Foreigners are bothersome.

Since last year politicians, civil servants and business leaders in India have been hectoring the RBI to reduce interest rates, arguing that high borrowing costs hamper new investments. Which is true. No one, it seems, is bothered about high inflation. While high interest rates increase cost of business and reduce profits they are an incentive to greater savings in banks. Just last week SBI increased interest on fixed deposits by 1% to attract more money and ease its liquidity. Inflation, on the other hand, affects everybody. It reduces consumer spending and reduces sales thereby reducing profits. So it makes greater sense to try and reduce inflation than focus constantly on interest rates. An article in the WSJ online, April 3 gives the answer. Seems that Indian companies sold Foreign Currency Convertible Bonds worth some $14 billion in 2006-7 when the stock market was zooming. At maturity these bonds may be converted to shares of the company selling them. Companies thought that share prices will continue to increase which would tempt bondholders to convert their bonds into shares rather than ask for repayment. That did not happen. Bondholders are now asking for repayment which companies are unable to do. Already some companies have defaulted. Bondholders are now filing petitions in court to wind up companies because they believe that companies have more cash than they admit and that a court appointed administrator will pay them more. Last year a group of bondholders, led by a unit of New York hedge fund QVT Financial LP, won against Mumbai based pharmaceutical, Wockhardt. Wockhardt had defaulted on bonds worth $110 million and was told to repay with interest by August 31. Now the same group has filed a winding up petition against Zenith Infotech, a Mumbai and Pittsburgh based information technology service provider. Zenith defaulted on $33 million of bonds due on September 21 which triggered cross-default of another $50 million due in August this year. Zenith has declared a cash balance of $52 million, part of which came from the sale of one of its businesses in the US. " We are willing to pay a substantial portion of the bond amount due provided we can restructure the rest," said a senior Zenith official. Had these companies borrowed from Indian banks their loans would have been restructured easily and the banks would have added the amounts to their Non Performing Asset class. No one would dream about filing winding up petitions. There has been an increase of over 300% in corporate debt recast this fiscal which has reached Rs 762.51 billion from Rs 250.54 billion last fiscal. Bank NPAs have risen from 2.3% to 3.4%. Politicians, civil servants and business honchos think that public money is for them to play with. Accountability is seen as an insult. Foreigners ask too many inconvenient questions. Hence the anguished cry for the RBI to reduce interest rates. Hence also the frantic efforts to support the Sensex. Stupid crooks.