The Indian mutual fund industry
could have a major impact on insuring that the markets receive timely and accurate information. If
it does, it can provide immeasurable support to the creation of an efficient
market in India and other emerging markets. It can also create enormous
problems. The problem of information was perfectly illustrated last year. In
the spring of 2009, the US markets reached for their crisis lows. Despite
support, injections of capital, and a massive government spending program, the
markets were still in free fall. The problem was that the market did not
have enough information on the health of the US banking system. Then the US
government required its 10 largest banks to undergo stress tests and make
the results public. The test showed that the banks were not in that much
trouble, but it they did require some additional capital. What followed the stress
tests was a sustained market rally as the markets were able to make
precise judgments based on good information.
Recently, as a result of the Greek crisis, the euro was plunging and the
existence of the Eurozone was in doubt. Many European banks' solvency
came into question. Rumors began to fly, distrust grew into panic. Finally, the
European leaders agreed to conduct stress tests for European banks and that
the results of the tests would be made public. With at least the potential for
accurate information, the euro has rallied.
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