Shashi, I have tremendous regards for banking and auto sectors.... they are perhaps the best leading indicators. Both are tremendously cyclical and hence provides tremendous insight into turn of cycles. Shashi, the government cannot do anything about inflation, unless ot decides to trade short at NYMEX....where also they are likely to get butchered if they decide to do anything of that sort . So, they mau curb trading in Futures commodity exchanges in the name of essential commodities, but if cost of input and cost of transporation rise, no God can limit inflation. Banks are bound to suffer in such a scenario.... you never know when a good debt becomes bad. Peple are so much on leverage, its time the institutions which are responsible for creating such leverage suffer. I am not a man of Gloom Boom doom cult.....but am not a wishful thinker either. All I say, is that stocks and especially the leading sectors are here to feel the pain. Shashi, I beleive you are extremely close to banking people..... do provide your feed-back on what the bank auditors are saying. Also, provide your own sense, on what you are feeling.... as somtimes I think its better not to hear stuff from horse's mouth( meaning directly from management).

 

Let me paint some scenarios:

 

1.Case No.1.- Inflation rises, nominal yields also rise, real yield increases or remains constant, consequently Rupee-dollar strengthens:  This can be real real scenario for banks. Can be dangerous for property and vehicles as well. And hence even more dangerous for banks. Will hurt exporters also quite badly. Trie money may flow in the sector from outside, but the money will get fixed instruments as real yield either goes up or remains constant.

 

2.Case No.2.- Inflation rises, nominal yields also rise,but real yield decreases, consequently Rupee-dollar weakens:Good for many people ,  but then flight of money may take place. It will be real hardship period, purchasing power of rupee will decline, cash as an asset will suffer....a sort of scenario which contains within itself seeds of recession. This is also bad news for banks again, as they have significant earnings in form of cash. And also, if its bad for markets, banks cant be any exception.

 

3.Case No.3-Inflation tames, either due to divine Intervention or thanks to Central Bank's intervention, nominal yields remains constant, real yields go up, rupee-dollar appreciates: Again not so good for banks. Exporters will lag again.

 

4.Case No.4-Inflation tames, nominal yields go down, real yields alse decline, ripee dollar declines: Good for banks. Good for exporters. Movement of funds from fixed instruments to equities.

 

Whats the probability of each scenario, I beleive then we can work out to some reasonable conclusion.

 

Celebration for Shorts!!!