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Rising Losses – Financial Sector Underperform

October 8, 2008

The Indian Economy maybe secluded from the Global Crisis to a large extent, however, some sectors dependence on the same is all set to drag down the Indian financial sector. Credit Suisse in a report said, on a conservative basis gross NPLs are expected to rise by 194% by March 2011, with the ratio rising to 4.3%, even before the most recent market turmoil. Amidst a much higher cost of capital and risk premia, the MSCI India financial index continues to trade at 2.3x P/B, greater than its historical average. Maintain UNDERWEIGHT on the Financials sector.

Rest of the Indian Economy:
Consumers: defaults could rise in personal and unsecured credit if unemployment rises and property prices fall more.

Investors / Promoters Risk: as elsewhere, many market operators in India borrowed heavily through structured or direct instruments over the last few years. One can not estimate the extent of damage, but if equities do not stabilize soon, defaults
from this segment could rise rapidly.

Corporate India: interest rates in India that are double those in many other markets, the interest burden of borrowing has grown to alarming levels for a few. If there was ever a time for the cyclical financial sector to sustain its bear market ranges, it is perhaps from hereon.

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