Dear Niveshaks,

The possible downgrade of US Treasury security dominated the headlines this month. S&P, Fitch, Moody have all warned of a possible downgrade, if US fails to raise its debt ceiling by the August 2 deadline. If the US defaults on its T-bills, something which it last did way back in 1979, the repercussion would be severe both for the US and the global economy. To make matters worse, the economic data from US indicate a stalling economy and a possible QE3 on cards. The expectation of QE3 has already made Gold prices to rally, which was already rallying hard on the back of fiscal concerns in Eurozone. In general, the monetary easing would create more volatility for commodity prices. In the last two instances of QE, money created in US went out into emerging markets and created bubbles in the commodity space, principally in oil but also in gold and other metals. Meanwhile, the euro zone’s debt drama has lurched from one nail biting scene to another. First Greece took centre stage, then Ireland, then Portugal, then Greece again and now Italy. Each time European policymakers reacted with denial, followed at the eleventh hour with a half-baked rescue plan to buy time. With Italy now at the centre stage of the debt crisis, it is clearly a new phase for the Euro debt crisis. No longer confined to the small peripheral economies of Greece, Ireland and Portugal, it has hurdled over Eurozone’s giant like Spain and Italy.

On the domestic front, the Indian economy is resilient, but the happenings over the past six months have not been right for the investor’s sentiments. The policy stance of the government in various fiscal matters and the recent Mumbai blasts have clearly increased the political uncertainty and affected the economic environment in the country. The Government has a lot of ground to cover if the target economic growth is to be achieved. The severe lag in the decision making process of the Government over the last few months, because of the various civil protests, has halted progress across sectors and affected the economic growth. Meanwhile, persistently high inflation and interest rates have hit business as well consumer confidence. The business, particularly the micro, small and medium enterprises (MSMEs) are cutting down on investments while the consumer led sectors such as the auto and housing are also experiencing slowdown due to high interest rates. RBI is further expected to increase the repo rate by 25 basis points at its monetary review, slated for July 26. It would be 11th time that RBI would be raising rates since early 2010. However, the inflation still remains high and a cause of concern for the policy makers.

This issue brings to you some more interesting and insightful topics. The cover story this month focuses on the draft microfinance bill posted by Ministry of Finance recently, its implications and the way ahead for the Indian microfinance industry. The article of the month explores the issue of savings rate deregulation, the pros and cons, and the steps RBI should take in this matter to benefit both banking institution and common people. Other articles in this issue focus on the impact of RBI monetary policy tightening, the role of securitization in structuring debt portfolio and the impact of CDS introduction in India. Lastly, the Classroom this month explores the topic of Capital Account Convertibility.

Hope you find the issue an interesting read.

Stay invested.

Dear Niveshaks,