India: Global News Worsens

Monday, October 27, 2008

The negative reports keep piling up. Global recession to last 2 years: Morgan Stanley

Should this transpire, it is a disastrous situation for India which has leveraged foreign capital inflows and is in need of continuous inflows. In this eventuality, we are looking for a down to sideways market for at least the next year or more.

We will have to lower interest rates to provide liquidity into the system further exacerbating the impact on foreign inflows. A lose-lose situation is developing.

Foreign investors have suffered significant foreign exchange losses on top of the market declines...yet they are willing to take these losses and sell.

I continue to wait for a liquidity event in is an excerpt from a previous post: Global Financial Crisis: Effect on India

This drama of capital inflow drying up will take years to play out...we can expect the following in India:

1. Business built on the out-sourcing phenomenon will suffer...a darwinian struggle will ensue and stronger, bigger and more efficient firms will emerge....job losses will be legion.

2. Financial firms which have levered themselves to a sharply growing economy will suffer...NPA's will rise on personal loans as well as home loans.

3. Real Estate firms will also enter a Darwinian struggle...those levered for high growth will die...those focussed on customers will thrive...consolidation will occur.

4. Every business house has created either an infrastructure subsidiary or a telecom subsidiary. If the money is already committed, it was done at the peak, and will be lost. If it is just an idea then they may reap huge rewards when the cycle turns in the next year or more.

5. Export oriented businesses are in trouble despite the weaking rupee. The consumer in developed markets has been hurt very badly and there is much more pain to come. Demand destruction is palpable.

6. These troubled times will force consolidation in the financial sector; we cannot fund our infrastructure and business growth with our tiny banks. We need banks of size to finance gargantuan loans with government backing. Given the shrinking capital inflows there will be no other choice left but consolidation...the scale and size of this consolidation will be unprecedented and job losses and labor strife will ensue for some time.

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