Bailout plan passed by the senate/Effect on Indian markets

The senate Wednesday night passed the controversial bailout bill with a wide margin of 74-25. The Presidential candidates Barack Obama, D-Illinois, and John McCain, R-Arizona are among the senators who voted in favor. Total 39 Democrats, 34 Republicans and independent Sen. Joe Lieberman voted in favor where as 9 Democrats, 15 Republicans and independent Sen. Bernie Sanders voted against the bill.

There were some changes to the bill that failed in the House (Congress) which softened the Republicans. This bill includes additional features of $110 billion in tax breaks for businesses and the middle class and a provision to raise, from $100,000 to $250,000, the cap on federal deposit insurance (FDIS). With the tax break there would be fewer burdens on common man and with raise in insurance limit the depositors will come forward to deposit in banks.

The Securities and Exchange Commission (SEC) eased a rule on mark to market prices. The companies’ balance sheets now need not show the devalued assets with the prices one can get in the current market.

Now this modified bill again will move to the House on Friday for the approval. The government has already started measures to change the minds of the people who voted against the old bill on Monday.

As most of you know, the common thing in both of these bills is to buy the troubled assets of worth $700 billion which will make a way for the banks and financial institutions to remove the illiquid holdings, start lending to other banks and public which will inject liquidity into the market. Government will sell these assets when the credit crunch gets eased considerably.

There would be two oversight committees. A Financial Stability Board which would include the Federal Reserve chairman, the SEC chairman, the Federal Home Finance Agency director, the Housing and Urban Development secretary and the Treasury secretary. A congressional oversight panel, to which the Financial Stability Board would report, would have five members appointed by House and Senate leadership from both parties.

The bill doesn’t designate a way to pay for many of the tax cuts. So there might be some opposition from conservative-leaning democrats on Friday.

Approval of the bill has already factored in the US markets. If it doesn’t get passed on Friday it may come down again. Even with the bailout plan it takes several months for bringing markets into normal situation. As far as the Indian market is concerned it may track the global markets in the short term. But they would move up once the inflation comes down and industrial growth rate grows up. None of our banks has exposure to this (Only ICICI bank has some exposure, but very less). The question is how they would come up with their Quarter results in this month. Any lower levels from here will be safer to enter for long-term benefits.