"Apartheid does
not happen spontaneously, like bad weather conditions."
—Jonathan Kozol (American, 1936)
Word
for the day
Nodus (n)
A difficult or intricate point, situation, plot, etc.
Malice
towards none
If surge pricing by app
based taxi operators is unacceptable; how could Indian Rail could be allowed to
use it?
First random thought this morning
PM Modi is gaining in international popularity ratings with every
flying mile he earns. His party, BJP, though is not able to match his steps.
The party in fact may be losing some of its core support bases - Traders, small
businesses, security forces for example.
In six months we would enter the election phase that shall
continue till the 2019 general elections. A loss in UP & Gujarat could hit
the party badly.
The question is should PM & FM make a mid-course correction in
their policy focus for electoral considerations or continue with their long
term strategy?
Bank on Banking - 3
In order to stabilize the collapsing currency and support the
precarious current account position in the summer of 2013, the then RBI
governor took a number of steps. The most famous amongst these measures was a
swap deal on FCNR deposits whereby the RBI had opened a window to the banks to
swap fresh FCNR dollar funds, mobilized for a minimum term of 3yrs at a fixed
rate of 3.5%pa for the tenor of the deposit. The swap window was opened from
September 2013 to December 2013.
Most banks offered 4.77% interest on fresh 3yr FCNR deposits. The
cost of these funds to Indian banks was thus around 8.27% (4.77% interest and
3.5% swap cost).
Smart NRIs and foreign banks sensed this big opportunity and
pumped more than US$34bn in Indian financial system. Most of this money was
borrowed at less than 1% interest from foreign banks.
These deposits are now due for repayment. There is a sense of
worry of that outflow of such a big amount in such short period of time will be
disruptive for Indian financial markets - bank liquidity, bond yields and
currency.
In my view, there is absolutely nothing to worry on this account,
for the following simple reasons:
(a) The event was known
3yrs in advance to everyone. RBI has assured time and again that it has made
adequate arrangements to provide the required foreign currency to respective
banks for honoring their repayment obligations. It is public knowledge that RBI
has enough ready forex and fully covered swap positions also.
(b) Banks who prepare their
balance sheet on weekly basis have known this outflow 3yrs in advance and would
have prepared well for it.
(c) The current rate of
3yr USD FCNR deposit offered by SBI is 2.11% p.a. and the current cost of 3yr
swap is around 4% p.a. For EUR and JPY the interest rate is materially lower.
The rate offered on a 3yr INR deposit is 7%.
The banks therefore
could easily accept new deposits or offer to renew these deposits at much lower
rates, provided they need this money to meet the credit demand.
The lending rates in
US and Europe are much lower and liquidity much higher as compared to 2013. So
for foreign banks and NRIs it will still be profitable to renew these deposits.
(d) Insofar as the bank's
liquidity positions is concerned - the fear may be unfounded. RBI has many
tools to infuse liquidity in the system. Increasing LCR, reducing SLR &
increasing OMO are only few to name.
(e) Bond yields have
moderated materially in past six months. If the spectrum auction and
disinvestment program goes as per the budget, the yields may actually fall
further. Irrespective of the 25bps hike by US Fed, the yield differential
between Indian and other bonds is too high to sustain.
No comments:
Post a Comment