Some argue that the Indian market will be only temporarily affected by the financial crisis because Indian banks had no exposure to the sub-prime crisis.
But it isn’t so clear-cut.
As to the banks:
In the first place, at least one affected bank, HSBC, the world’s fourth biggest bank, with a market value of more than $200 billion, is invested in the Indian market.
HSBC ended the year up by 21%, apparently because the $17 b loss it took on subprime in the US (98% loss) was made up by its gains in Asia. But HSBC has had other problems, including litigation rising from the subprime hit and another hit from its exposure to Madoff’s fund. What’s more, Knight Vinke, the activist investor based in Monaco, claims that HSBC”s losses would be twice as high as it admits to if it followed the same accounting rules as its rivals. (Shades of G Sax).
HSBC, headed by Naina Lal Kidwai (more on her at my blog in a post on Indian women business leaders), is also focusing rather heavily on India, with plans to penetrate the insurance and investment bank business.
Looks like it doesn’t have than much else profitable about its other ventures.
HSBC isn’t the only one.
There are a number of other banks described as actively involved in or interested in the Indian market – among them, Fullerton India and Stanchart, according to this piece in Sept 2007 in The Business Standard.
In the second place, subprime exposure isn’t easily ascertained at all, since the risk is separated into different levels and rebundled in rather opaque ways.
Thirdly, we cannot know for sure that there is no corruption involved when the Indian government denies that any banks have exposure.
Fourthly, Goldman Sachs and other banks and funds have been investing quite a bit in the Indian commercial market, so there might be an exposure there, apart from what is or is not present in the residential real estate market,
Besides the banks, there are other economic factors:
Foreign Institutional investors (FII) are only one part of the picture. So the fact that they have been regulated or may have played a smaller role than a worst case scenario doesn’t dispose of the problem of contagion.
World markets affect India in other ways, as Susan Thomas points out in the Economic Times.
1. Many Indian companies are multinationals themselves and produce in and export to foreign countries.
2. Many large Indian companies, like Infosys, are heavily dependent on exports. When they are affected by world markets, they pass on the volatility to their customers. Often this influence is disguised by the existence of intermediary companies.
3. Producer prices tend toward parity across the globe, thus affecting the industries buying products and those industries’ share prices.
No surprise then that Indian industrial production has fallen for the first time since 1992, a predictable consequence of the flight of foreign investors from the stock market, dampening of industrial production, fall in exports and decline in domestic demand… among other things….
Notably, India stock exchanges was the worst performing of the emerging market exchanges in February 2007, a situation quite different from the drop in 2006.
On the plus side: fundamentals remain good and liquidity is strong
But with the worsening news on all fronts, and the latest terror (?) attack in Mumbai, the hope is a little tinged with fear.