From September 15, when Lehman Brothers died and the money market in London seized up, to now, how have global liquidity, credit conditions changed and how different is the situation for Indian companies? When the crisis hit at full force, it was a big problem for two kinds of Indian firms: firms who were used to borrowing on the London money market and firms that are users of trade finance. The users of the London money market were unable to refinance themselves there—as they usually can in normal circumstances—and were scrambling for dollars. This led them to borrow rupees on the Indian money market and transport this money to London after converting it into dollars. The users of trade finance required more dollars because the normal lines of credit connected with trade finance were impaired. This gave the crisis of October, where the rupee money market choked up and the rupee sharply depreciated. Now, conditions appear to be improving. In London, money market conditions are slowly returning to normalcy. The TED Spread—this measures the mistrust of banks on the inter-bank market in London—peaked at 4.63% on October 10, at the height of the money market crisis. It has reverted to 2%, which is exactly the pre-crisis level seen on September 15. Blue chip companies in the West, which had been reduced to issuing commercial paper (CP) of as little as one or two days maturity, are now inching back to issuing CPs of three month maturity. The transaction volume and placement capability in London is still a shadow of its former self. But when compared with conditions of last month, there is a pronounced improvement. This will help Indian companies get back to participating in the London money market and in obtaining trade finance.
The other equally important positive development is equity issuance by Indian companies. Over the latest year, the median value for equity issuance by Indian companies was Rs 5,652 crore per month. In October, this had dropped to Rs 1,433 crore. So far, November has done well with a series of high profile transactions taking place. To take an example, Tata Teleservices has raised equity capital, part of which goes to Tata Sons, thus helping Tata Motors, which has considerable financial obligations arising out of its earlier acquisitions. By raising equity, Indian companies reduce their leverage, and increase their financial buffers for coping with the downturn. This is a statistic that must be tracked over the next few months.