I haven't written here since some time (2+ years), but today as I sat reading my previous posts, it was a joyful experience. Of course a lot has happened since I last wrote, most prominent of those were my marriage, quitting my cushy job, leaving Mumbai behind, my first property purchase, etc. Writing helps me keep things in perspective, focus on what to do next and the best path to take.
As we move into another election year I am bogged by this pertinent question: what will happen if Indian rating is downgraded below investment grade after a hung assembly post national elections.
One clear impact will be foreign investors who are not allowed to invest in non-investment grade securities will stay away from India. This would mean that pension funds and other long-term funds will stay away from India. It could also mean that if foreign investors with positions in India start exiting, the stock market might go down drastically in the days to come. This flow of capital will also pull the rupee down to maybe 100 vs the dollar.
The way foreign investors think about India is very important in deciding how well the Indian stock market performs. Since the beginning of the year foreign institutional investors have been net sellers (the difference between what they have bought and what they have sold) of stocks to the extent of US$ 318mm. In CY2013 they have been net buyers of US$ 118.28bn. FIIs have been a major force in the equity and debt markets off late. Ever since India eased capital controls post the 1991 crisis and FIIs were allowed to enter the market their participation has risen significantly. In 2005, they constituted ~7% of the total market cap. Equity market performance aside (they have been active in the debt market as well but the size is fairly small), I am more concerned about its impact on our day to day lives. Will we see any FDI still coming in? Of course there'll be lot of talk about India's fundamentals still being strong, etc. but the global impression will take a beating. Coming to my employment, IT companies should benefit from the Rs/US$ rate, India's advantage as a low cost destination will be strengthened, however, coming to the broader economy, the high import costs will be bad for the fiscal situation of the country. RBI will have a tough time controlling inflation, the Govt has been doing little to improve the infrastructure roadblocks, just monetary policy will not be able to contain inflation. At this time I am not able to comprehend the enormity of the repercussions that India will face but rest assured it'll trigger a domino effect not possibly resulting in much positive impact for the country.
As we move into another election year I am bogged by this pertinent question: what will happen if Indian rating is downgraded below investment grade after a hung assembly post national elections.
One clear impact will be foreign investors who are not allowed to invest in non-investment grade securities will stay away from India. This would mean that pension funds and other long-term funds will stay away from India. It could also mean that if foreign investors with positions in India start exiting, the stock market might go down drastically in the days to come. This flow of capital will also pull the rupee down to maybe 100 vs the dollar.
The way foreign investors think about India is very important in deciding how well the Indian stock market performs. Since the beginning of the year foreign institutional investors have been net sellers (the difference between what they have bought and what they have sold) of stocks to the extent of US$ 318mm. In CY2013 they have been net buyers of US$ 118.28bn. FIIs have been a major force in the equity and debt markets off late. Ever since India eased capital controls post the 1991 crisis and FIIs were allowed to enter the market their participation has risen significantly. In 2005, they constituted ~7% of the total market cap. Equity market performance aside (they have been active in the debt market as well but the size is fairly small), I am more concerned about its impact on our day to day lives. Will we see any FDI still coming in? Of course there'll be lot of talk about India's fundamentals still being strong, etc. but the global impression will take a beating. Coming to my employment, IT companies should benefit from the Rs/US$ rate, India's advantage as a low cost destination will be strengthened, however, coming to the broader economy, the high import costs will be bad for the fiscal situation of the country. RBI will have a tough time controlling inflation, the Govt has been doing little to improve the infrastructure roadblocks, just monetary policy will not be able to contain inflation. At this time I am not able to comprehend the enormity of the repercussions that India will face but rest assured it'll trigger a domino effect not possibly resulting in much positive impact for the country.
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