1. For almost a decade, about 75% of daily stock market transactions in India are done by FIIs (of which about 75% again are done through anonymous Participatory Notes). About 20% of the balance are done by Indian mutual funds. Individual public does the remaining 5% . Spectacular rises of stock indices (sensex /nifty) are almost wholly the result of bull operations of FIIs; and these are an integral part of these FIIs` daily global stockmarket operations. Indian market operators imitate FIIs every day of trading. In other words, for nearly a decade Indian stockmarkets are markets of India, not markets for India alone.
2. Most of the FIIs in India are, or were till the other day, investment banks in USA, which are different from regular commercial banks controlled by USA`s reserve bank, i.e. the Federal Reserve. US investment banks are like private asset management trusts, and are almost unsupervised by anyone.
3. For last two decades, due to limited investment opportunities, USA’s commercial banks have been lending huge sums to sub-prime home loans – Non Performing Assets in our language. Lending and relending , and then “Securitising” these bad loans and then trading in these “securities”. The bubble has now burst. Commercial banks have gone bankrupt.
4. These commercial banks of USA had substantial holdings of stock of shares/ derivatives. When going bankrupt they unloaded their holdings. This pushed down share prices. Coupled with fall in bank’s own shares, this triggered the slump.
5. When shares slumped in USA, its investment banks whose main assets were shares/derivatives, were also hit. They too have gone bankrupt.
6. Many real-economy companies in USA have been for decades playing in the shares/ derivatives market, in order to pad their balance sheets with gains in stock/derivatives market because of low operating incomes/ losses in their actual businesses. With the stockmarket crash, these companies` balanced sheets are also collapsing. Hence, talk of recession, even depression. “Operating” recession was already there for 2 decades, now there is “net” recession.
7. Scenario in EU nations is similar to that of USA’s.
8. Indian stockmarket crash of 2008 is due to
(a) pulling out of holdings by FIIs, which is the 75% chunk of the market.
(b) imitation of FIIs by the nervous Indian stockmarket operators.
Nothing more .
9. Indian banks are not today faced with sub-prime loans like US banks. For a change ,GOI is right – there is no real cause for worry.
10. Due to “traditional” approach of RBI, public sector banks in India have not been allowed, despite continual strong temptations offered by the Liberalisers, to invest in stockmarkets beyond a small limit linked to their networth/ assetbase/ etc. This has saved Indian banks, again.
11. Private banks in India have not been so restrained in taking exposure in share/ derivatives markets. That is why ICICI Bank has come under a cloud of suspicion. Ditto for other private banks.
12. Govt. has indicated a figure of Rs.27,000 crore as Indian Bank’s exposure to derivatives markets. This is small indeed.
13. But what cannot be quite measured is the indirect exposure of banks in shares/ derivatives by way of disguised loans taken by companies not for their stated purposes but actually for stock/ derivatives investments. With the sharemarket crash, such loans will have become sub-prime / NPAs. How much are such disguised loans is anybody’s guess. Here again, public sector banks would not have gone the whole hog, even unwittingly. Private sector banks are another story, but even they would not have, I guess, gone really wild except perhaps one and a half bank.
14. The really worrying part is the extent to which Indian real- economy companies have resorted to shares/ derivatives exposure for padding their balance-sheets. No one knows, and no one is telling.
15. Talk about fundamentals and valuations are so much blather and bullshit. In reality there is nothing which can be called actual value of share. Accountants just make some wishful mathematical correlations with balance-sheet items like networth, turnover, dividend payout, etc. In reality, brokers determine the actual value, each day.
16. Conservative and traditional Indian Banks, mainly public sector ones, have saved the Indian economy once again. If the Liberalisers and Globalizers of banks had carried out their hoped for heist, India too would have been in the dumps. A big lesson here, for the Indian public, parliament and pundits.
17. As in USA/Europe so in India , the affected corporate groups after getting bailout packages from government ( which means ordinary public`s taxpayings) are doing much doom – mongering in their pliant media to extract even more money from scared govt/public .