Government to start the much talked second wave of Economic reform.

an article by Pankaj Razdan, CEO Aditya Birla Group appearing on DNA indicates that India may gain from the present situation:

US downgrade a huge opportunity for India - Analysis - DNA

US downgrade a huge opportunity for India
Pankaj Razdan | Monday, August 8, 2011

The US sovereign downgrade is not entirely unexpected, but more import-antly, it is yet another sign that the effects of the global financial crisis which began three years back will be felt for many years to come.

Gradually, the loss of its AAA rating will have an impact on US' standing in the world, the dollar's status, and, of course, the global financial system.

The action by Standard & Poor's may trigger some knee-jerk reaction in global markets, especially as the move coincides with the contagion in euro zone and a weakening global economy. But unlike the Lehman Brothers collapse, this time the market seems prepared because it has already discounted to a large extent the US downgrade.

The big question, I feel, is what will happen to US sovereign yields?

The US treasury will gradually weaken and will remain so till there is an upward revision in rating.

Incremental allocation to gold and other strategic commodity assets will increaseat the cost of US bonds.

The dollar as a global urgency reserve has lost its charm — it now constitutes 61% of total global foreign currency reserves, down from 73% in 2001.

The negative outlook assigned on the new AA+ rating of the US will most likely ensure a tighter fiscal policy regime.

It will be interesting to watch the dynamics of tighter fiscal policies and a very loose monetary policy. The effect of this interplay on US growth and inflation would determine the likelihood, timing and nature of further quantitative easing.

At this juncture, the probability of a full-fledged monetary expansion looks low in the near term but cannot be entirely ruled out in 2012. Over a longer-term, global economic equations are set to shift significantly with concerted efforts towards working out a new, alternative global reserve currency and likely gradual change in global reserves' asset allocation mix towards gold and other commodities and high-potential emerging markets.
In my view, gold will continue to shine on the back of central bank buying support and shortage of physical metal.

Already, Chinese policymakers are discussing ways to diversify the country's foreign exchange holdings away from dollars (one-third of its reserves) and also how to encourage Chinese companies to invest some of the foreign reserves overseas.

However, the status of US treasuries as a 'relative' safe haven is likely to continue over the medium term, given its stature as the deepest and most liquid sovereign bond market.

India will benefit from lower commodity prices in the long term and a strong rupee, which also help tackle inflationary challenges to some extent.

We need to see how the Reserve Bank of India (RBI) deals with two challenges: the first is currency management, especially allowing more forex inflows, which are crucial in the long term; and, secondly, the change in the hawkish monetary stance.
Despite high core inflation the RBI will surely read into challenges in the global environment.

It should not end up tightening too much, which will dampen the Indian economy particularly when country will have some worries on the export of services to the US in the new order of things.

However, in the case of any sharp currency movements, the RBI is likely to step in and intervene to limit rupee appreciation.
In a way, the current situation throws up massive opportunities to build long-term forex reserves with extraordinary policy reforms and macroeconomic stability.

Overall, while the short-term impact of the latest S&P rating action will give the markets a dose of jitterbugs, in the long term, India should be ready to take advantage of such global shocks by concentrating on economic reforms so that its rating improves.
India will remain big beneficiary in terms of fund flows — both in the portfolio and direct investment segments — in the long term.
India's growth differential with US will widen, but, at same time, the interest rate differential will compress in times to come.

— The writer is deputy chief executive - financial services, Aditya Birla Group

In this context valuable opinions are welcome.

Regards

 

[sanjay]

US decline leaves China tipped as next economic superpower while pressure on US bonds is set to affect eurozone crisis

All of a sudden, the US govt has to pay more attention to what countries like China and India say:

When India joined China in criticising the United States' chaotic handling of its hefty debts this weekend, describing the challenges facing the White House as "grave", it was the clearest indication yet that the old order had been swept away.

Until recently the US was the unassailable economic superpower, and the prospect of the White House being bossed about by the bond markets – let alone by Beijing or New Delhi – was unthinkable.

But following a week when an estimated $3tn (£1.8tn) was wiped off the value of world shares, Friday's downgrade of America's cherished AAA rating to AA+ by Standard & Poor's is set to cause more turmoil on global markets and potentially jeopardise Europe's attempts to solve its own financial crisis.

With currency markets, particularly the dollar, expected to come under pressure, and US bond yields almost certain to rise, this could have the knock-on effect of raising borrowing costs in the eurozone at a time when Spanish and Italian bonds in particular have seen yields soar.

This could prove to be a tipping point for the transfer of global power from the US to its great rival China, even though the fortunes of Asia and the west are inextricably linked.

The boom of the past two decades in the US, the UK and much of Europe came at the expense of an extraordinary growth in borrowing, much of it from the Chinese and other fast-growing Asian economies, which were happy to keep piling up Treasury bills and buying blue-chip companies, so long as the billions of dollars they spent were recycled into cheap consumer goods.

At the height of the credit crunch, it seemed both lenders and borrowers were finally getting their comeuppance, but as the Bank of England governor, Mervyn King, has repeatedly pointed out in the past 12 months, the "global imbalances" that led to the crisis – the vast trade deficits and debts – never went away.

Gerard Lyons, chief economist at Standard Chartered, blames the turmoil of recent days on a combination of "ineffective policymakers, excitable markets and a realisation that the recovery is going to be very slow in the west".

David Blanchflower, a former member of the Bank of England's monetary policy committee, went further: "What we've seen is a once-in-100-years financial crisis that will take 20 years to adjust to."

As for the US itself, Alan Greenspan, the former Federal Reserve chairman, said on NBC that the downgrade was having a salutary effect on the public as well as on policymakers. He said: "It gave the sense there is something basically bad going on. And it's hit the self-esteem of the United States, the psyche."

But there is little glee in China about the west's travails. Beijing has repeatedly expressed concern about the mounting US debt burden and the reliance of the global economy on the mighty dollar. Now, the gloves are finally off. The official news agency has accused the US of "debt addiction" and insisted that, as its largest creditor, China now "has every right to demand the United States address its structural debt problem and ensure the safety of China's dollar assets".

The Chinese economist Sun Lijian, in a commentary for the People's Daily, said: "The biggest victims [of the downgrade] may not be the United States itself, but other countries that have depended on external demand to amass national wealth – be they Asian nations that depend on exporting goods, or nations in Latin America and the Middle East, as well as Russia, that depend on exporting resources."

For decades, the interest rate on American debt has been known as the "risk-free rate", because a US default was as close to impossible as anyone in financial markets could imagine, and all other bonds were priced relative to America's.

Now that the markets have been forced to think the unthinkable, it is not at all clear what happens next. Erik Britton, of the City consultancy Fathom, says one possibility is that borrowing costs everywhere will rise.

"It's the cascade effect – it's the chain reaction that we're concerned about. Do other countries retain the same risk premium relative to the US? If that's the case, then all bond yields will go up. Everybody's borrowing costs will go up, and that includes Italy and Spain, where it won't take much to make their situation unsustainable."

And while Standard & Poor's verdict on the US is a humiliating blow, it merely raises the distant fear of a future default, while for Italy and Spain that risk is much more immediate. When the crisis reached Rome, it finally became impossible for Europe's leaders to write off the turmoil in bond markets as a problem of the "periphery" – little Greece, Ireland and Portugal.

As German officials told Der Spiegel this weekend, Italy's economy simply looks too big to rescue, certainly by the current bailout fund, the European Financial Stability Facility (EFSF).

Jean-Claude Trichet, president of the European Central Bank (ECB), has reluctantly ridden to the rescue many times during the crisis; the ECB will begin large-scale buying of Italian and Spanish bonds on Monday. The eurozone has repeatedly drawn back from the brink over the past three years, but a default by Italy or Spain would pose a threat to the single currency's existence.

Sony Kapoor, of the Brussels-based consultancy Re-Define, said the ECB decision to buy bonds would not be enough; eurozone politicians also needed to revisit their plans for beefing up the EFSF.

No one knows what will happen this week, but no one believes it can ever be back to business as usual for the global economy.

Financial crisis: full force of US downgrade is felt around the world | Business | The Guardian

 

[Yusuf]

The bloody dollar should fall because of what's going on, but the opposite is happening in india. My import cost is going up for no reason and margin getting tight. All for no fault of mine. Damn the dollar.

 

[sanjay]

Sorry to hear that, Yusuf. I think this is the immediate aftermath response, but longer-term, Indian rupee would strengthen relative to the dollar, which would benefit your US imports. Better for you to source out other parallel supply channels whose currency exchange rates are more stable/favorable to you. Maybe better to build some price-hedging into supply contracts, if you can do it.

India's exim industries will be hit, including IT, as the dollar weakens relative to INR. FDI has already been hit, but it's not clear that it will rebound, due to corruption fears. Now the ruling govt will have to face a reckoning for its stupid antics. This has created a vulnerability for them. Change of govt is what's really required to improve the valuation of the Indian economy and the Indian rupee.

 

[Virendra]

Our clients in IT had only just begun showing good confidence again. This doesn't sound good
Thankfully I'm in an India based IT Co. right now, and they (specially my Co.) think twice harder before laying off.
However, the annual appraisals of many of our associates, which are due in coming months .. God knows what'll happen to them if the demand succumbs. It has a telling impact because you can't keep up with inflation if there isn't a decent annual appraisal

Regards,
Virendra

 

[thakur_ritesh]

in this drive of new world order emerging, will we regret taking to economic reforms 13years too late than china, i suspect, yes, wish rajiv gandhi had been successful with the first wave of reforms he wanted to usher-in in '84 but then we are better off than had we never taken to those reforms anyway, even though that was the only option left.

a lot of changes are happening a lot quicker than expected, and no one is better placed than china to make the most of it, but will this transition be peaceful for newer players taking/joining the lead, lets see what awaits china, because west is not expected to let go off it all that easily, and then with exports yet again dipping, the chaos taking shape internally would be that much more.

various industry bodies saying india is better placed to make a better deal out crisis does show a sense of confidence, but those could well the attempts to soothe tensed nerves in the dalal street, but still it seems we will emerge better and bigger, west especially various counties in the euro-zone will witness contraction of their economies.

domestically all the talk of reforms will fade away, conservatives will start selling the stories of how we were saved thanks to an economy that was left effectively closed or marginally open in many sectors, without revisiting how opening up various sectors helped those, and the government will be happy on one account and that is inflation taking a dip, but it will also mean the real growth rate taking a dip and no it wont be 7.5-8% this fiscal, guess a lot-lot lesser if this atmosphere of uncertainty was to continue longer.

 

[thakur_ritesh]

The bloody dollar should fall because of what's going on, but the opposite is happening in india. My import cost is going up for no reason and margin getting tight. All for no fault of mine. Damn the dollar.

plan your pricing and quotation with exchange rate at around rs50 to a dollar if not more,

Sorry to hear that, Yusuf. I think this is the immediate aftermath response, but longer-term, Indian rupee would strengthen relative to the dollar, which would benefit your US imports. Better for you to source out other parallel supply channels whose currency exchange rates are more stable/favorable to you. Maybe better to build some price-hedging into supply contracts, if you can do it.

India's exim industries will be hit, including IT, as the dollar weakens relative to INR. FDI has already been hit, but it's not clear that it will rebound, due to corruption fears. Now the ruling govt will have to face a reckoning for its stupid antics. This has created a vulnerability for them. Change of govt is what's really required to improve the valuation of the Indian economy and the Indian rupee.

i suspect the immediate aftermath will lead to 10-15% erosion in valuation of rupee for now, but as you said, in mid-long term rupee is bound to strengthen, but still feel rbi would then like to keep it in the range of 35-45. for now at least the bottom lines are bound to be hit, there is no saving that, even exporters will be hit.

 

[Yusuf]

OMG!! Look at the volatility in the market. The rupee is swinging like crazy. What the hell is the RBI doing? Damn, we need to peg like the chinese.

 

[thakur_ritesh]

mate with exports expected to take a hit, expect GoI to off set the losses by making the exports cheaper, and rbi to enter the scene a little later. rbi should enter around 46, lets see, 47-48 is a definite on the cards.

 

[Yusuf]

we import more than we export..oil is expensive anyways..we cannot let the rupee slip so far down.the rupee has fallen 3% in the last week.

 

[nitesh]

ritesh pricing like you are suggesting will lead to clashes with customers, rather I suggest to keep a clause which says conversion rate will be at actuals on the day of ordering.

 

[thakur_ritesh]

oil will get cheaper mate, demand is bound to dip globally. with so much money being taken out of the market and rupee in high demand, higher value quotation is bound to happen. again govt would like to off set the losses to the exporter by making it cheaper for him so that he can quote a cheaper rate.

 

[Yusuf]

oil will get cheaper mate, demand is bound to dip globally. with so much money being taken out of the market and rupee in high demand, higher value quotation is bound to happen. again govt would like to off set the losses to the exporter by making it cheaper for him so that he can quote a cheaper rate.

If the rupee is in high demand, it should appreciate not go south. I am very confused about whats going on. I have payments to make and wondering what to do. I have already taken a 3% hit just waiting and thinking about what to do. I am not getting any right ideas seeing all the volatility.
What i dont understand is why are FII leaving Indian markets when its the US which has crashed? Indian fundamentals are strong and they should stay put here rather than leave. I think the knee jerk reaction of the FII pulling out is what is causing the rupee to swing wildly. Just the other day rupee closed at 44.08.. I was salivating at the possibility of it going sub 44. All hopes dashed now.

 

[thakur_ritesh]

If the rupee is in high demand, it should appreciate not go south.

yup, sorry, my bad. should have said, money leaving the markets/country.

 

[Yusuf]

yup, sorry, my bad.

Thats it? my bad? Mate phati padi hai. Kuch to bolo. What the hell is happening.
Just checking the news, some good news SnP has said its not going to downgrade Indias rating as a result of the US rating going down. Stock Market has recovered and the rupee has gained 15ps in the last half hour. But we can never say what will happen next. Kuttiya hai yeh dollar mere liye. It has always been so whenever i have an import payment to make.

 

[Yusuf]

I am continuously tracking major currencies in the last one hour. What i notice is the wild swings in rupee compared to pretty sober ones in other. Why is that the rupee is affected so badly and swings so wildly than other currencies? I mean i am seeing a jump or fall of 3-5 paise every refresh that happens while others are changing in the 4th decimal. some one please explain.

 

[thakur_ritesh]

Thats it? my bad? Mate phati padi hai. Kuch to bolo. What the hell is happening.
Just checking the news, some good news SnP has said its not going to downgrade Indias rating as a result of the US rating going down. Stock Market has recovered and the rupee has gained 15ps in the last half hour. But we can never say what will happen next. Kuttiya hai yeh dollar mere liye. It has always been so whenever i have an import payment to make.

call me foolish or whatever, i am still holding on to my certain investments in the market, my sense is after the initial panic, dust will settle down in india. there is no big reason why it shouldnt happen, various industry bodies are confident as well, are they just putting up a brave face, i dont think so but mate as i am saying, to off-set the losses in the exports they will let the rupee dip, to what extent will have to be seen.

mate when the US markets sneeze, rest of the world catches cold, but i still feel post 2008-09 crisis we are much better placed to recover better.

phil haal sab ki phati pari hai.

 

[thakur_ritesh]

I am continuously tracking major currencies in the last one hour. What i notice is the wild swings in rupee compared to pretty sober ones in other. Why is that the rupee is affected so badly and swings so wildly than other currencies? I mean i am seeing a jump or fall of 3-5 paise every refresh that happens while others are changing in the 4th decimal. some one please explain.

profit booking in the stock market, guess the 08-09 memories havent faded. if others are not panicking expects things to be calm in a day or two, but would it too late for the importing community, dehk te hai.

 

[Daredevil]

If the rupee is in high demand, it should appreciate not go south. I am very confused about whats going on. I have payments to make and wondering what to do. I have already taken a 3% hit just waiting and thinking about what to do. I am not getting any right ideas seeing all the volatility.

What i dont understand is why are FII leaving Indian markets when its the US which has crashed? Indian fundamentals are strong and they should stay put here rather than leave. I think the knee jerk reaction of the FII pulling out is what is causing the rupee to swing wildly. Just the other day rupee closed at 44.08.. I was salivating at the possibility of it going sub 44. All hopes dashed now.

They are just making sure that there is no drop in value in their investments anymore. Once the Sensex shows a stable upward swing, they will come back. There will be lot of fluctuation in currency rates for next two weeks and most likely rupee will appreciate.

 

[johnee]

I think, once the dust settles, India will be better(if not best) placed than most.