In an African folk tale, a prince can only be coronated when he can sense the faintest noises of the jungle that even most alert predators tend to skip. The world of investing is similar. Surrounded by commotion and distractions, this economic jungle can lead even the most experienced predators to miss the whispering winds of change.

India’s equity markets have been roaring loudly, to the extent that some investors are simply taking it as background noise. A slew of positive news continues to come out of this Far East land. Here I will highlight two unrelated but key recent events: 

I will cover both of them in detail. I will try to be economical with words like “unprecedented,” “staggering” and “unheard of”; however, pardon my exuberance, for there is no other way to describe the changes occurring in this Eastern land!

Stressed Banking Books Coiling Credit Growth

India’s central bank, the Reserve Bank of India (RBI), has consecutively cut interest rates by 200 basis points (bps); however, retail banks, especially public sector banks, which account for two-thirds of financial assets, have been unwilling to completely transmit lower rates to an end person. The reason lies in their loan books, which are concentrated in the industrial sector. In the aftermath of the financial crisis, these loan books struggled, and thus 20% to 25% of net loans lent by these banks are now starting to default.

This has caused banks to be hesitant about further lending, resulting in a higher cost of borrowing, even for genuine entrepreneurs. The net result is stalled credit expansion, like prey trapped in the tight grip of a snake.