Why India’s bank rescue will raise loans and rates
The measures are likely bearish for short-term rates, as they make the RBI more likely to hike rates sooner than market expectations Goldman Sachs economists
mumbai — Goldman Sachs Group just got more bullish — and hawkish — on India.
The government’s plan to inject a record Rs2.1 trillion ($32 billion) of fresh capital into its struggling lenders over the next two years will spur loans and growth in gross domestic product, boosting stocks and the rupee, according to economists at Goldman. The move will also probably push up short-term rates, the investment bank says.
“A Rs1.05 trillion infusion into state-run banks over the next 12 months would lower the drag on bank credit growth by up to 10 percentage points and boost GDP growth by up to five percentage points,” Goldman economists led by Jonathan Sequeira wrote in a note. “The measures are likely bearish for short-term rates, as they make the RBI more likely to hike rates sooner than market expectations.”
Goldman reiterated its forecast that the Reserve Bank of India will raise its key rate three times by the end of 2018, “an outcome that is not fully priced in by the market,” where swaps indicate little change. The RBI is due to review policy December 5-6, and a split within its ratesetting panel is already widening as members disagree sharply over the trajectory for inflation.
Money multiplier
Macquarie Group estimates that state-run lenders account for more than 70 per cent of India’s banking system and they hold almost 90 per cent of all bad loans in the country, according to data from Credit Suisse Group.
Even after providing for the stressed assets, banks will have around Rs1 trillion available for lending, said Soumya Kanti Ghosh, chief economic adviser with State Bank of India, the country’s largest lender.
That could unleash at least Rs3.3 trillion which could rise to a Rs10 trillion additional infusion in the economy, he said.
The recapitalisation plan “addresses an important supply-side issue and improves the outlook for private capex recovery,” said Upasana Chachra, India economist at Macquarie.
She retained her 7.2 per cent growth estimate for the year through March 2019 but said that may rise if investments — some 30 per cent of GDP — improve quicker than expected.
Goldman expects the RBI to start tightening in the second half of 2018 as inflation will move into the upper part of the central bank’s two per cent to six per cent target range, Andrew Tilton, Goldman’s chief Asia-Pacific economist, said in an e-mail.
The risk is that if rates aren’t cut substantially, high real rates will dampen demand for loans and the infusion will go only toward capital requirements without leaving additional growth capital with banks, according to Bloomberg economist Abhishek Gupta.
Goldman sees the rupee strengthening to 64.5 a dollar by the end of March. The currency was trading at 64.7950 as of 11:45am in Mumbai on Tuesday. — Bloomberg