Banking News: October 4, 2018
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India risks U.S. sanctions with
$5-billion purchase of Russian missiles
Sanjeev
Miglani & Lesley Wroughton
The
Reuters
Published
on October 3, 2018
|
New Delhi & Washington,
October 3 (Reuters): The United States has warned India against a planned
purchase of S-400 surface-to-air missiles from Russia when President Vladimir
Putin visits New Delhi this week, saying such an acquisition would attract
sanctions under U.S. law.
India’s military wants
the missile batteries, both as a deterrent against China and to gain an edge
over traditional rival, Pakistan, as they are able to track and shoot down
combat aircraft, even stealth planes, at unprecedented ranges. India and
Russia will sign the missile deal, estimated at more than $5 billion, during
Putin’s visit for annual summit talks with Indian Prime Minister Narendra
Modi beginning on Thursday, a Kremlin aide said.
But the United States
has warned countries trading with Russia’s defence and intelligence sectors
they would face automatic sanctions under a sweeping legislation called
Countering America’s Adversaries Through Sanctions Act (CAATSA) that
President Donald Trump signed into law last August. The law is designed to
punish Putin for the 2014 annexation of Crimea from Ukraine, involvement in
the Syrian civil war and meddling in the 2016 U.S. presidential election.
“We urge all of our
allies and partners to forgo transactions with Russia that would trigger sanctions
under the CAATSA,” a U.S. State Department representative said. “The
administration has indicated that a focus area for the implementation of
CAATSA Section 231 is new or qualitative upgrades in capability – including
the S-400 air and missile defence system.”
Last month, the United
States imposed sanctions on China’s military for its purchase of combat
fighters as well as the S-400 missile system it bought from Russia this year.
The United States is also concerned about NATO ally Turkey’s decision to buy
the Russian missile system, seeing it as incompatible with the alliance
systems.
Modi’s government,
caught in the U.S.-Russia crossfire, hopes the Trump administration will give
it a pass on the proposed arms transfer from Russia, officials in New Delhi
said. Defence Minister Nirmala Sitharaman told reporters India was closing in
on the deal to buy the air defence system from Russia, with which it has
long-standing military ties.
“Negotiation on S-400
air defence systems has been on for a long while and it is at a stage where
it can be finalised,” Sitharaman said last week. “We have a big legacy of
buying defence equipment from Russia.” More than 80 percent of India’s
military equipment was of Soviet origin during the days of the Cold War, but
since its breakup New Delhi has diversified its weaponry.
The United States is
one of its top arms suppliers, closing $15 billion worth of deals in just the
last decade. U.S. firms Lockheed Martin and Boeing lead the race to
sell the Indian military hundreds of aircraft to replace its ageing Russian
MiG planes. The Modi government hopes the Trump administration will not
disrupt burgeoning defence ties with the world’s biggest arm importer by
levying sanctions the U.S. Congress has sought.
The Trump
administration faced competing pressures from Congress pursuing a hard line
on Russia, said Jeff Smith, a specialist on South Asia at the Heritage
Foundation. “The administration was critical of the CAATSA and fought hard
for a national security waiver at the cabinet secretary level but was denied
by Congress,” he said. “The administration is not only trying to navigate
competing geopolitical interests but relatively stringent conditions imposed
by a Congress determined to tie its hands on Russia policy.”
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India's rescue of debt-ridden IL&FS
may spell Major losses for Lenders
Manoj
Kumar & Promit Mukherjee
The
Reuters
Published
on October 3, 2018
|
It is becoming clear some of its lenders will need
to suffer major losses: Finance Ministry Official
New Delhi & Mumbai,
October 3 (Reuters): India’s move to take control of debt-laden
Infrastructure Leasing and Financial Services (IL&FS) will only succeed
if lenders agree to take substantial losses, government sources familiar with
the discussions told Reuters.
The federal government
on Monday replaced the board of IL&FS, a major infrastructure financing
and construction firm, after its failure to honour debt obligations sent
shockwaves through Indian financial markets.
The beleaguered
company’s debt pile had grown to more than 900 billion rupees ($12.33
billion) as it rode a lending boom among so-called non-bank financial
companies (NBFCs), or the shadow banking sector, which manage an aggregate
loan book of nearly $300 billion.
But IL&FS had
compromised on corporate governance and risk management norms, the government
told the company law tribunal on Monday as it explained why it intended to
take over the firm. The new six-member IL&FS board will prepare a revival
plan, but it is becoming clear some of its lenders will need to suffer major
losses, one finance ministry official said.
“It may be difficult to
save it (IL&FS) unless the lenders agree to take substantial haircuts,”
said the official, who declined to be identified due to the sensitivity of
the matter. The official added that there had been no discussions with the
company’s lenders, among them India’s largest bank, the State Bank of India,
and state-owned lenders, such as Bank of India and Punjab National Bank.
A second government
source echoed those views, saying IL&FS needed nearly 150 billion rupees
($2 billion) in financial support to avert a collapse and could only be saved
if lenders agreed to take a big haircut. The IL&FS fallout has already
roiled stock markets and the government has scrambled to contain further
damage that could undermine confidence in the financial sector.
A credit crunch in
financial markets also does not bode well for Prime Minister Narendra Modi,
who is already facing a growing backlash over rising fuel prices, a falling
rupee currency and farmer protests over low crop prices months before he
seeks a second term at an election due by next May.
The government has said
IL&FS was presenting a “rosy picture and camouflaging” its financial
statements, but still wants to ensure adequate liquidity for it to avoid
further defaults. One of the government sources, however, cautioned that more
defaults cannot be ruled out, as IL&FS needs to repay more than 250
billion rupees by March 2019.
India’s parliamentary
panel on finance on Wednesday decided to investigate the IL&FS matter and
its members will visit Mumbai this month to meet the new board, a source with
direct knowledge of the deliberations said. They will also talk to finance
ministry officials, the source added.
Separately, India’s
Serious Fraud Investigation Office (SFIO) has launched an inquiry into
alleged financial irregularities at IL&FS, questioning its top management
and searching its offices, the Economic Times newspaper said. Reuters could
not immediately reach SFIO officials to seek comment.
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KC Chakrabarty’s PNB stint under
CBI lens for alleged wrongdoing
Raghav
Ohri
The
Economic Times
Published
on October 4, 2018
|
New Delhi, October 3:
The Reserve Bank of India (RBI) deputy governor KC Chakrabarty is under
scrutiny by the Central Bureau of Investigation (CBI) over his alleged
“indiscretions” as chairman of Punjab National Bank, said one of several
people with knowledge of the matter.
The investigations
don’t relate to his time at the regulator, they said. A second case involving
Chakrabarty pertains to allegations of forgery made by Indian Overseas Bank
against a travel company. Chakrabarty has denied all allegations of
wrongdoing.
He figures as a suspect
in CBI’s investigation into the debt default by Vijay Mallya founded
Kingfisher Airlines. Chakrabarty was chairman and managing director of PNB
from 2007 to 2009. The agency is probing his role in the disbursal of
“high-risk” loans to Mallya’s companies “with minimal security,” said one of
the persons cited above.
ET has also learnt that
the role of another top-level RBI officer, who was in office until 2010, was
examined by the agency. The RBI’s regulatory role in maintaining standards
for lending was also looked into. Besides the RBI officer, the role of two
former top bureaucrats during the second term of the United Progressive
Alliance (2009-14) was also scrutinised by the agency. They belonged to the
finance and civil aviation ministry, said the people cited above.
The agency is said to
be probing a “larger conspiracy” involving government officials and bankers
over loans to Mallya without ensuring adequate collateral. ET was the first
to report on August 1 that CBI is preparing a charge-sheet in the case
pertaining to loans of more than Rs 6,000 crore to Kingfisher Airlines by a
consortium of 17 banks led by State Bank of India (SBI). The banks are
seeking more than Rs 9,000 crore after adding penalties.
A first information
report (FIR) was registered against Mallya in August 2016 on the complaint of
SBI, which had an exposure of Rs 1,600 crore. PNB and IDBI Bank have an
exposure of Rs 800 crore each, followed by Bank of India at Rs 650 crore,
Bank of Baroda at Rs 550 crore and Central Bank of India at Rs 410 crore. ET
had reported on September 17 that CBI informed a local court that Chakrabarty
was a “suspect” in two cases.
Besides the Mallya
case, Chakrabarty is a suspect in a forgery case filed by Indian Overseas
Bank against a Delhi-based travel company- Airworth Travels &
Tours. Chakrabarty, who was deputy RBI governor between 2009 and 2014, denied
all accusations of wrongdoing in a May 15 letter to the CBI director.
Dismissing his petition seeking to be allowed to travel abroad, CBI court
special Judge Savita Rao had held that the agency’s concern that Chakrabarty
may not return from overseas and escape justice was legitimate.
“We, advocates of KC
Chakrabarty, Shailesh N Pathak and Vibhav Mishra of VSP Legals, decline to
comment on the merits of the case except for the fact that KC Chakrabarty is
completely innocent and the order of the lower court is based entirely on
conjecture and surmise, over which, we have a firm belief that it shall not
sustain in appeal,” the law firm had told ET last month in an email. The
court held Chakrabarty’s presence was required in the two cases.
“The applicant had been
summoned as witness but it is stated by IO (investigating officer of CBI)
that the applicant is the suspect and required for further interrogation as
well as his presence is required for confrontation with records as well as
with the accused TK Bose and Gaurav Mehra (promoter of Airworth),” according
to the September 5 court order.
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Rupee closes at record low of Rs 73.34 per USD
The
Moneycontrol News
Published
on October 3, 2018
|
Mumbai, October 3:
Indian rupee ended at a record closing low of 73.34 per dollar on Wednesday
on the back of strong demand for US dollar from importers amid rising global
oil prices. It has touched a record low of 73.41 in the morning trade, while
it saw some recovery during the day after it opened lower at 73.24 against
Monday's close of 72.91 per dollar.
Forex market remained
closed Tuesday on account of Gandhi Jayanti. According to IFA Global currency
report, higher crude prices would continue to weigh on domestic bonds and the
rupee. The next domestic trigger would be the tone of the RBI policy on
Friday.
Rushabh Maru - Research
Analyst, Anand Rathi Shares and Stock Brokers said, The rupee has made a new
record low today on back of consistent rise in the crude oil prices. Sharp
rise in the crude oil prices along with steep depreciation in the rupee might
push inflation higher in coming months."
"Sharp volatility
in the domestic equities and steep FIIs outflows from equity and debt
segments keeping sentiments bearish for the rupee. The dollar index is
hovering around multi-months high as the Federal Reserve continues to raise
interest rates aggressively," he added.
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Oil shock puts rupee on course to
beat taper-tantrum losses in 2013
Kartik
Goyal
The
Bloomberg News
Published
on October 3, 2018
|
Predictions
that crude could return to $100 per barrel signal that things may get a lot
worse for rupee in final 3 months of 2018.
Mumbai, October 3
(Bloomberg): Move over taper tantrum. The Indian rupee looks set to
outpace losses seen in 2013 as efforts by policy makers to stem its rout fall
flat in the face of rising oil prices and relentless foreign outflows.
Down more than 12 per
cent as Asia’s worst currency in 2018, predictions that crude — India’s
biggest import — could return to $100 per barrel signal that things may get a
lot worse for the rupee in the final three months of the year.
Back in 2013, the
currency had rallied in the October-December period following a two-quarter
plunge of more than 13 per cent on indications the Federal Reserve would wind
back stimulus.
“It’s pretty difficult
to see a huge turnaround in the rupee,” said Khoon Goh, the head of research
at Australia and New Zealand Banking Group Ltd. in Singapore. The underlying
causes for the rupee’s weakness — higher oil and foreign outflows due to
higher U.S. rates — will still remain, he said.
The rupee has been
setting one record low after another recently, with overseas investors having
pulled a net $9.1 billion from Indian stocks and bonds this year amid an
emerging-market selloff. Strategists have been playing catch up as losses
accelerate, with the median year-end estimate for the currency now at 72 per
dollar versus 69 at the end of August.
ANZ is far more
bearish, with a forecast of 74. That compares with the rupee’s latest record
low of 72.9750 reached on Sept. 18, and is 1.5 per cent weaker than its close
of 72.9125 on Monday. Indian markets were shut Tuesday for a holiday.
One positive for the
rupee is that its implied volatility has remained lower than in 2013. That
also perhaps explains the lack of aggressive intervention by the Reserve Bank
of India in the currency market, even as policy makers have taken other
measures. The RBI has for long maintained that it steps in only to curb undue
volatility and doesn’t target any particular level of exchange rate.
As comparisons are made
with 2013, there has been some speculation that the central bank may revisit
a policy it employed that year of opening a foreign-exchange swap window to
meet the entire daily dollar requirements of Indian oil-marketing companies.
For now, the oil surge
means that India’s current-account deficit is estimated to widen to $75
billion in the fiscal year to March, or 2.8 per cent of gross domestic
product, according to Bank of America Merrill Lynch. That would be the
highest since fiscal 2013.
The RBI has limited
options to meaningfully influence the rupee’s trajectory in the near term,
which implies that the currency will remain exposed to the ebbs and flows of
global tides, according to Siddhartha Sanyal, an economist at Barclays Plc.
He predicts the rupee will depreciate to 74.50 per dollar by end-December.
– Bloomberg
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State Bank of Mauritius' India operations hit
by USD 14 million cyber fraud on October 2
The
Press Trust of India
Published
on October 3, 2018
|
An
internal inquiry has been initiated and the matter
reported
to the relevant authorities for investigation.
New Delhi, October 3
(PTI): India operations of State Bank of Mauritius were hit by cyber fraud on
October 2, according to a statement.
In a statement, SBM
Holdings (SBMH) said that no loss has been caused to customers and the Indian
business operations would continue as normal.
On October 2, the India
operations of SBM Bank (Mauritius) Ltd was the subject of cyber fraud with a
maximum potential loss of USD 14 million, it added.
According to the
statement, an internal inquiry has been initiated and the matter reported to
the relevant authorities for investigation.
The SBM Group remains
well capitalised and has sufficient liquidity to continue to finance its
future plans, it added. SBM Bank is part of the group.
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Why merger of PSBs is not a good idea
B
Yerram Raju
The
Business Line
Published
on October 4, 2018
|
Human
resource and cultural issues apart, most mergers
in
the past haven’t led to improvement in profits
Emboldened by the
apparently frictionless merger of the associate banks with SBI, the Ministry
of Finance has decided to merge two weak banks with one strong bank, namely,
Bank of Baroda, Dena Bank and Vijaya Bank, in the PSB (public sector bank)
space. That this should happen exactly 10 years after the Great Recession of
2008, which was triggered by big banks, indicates a certain overconfidence
about financial stability in India.
Since nationalisation,
Indian banking has grown and exhibited much diversity in size, content and
structure, represented by PSBs, regional rural banks, new generation private
banks, old private banks, foreign banks, cooperative urban banks, cooperative
rural banks, small payments banks, small finance banks, and NBFCs.
Business correspondents
support the financial inclusion efforts of banks. Such diversity and
effective regulatory oversight contained the contagion effect of the
decade-old global recession on the Indian economy. The Narasimham Committee
(1994), while arguing for six large globally competitive banks, preferred
closing the weak banks to merging them with strong ones.
There have been 39
mergers and takeovers during the post-nationalisation period, which includes
the SBI merger. It is important to draw lessons from all these mergers.
While all banks reduced
their presence in rural and semi-urban, non-profitable centres
post-liberalisation, SBI, post-merger, closed 5,000 branches, thus
effectively guillotining the plan to reach the unbanked poor.
Regulator-driven
financial inclusion efforts of 2005, board-monitored measures, and Jan Dhan
have supplemented the financial inclusion agenda. India Post Bank is the new
institution aimed at taking banking services to the doorsteps of the least
banked.
Against this backdrop,
the latest merger is enigmatic.
Former RBI Governors YV
Reddy, D Subba Rao and Raghuram Rajan have, on one occasion or the other,
cautioned the government against seeing consolidation as a panacea for the
ills of the banking system.
Though the RBI’s
Financial Stability Report has estimated healthy economic growth of over 7.5
per cent for 2018, it has warned against complacency. And, this comes despite
legal and regulatory measures to stem the NPA (non-performing asset) rot in
banking through ‘market-based resolution plan for insolvency’ (IBC), putting
11 banks under surveillance via prompt corrective action plan, and continuing
efforts to de-stress the sector.
The government,
however, has put together another merger, even before the results of the PCA
were known.
Of the three banks —
Bank of Baroda, Vijaya Bank and Dena Bank — slated for merger, BoB is on the
plate for the second time in the merger exercise. As at the end of 2017-18,
BoB was the biggest with a total income of Rs. 50,306 crore, a net loss of
Rs. 2,432 crore and net NPA of 5.5 per cent.
Vijaya Bank comes next,
with a total income of Rs. 14,190 crore, a net profit of Rs. 727 crore, and
net NPA of 4.4 per cent. And, Dena Bank recorded a total income of Rs. 10,096
crore, a net loss of Rs. 1,923 crore, and a net NPA of 11.95 per cent.
Profitability ratios
Results of a study by
Jagadeeswaran et al on the pre- and post-merger comparisons of profitability
— with the year of merger as base year — in the case of SBI, IOB, BoB, PNB,
IDBI and OBC reveal that net profit to total income, net profit to interest
income, net profit to total assets and net profit to net worth declined for
all except PNB and BoB. The exception was partly due to the period of merger,
when the capital regulations post-Basel did not hit them. Banking is all
about financial intermediation.
People are at the
epicentre, both in front and behind the counters. The culture of the
institutions is intertwined with the culture of the regions. Human resource
and cultural issues have impeded the success of mergers across periods and
nations.
It is, therefore,
important that the big banks think twice before turning into unwieldy
conglomerates. Basic banking and customer services cannot be compromised.
The government would do
well to start development banks to fund infrastructure projects and, thereby,
relieve PSBs of this task. Experience has demonstrated that PSBs are not
right channel for the job as it involves their funding long-term projects
with short term resources.
Universal banking did
enough damage with banks selling more third-party products, eyeing hefty
commissions, instead of focussing on core banking operations. Hopefully,
thanks to the latest directive from the Finance Ministry, this damage will be
minimal, where banks alone will stand to gain, and not the officials selling
such products.
Looking ahead
While past
accomplishments are no guarantee to future success, past failures can serve
as good foundation for enduring success. To improve its own stock, the
government would do well to concentrate on improving governance in PSBs,
pledge not to interfere in loan sanctions, and move a resolution in
Parliament that no party would indulge in loan write-offs either for the farm
or other sectors unless the areas are affected by severe natural calamities.
Further, higher capital
allocation with or without Basel-III cannot prevent bank failures triggered
by systems, people and processes.
Both demonetisation and
GST had hit not just the MSMEs but also resulted in the lengthening of
processing time. Even politically speaking, with elections round the corner,
toying with the financial sector with mergers looks faulty, unwise and
untimely.
The
writer is an economist and risk-management specialist.
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Would not suggest demonetisation to any country: New
IMF chief economist Gita Gopinath
Mahua
Venkatesh
The
Print Online
Published
on October 2, 2018
|
Gita
Gopinath also criticised the RBI for its communication
strategy
during demonetisation but called GST a ‘real reform’
New Delhi, October 2:
The newly-appointed chief economist of the International Monetary Fund, Gita
Gopinath, was a vocal critic of the Narendra Modi government’s demonetisation
move, but called the Goods and Services Tax a ‘real reform’.
In a Walk the Talk
conversation last year with ThePrint Editor-in-Chief Shekhar Gupta, Gopinath
said no macro-economist would recommend this prescription (demonetisation)
for any developing or advanced economy. The Modi government’s demonetisation
drive shook the Indian economy on 8 November 2016 by sucking out 86 per cent
of the cash in circulation overnight.
Demonetisation
In Walk the Talk, the
46-year-old economist called the drive unprecedented. “Not only unprecedented
in terms of practice, it is also unprecedented in terms of theory. Because
pretty much every single macro-economist colleague of mine, whom I have
spoken to, would say that this is something that we probably do not recommend
to any developing country,” said Gopinath.
“Even in an advanced
economy, you wouldn’t do that,” said the John Zwaanstra professor of
International Studies and Economics at Harvard University.
However, Gopinath added
that India could move towards a less-cash economy, leaving more money in the
banks, as a positive impact of the demonetisation drive.
“So, for
demonetisation, I think the biggest plus has been the shift away from a
cash-driven economy to a cashless economy. Maybe more parts of the informal
economy become formal, but everything we know on this transition process is
that it’s a slow one. So, I don’t expect anything to happen very quickly,”
Gopinath said.
Referring to the argument
that more cash meant more corruption, Gopinath said Japan had the highest
cash per capita, way more than India. “The cash in circulation, relative to
the gross domestic product (GDP) for India was 10 per cent, whereas in Japan
it is 60 per cent. That is not black money, that is not corruption,” she
noted in an interview to news daily Business Standard.
In the same interview,
Gopinath underlined the implementation of the Goods and Services Tax (GST) as
a favourable move and termed it a “real reform”. She said GST was a way of
formalising the economy and ensuring tax compliance. The time that was used
to manage the aftermath of demonetisation should have been effectively used
to roll out GST smoothly, she added.
RBI
Gopinath also
criticised India’s central bank for its communication strategy during
demonetisation. “I think a few things that could have been done better would
have been the communication from the RBI (Reserve Bank of India), even in
real time, about how they expect things to play out, where things stand. So,
there could have been a more regular communication with the public than has
happened,” she said in Walk the Talk.
“There could have been
more transparency in terms of how they thought this particular policy would
affect the economy.”
Even as many raised
questions on the role of RBI in the demonetisation drive, Gopinath said its
governor Urjit Patel was “terrific” and his appointment made her happy.
However, the economist
added that demonetisation could eventually benefit the Indian economy, six
months or a year ahead.
Lack of authenticity of
data
In the interview to
Business Standard, Gopinath said India needed to focus on data and its
collation as gathering credible data is a tall task in the country.
“What needs to be done
generally for policy in India is just better data. It’s not great when
everybody, everywhere, seems to be suspicious of the GDP numbers,” Gopinath
said.
She further pointed out
that investment remained weak in India and this trend existed even prior to
demonetisation.
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RBI has the unenviable job
of facing multiple challenges
Radhika
Rao
The
Moneycontrol News
Published
on October 3, 2018
|
Being a central banker
is an unenviable job in this environment. The Reserve Bank of India (RBI) has
been no exception, as it juggles multiple priorities, in the face of external
and domestic challenges. After five years of relative calm in the global
environment, risk catalysts have concurrently re-surfaced. This has
jeopardised the central bank’s policy response framework, as it tackles the
need to raise rates to safeguard the rupee, ensure ample domestic liquidity
to lift growth, and compensate, when required, for fiscal slippage risks.
Globally, the US
Federal Reserve has delivered eight rate hikes in the ongoing cycle, with 4-5
more in the pipeline before 2019-end. This has raised risks of capital
outflows from emerging markets and lifted dollar funding costs, hurting firms
with unhedged exposure or without natural cover from dollar receivables. The
economy’s gross external financing ratio also paints an unfavourable picture
for India next year as short term external debt falls due for payment. A
stronger dollar has meanwhile spelt trouble for the rupee, which has retained
its position as the regional underperformer since Q2 CY18.
Oil prices are clearly
the biggest risk facing the economy, worsening the current account, inflation
and fiscal balances. The government has prudently held back from either
reinstating subsidies or cut taxes to lower record high domestic fuel prices.
Approaching elections and relative inelasticity of domestic energy demand,
however, suggests the fiscal and external balances will continue to be
tested. Finally, global protectionist policies threaten world demand,
providing little respite to India’s exports performance. A cheaper rupee is
unlikely to materially add to competitiveness or lift exports if global
demand wanes on tighter trade controls.
These challenges
complicate the RBI’s policy framework. At home, the likelihood of inflation
undershooting RBI’s H2 FY19 projection calls for a rate cut. However,
persistent cost-push factors i.e. high oil prices and a weak rupee, risks
hardening inflationary expectations and disrupting the current benign
inflation outlook.
It is necessary to
acknowledge that India is more open than is believed, and hence monetary
policy should factor in the direction of global interest rates and what it
means for the domestic market. To this extent, a gradual rate hiking cycle is
likely, with the gradient subject to evolving global and domestic drivers. In
addition to a likely 25 bps hike this week, we foresee at least another 25
bps increase in CY18.
We are also mindful
that an aggressive rate hiking cycle, akin to Indonesia (150 bps this year)
and Philippines (150 bps), is unlikely. A smaller exposure of foreign
investors to Indian government debt (which is more sensitive to rate
movements) limits the upside from a sharp increase in policy rates. Also, a
higher proportion of FPIs into India are invested in equities than debt, with
the latter already subject to regulatory controls and pre-set thresholds.
Moreover, a rate hike
at this juncture is largely symbolic, with market-based borrowing cost up
90-100 bps since January on tighter liquidity, while the repo rate is up 50
bps over the same period. Capital outflows, slower deposit growth, higher
currency in circulation and persistent forex intervention have squeezed
liquidity conditions. Ample support is necessary to support ongoing
deleveraging efforts in the banking sector, apart from accommodating the
government’s bond issuances. In the rupee-denominated credit space, spill
over worries from a domestic NBFC default and potential asset-liability
mismatch drove up short term rates, widening credit spreads, depressing
equity price action and driving down the rupee. To address these, the central
bank has undertaken directed measures to ensure that systemic liquidity
remains close to neutral rather than a significant deficit.
The extent of RBI’s
heavy lifting also depends on fiscal slippage risks. Political priorities are
likely to rise in this pre-election year. However, fiscal orthodoxy should
not be sidestepped, particularly after the medium term deficit target of -3
percent of GDP has been pushed back multiple times. The Centre’s April-August
fiscal deficit has already hit 95 percent of the budgeted target, as capital
expenditure is being frontloaded (44 percent of budgeted versus 36 percent
last year).
A weaker-than-required
run rate for Goods & Service Tax collections and slower progress on
privatisation might require expenditure to be curtailed in H2 FY19 to meet
the fiscal deficit target of -3.3 percent of GDP. A bigger problem, however,
lies with states, which has diluted the Centre’s fiscal consolidation
efforts. As a result, the state plus central deficit at -6.9 percent of GDP
in FY18 is little changed from -7.2 percent in FY15. Higher the risk to
fiscal consolidation, more the risks of monetary tightening this year.
In nutshell, the RBI will
seek a balance between its various priorities. Any sharp deterioration in the
global environment will still require monetary policy to be put forth as the
first line of defence, followed by other resource mobilisation efforts (read:
non-resident Indians deposits/bonds), if the balance of payments deficit
widens sharply.
(Radhika
Rao is an economist, DBS Group Research, Singapore)
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India’s ostrich club and the global recession
Parsa
Venkateshwar Rao Jr
The
Asian Age
Published
on October 3, 2018
|
New Delhi: L’affaire
Infrastructure Leasing and Financial Services (IL&FS) meltdown is not a
freak incident. It is an inherent market risk for companies to fail, for good
reasons and bad. Inquiries might unearth corporate mis-governance in the case
of IL&FS, but that is an entirely different story. The moral of the market
economy is that small disasters trigger bigger ones, potentially. It is a
lesson that Indian economists do not sufficiently emphasise, and to which
political leaders turn a blind eye to. This takes us to the main issue: Did
India’s eggheads ponder over what has come to be known as the Great
Recession, which continues to linger after a decade?
Most Indian
politicians, policymakers and economists have displayed a strange
indifference to the major quake that shook the global economy, first in the
United States and then in the European Union, from 2007-08 through 2017-18.
In December 2008-January-2009, then finance minister Pranab Mukherjee
announced a Rs 40,000-crore stimulus package for the industry to smoothen
their frayed nerves, which had its own deleterious effects on the
government’s growth and financial deficit numbers. In 2013, P. Chidambaram,
in his second run as finance minister, had to face the rupee volatility after
the US Federal Reserve announced its decision to taper its unusual monetary
policy (UMP) of infusing funds into the tottering financial and industrial
institutions. There was a flight of capital from emerging market economies
like India, and it dampened the Indian economy’s prospects.
The leaders of the BJP,
who were then in Opposition, including former finance minister Yashwant
Sinha, then Leader of the Opposition in Rajya Sabha Arun Jaitley and then
Rajya Sabha member Nirmala Sitharaman mercilessly flayed the UPA-2 government
over the country’s dithering economy, and refused to accept the argument that
the global economic squall had battered the Indian markets, especially
exports. The argument put forward by the leaders of the BJP and others was
that India did not depend on exports for its economic growth, and that the
huge domestic market and the consumption it entailed was good enough to keep
the economy in shape and the global developments were marginal. After the BJP
came to power in May 2014, Ms Sitharaman, as commerce minister, put up a
stoic front in the face of sluggish exports and finance minister Arun Jaitley
confessed that seven per cent growth in GDP was laudable in the face of a
subdued global economy.
In the immediate
aftermath of the outbreak of the financial crisis, the Communist parties
claimed credit for the relative stability of the Indian economy because they
said they did not allow the government to liberalise the financial sector,
and therefore no harm was done. It turned out, however, that the undisclosed
global exposure of State Bank of India (SBI) and ICICI Bank ran into a few
hundred million dollars. The Left was supporting UPA-1 from the outside and
they exerted an invisible veto on what the government could do on the
economic policy front. That is the reason for the Left’s tone of triumphant
satisfaction.
The Left parties and
their intellectual fellow-travellers did not, however, proclaim the end of
capitalism after the 2007-08 implosion. The criticism was muted as there was
no alternative socialist model anywhere in the world which they could cite as
a counter-example. The Left’s discomfiture in raising the ideological battle
cry against the failing global markets was understandable. But it was the
silence of the market economists, the liberals and right-wingers, that was of
greater concern. For over a quarter century after the collapse of the Soviet
Union and along with it the state-controlled economy, the boast of the market
economists had been that the markets were sure-fire engines of growth and
prosperity.
Moral critics of
unbridled greed like Nobel Prize-winning economists Joseph Stiglitz and Paul
Krugman were gloating in their self-righteousness, but they were not
addressing the structural flaw in the market system that had led to the
breakdown. Nassim Nicolas Taleb’s “black swan” event explanation is
interesting, and it should have led to greater analysis of the
unpredictability of the markets and should have created the equivalent of
quantum mechanics in economics, but it did not. Perhaps the real world cannot
bear too much of probability and unpredictability. The only moment of
critical self-awareness among the free market economists came when they
rediscovered American economist Hyman Minsky’s 1980s’ analysis of the
phenomenon of securitisation and how it could lead to complications of
multiple mortgages and thus lead to a collapse. For a moment, Hyman Minsky
became the prophet before his time!
In India, the only man
who seems to have looked at the reality of the frayed free market system was
former Prime Minister Manmohan Singh, who did not ever flaunt his credentials
as a trained and professional economist, but who was deferred to at the G-20
meetings that became regular post-2007-08, who made the clear-eyed
observation in his speech at the UN General Assembly on September 24, 2011:
“Till a few years ago, the world had taken for granted the benefits of
globalisation and global interdependence. Today we are being called upon to
cope with the negative dimensions of those very phenomena.” But he did not go
any further than that.
The free market
enthusiasts in the country appear to be too embarrassed to discuss the issue
of the inevitable market crashes that are bound to occur because they had
rather naively believed the market to be the proverbial horn of plenty, and
that no inefficiencies could be associated with it. There is a slow veering
round to the view, which would have been laughed out of court a few years
ago, that the State has a necessary role to play in sustaining the markets.
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Deepening farm crisis in India
could hurt Modi's re-election bid
Rajendra
Jadhav & Mayank Bhardwaj
The
Reuters
Published
on October 3, 2018
|
Mumbai & New Delhi,
October 3 (Reuters): The financial squeeze on India’s farmers is set to
worsen because of record high fuel prices and surging costs of fertilisers,
posing a challenge to Prime Minister Narendra Modi in an election that must
be held by May.
The rise in input
prices could not have come at worse time for farmers, already grappling with
falling domestic product prices due to rising yields and abundant harvests.
Yet, the government has
few easy options to respond. Rival global producers have complained about
Indian state support and falling global farm product prices undermine export
prospects.
Indian farmers voted
overwhelmingly for Modi in 2014. But a fall in rural incomes risks damaging
that support next year.
Thousands of farmers
marched on New Delhi on Tuesday to demand better prices for their produce.
Police responded with teargas and water cannon. Farmers suspended their
protests after talks with officials that ran into early Wednesday morning.
But their demands and
those of other agriculture workers, who together make up about half India’s
1.3 billion people, have not gone away.
“Although we have
decided to end our protest, we still believe that the government is not
serious about addressing the concerns of the farmers,” Anil Talan, national
secretary of farmers body Bhartiya Kisan Union, said after the march.
Diesel prices have
surged 26 percent this year, making tilling fields, harvesting and
transporting crops expensive for India’s 263 million farmers who mostly use
diesel tractors.
Alongside rising diesel
costs, prices of key fertilisers such as potash and phosphate have jumped
nearly 15 and 17 percent respectively in a year, as companies pass on the
rise in global prices and the impact of the weak rupee to farmers.
India, the world’s
second-biggest producer of staples such as rice and wheat, imports all its
potash needs and relies on foreign supplies for nearly 90 percent of the
phosphate it uses.
“It’s a double whammy
for farmers who have to bear the brunt of lower crop prices and higher input
costs,” said Devinder Sharma, an independent food and trade policy analyst,
saying this explained “why farmers’ anger has come to the fore.”
Diesel demand is rising
as farmers have started harvesting summer crops. After tilling, they will
plant wheat and rapeseed, the main winter crops.
Union official Talan
said the government needed to prop up commodity prices and keep a lid on
farmers’ costs to support the agricultural industry, which accounts for about
16 percent of India’s $2.6 trillion economy.
“Because of higher
diesel prices I need to spend nearly 20 percent more on harvesting soybean
but soybean prices have crashed this year,” said Uttam Jagdale, a farmer from
Pune, about 150 km (94 miles) south of Mumbai.
Nilesh Sable, a cane
farmer from Sangli in the western state of Maharashtra, said fertiliser
prices were rising each month.
Fertiliser firms say
they have little choice but to pass on at least some extra costs due to a
sharp fall in the rupee and a 20 percent rise in international potash and
phosphate prices.
“Still, we are not
passing the entire burden to farmers,” said an official with a state-run
fertiliser company, asking not to be named in line with government policy.
Greater farm efficiency
is partly to blame. Mechanised farming, high-yielding seed varieties and
increased use of pesticides have pushed up harvests. Output of most crops has
soared to record levels each year.
India’s production of
pulses, such as lentils and beans, surged to 24.51 million tonnes in the year
to June 2018, up from 23.13 million tonnes in the previous 12 months.
Imports of pulses, such
as lentils from Canada, Australia and Russia, fell to 1.2 million tonnes in
the financial year to March 2019, the lowest since 2000/01 and well below the
6.6 million tonnes imported in 2016/17 after back-to-back failures in the
monsoon.
Plentiful supplies
extend to other crops. India is set to surpass Brazil as the world’s top
sugar producer in the 2018/19 season, but rising output has driven down local
sugar prices by 15 percent and left mills nursing losses.
In bid to help the
sector, the government unveiled measures last week such as transport
subsidies and incentives to export at least 5 million tonnes of sugar.
Brazil, Thailand, Australia and other rival producers were quick to complain.
Vegetable prices,
especially onions, cabbage and tomatoes, have also fallen 25 percent from
last year, largely because of overproduction. Without enough refrigerated
trucks, excess production cannot be stored.
Domestic milk prices
dived more than 25 percent in the past year, but a global glut has made
Indian exports uncompetitive.
Harish Galipelli, head
of commodities and currencies at Inditrade Derivatives & Commodities in
Mumbai, said India needed to find markets abroad to reduce its inventories.
“But exports will not
be easy, as global prices are depressed, and there is no export parity for
most commodities,” he said.
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Source:
Internet Newspapers and anupsen articles
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