Fall in Banks’ As­set Qual­ity Fright­en­ing: RBI Panel

The Economic Times - - Markets + Finance -

The as­set qual­ity in banks de­te­ri­o­rated at a “fright­en­ing pace” in FY14 with pub­lic sec­tor banks bear­ing the max­i­mum brunt of bad loans, an RBI panel has said. At the quar­ter ended De­cem­ber 2013, banks held loan pro­vi­sions of .` 98,593 crore, up 13% from a year ago. Of this, .` 32,295 crore of pro­vi­sions were held by the SBI group. “... 79% of to­tal pro­vi­sions were held by pub­lic sec­tor banks, demon­strat­ing high level of stress in these banks. This has taken a toll on their quar­terly prof­itabil­ity,” it said. The cur­rent eu­pho­ria in the mar­ket — as mir­rored in the sharp up­swing in the stock mar­ket — would hope­fully be re­placed by a more sober anal­y­sis of eco­nomic out­look. There are fault lines in the econ­omy as re­flected in the lat­est IIP num­ber, el­e­vated CPI lev­els and fore­cast of poor mon­soon. Be­sides, tur­moil in Ukraine and the ac­cel­er­ated pace of QE ta­per­ing would af­fect global liq­uid­ity and in­vestors’ ap­petite for risky as­sets, and slow down FDI & FII in­flows. It was only a few months ago that we had to in­cen­tivise NRIs and sub­sidise banks to shore up forex re­serve through FCNR(B) de­posit route — all at the tax-pay­ers’ cost. The good part is that the US econ­omy con­tin­ues to show im­prove­ment, which will help In­dia’s ex­port per­for­mance; the Eu­ro­zone econ­omy has sta­bilised; Chi­nese econ­omy, too, hope­fully, will sta­bilise and show up­turn; and ECB and BOJ will con­tinue to pro­vide liq­uid­ity. Com­ing to the forex re­serve, cur­rently at around $310 bil­lion, we need to asses the ad­e­quacy of re­serve not only from the stan­dard bench­mark in terms of the num­ber of months of im­ports or as a ra­tio of short-term ex­ter­nal debt, but also from the stand­point of RBI’s abil­ity to in­ter­vene and in­flu­ence the mar­ket at times of sharp slide in the ex­ter­nal value of ru­pee. Around the same time last year, the volatil­ity in the forex mar­ket desta­bilised the econ­omy and RBI kept telling the world at large that it has limited re­serve to spare.

In fact, of­ten, hes­i­tant and in­ter­mit­tent in­ter­ven­tion strat­egy of the RBI — pos­si­bly aris­ing out of its own as­sess­ment of in­ad­e­quacy of re­serves and the need to pre­serve for a rainy day — added to the volatil­ity. Pol­icy re­sponses from both the min­istry of fi­nance and RBI also led to a lot of col­lat­eral dam­age as re­flected, in­ter alia, in the sharp up-move in bond yields and di­ver­sion of gold im­port to un­of­fi­cial chan­nel. We also saw how the forex re­serve of $320-plus bil­lion got de­pleted to $265 bil­lion in a mat­ter of months. All these mea­sures could not pre­vent the slide of the ru­pee, which touched a low of 68.80 against the dol­lar. One ma­jor fac­tor that even­tu­ally helped ar­rest the de­cline was the US Fed’s de­ci­sion in Septem­ber last year to de­lay QE ta­per­ing. This is not to take away the credit that the RBI de­serves for tak­ing var­i­ous other mea­sures to bring sta­bil­ity to forex mar­ket.

The ru­pee has sta­bilised in the 60-62 range over the last few months. Re­cent FII in­flows to the In­dian stock and debt mar­kets put pres­sure on the dol­lar-ru­pee to breach the 60 level and the pair is cur­rently hov­er­ing around the 59.5060.30 range. The RBI has been mop­ping up ex­cess sup­ply of dol­lars on a reg­u­lar ba­sis, adding to the forex re­serve. The moot point in the mar­ket is whether and how long the RBI would con­tinue to in­ter­vene to buy dol­lars. Af­ter all, dol­lar buy side in­ter­ven­tion has a cost at­tached and in­fuses ad­di­tional liq­uid­ity to the do­mes­tic money mar­ket, which has an in­fla­tion­ary im­pact. The RBI needs to ster­ilise such dol­lar pur­chases through forex for­wards and/or is­suance of mar­ket sta­bil­i­sa­tion bonds. De­spite hand­some amounts of stable in­flows like FDI and re­mit­tances last year, ex­change rate move­ment re­mains ex­posed to the risk of volatile flows. We also need to un­der­stand that, given the likely re­lax­ation of curbs on gold im­port by the new govern­ment, and the econ­omy gath­er­ing mo­men­tum in the com­ing months, CAD will wi­den in FY15. Also, from a very the­o­ret­i­cal point of view, in­ter­est dif­fer­en­tial be­tween two coun­tries needs to be re­flected in the ex­change rate.

Any sharp ap­pre­ci­a­tion of the ru­pee now can in­crease the pos­si­bil­ity of a sharp and nasty de­pre­ci­a­tion later due to some event risk. While a lot will de­pend on the di­a­logue that the new fi­nance min­is­ter will have with the RBI gover­nor, it is most likely that the RBI will con­tinue to pick up dol­lars from the mar­ket and pre­vent any ma­jor ap­pre­ci­a­tion of ru­pee. Go­ing for­ward, we have to see whether the strong sup­port level of USDINR at 59.50 gives way to a new range of 58-60 or we re­main in the cur­rent range of 59.50-61.50.

A sharp rise of ru­pee now in­creases pos­si­bil­ity of a sharp fall later due to event risk

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