Part of the problem in the banking system is the steep increase in borrowing costs. The central bank has raised interest rates by 375 basis points since March 2010, driving up deposit rates and hurting profits. Furthermore, savings rates have been deregulated, forcing banks to compete for customers. Coupled with higher borrowing costs, profits are shrinking.
Corporate earnings in India have begun to slow. U.S. technology bellwether Cisco (CSCO) for the first time mentioned India as a concern on its quarterly conference call last week. CEO John Chambers said "Europe and India obviously are two geographies we're watching, and India, it's partially currency and macro but it's a large part, the government gears are just grinding to a halt."
Tom Linebarger, president and COO of industrial-goods company Cummins (CMI), said in a recent earnings call that "government actions to reduce inflation in India and China have resulted in softer near-term demand."
There are a number of signs that point to a slowing economy in India, making it a country to keep our eyes on. Reducing exposure to investments in India now would be wise. Remember what happened when Moody's placed Italy's rating on review?
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