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Given how non-performing assets at state-owned lenders have ballooned to more than 10% of their total advances, and the precarious financial positions of at least 11 lenders, it is surprising the government wants capital adequacy norms prescribed by RBI to be diluted. Specifically, the government believes RBI’s prescribed CRAR of 9%, as compared to the 8% as required by the Basel norms, is too high. It might seem an unnecessary cost at this point but it is actually an investment to keep a crisis at bay. While it is true that banks are now following stricter provisioning norms for stressed assets as compared to what they were doing earlier, it is nonetheless necessary for them to set aside more capital than their counterparts in other countries. That is because, as RBI deputy governor NS Vishwanathan, has explained, the losses tend to be higher in India.
To be sure, there is some improvement post the IBC (Insolvency and Bankruptcy Code) and the rollout of RBI’s revised framework for stressed assets. Nonetheless, Vishwanathan has argued that, given the kind of default behaviour observed in India, applying the Basel-specified risk weights would understate the risk levels of the assets on banks’ books. Studies show the probability of a non-default rating—assigned by the credit rating agencies—turning into a default rating within a certain period of time is higher in India. Also, the track record of ratings agencies leaves much to be desired, as can be seen from the recent case of IL&FS where the company was rated default almost overnight. So, relying on credit rating agencies would probably not be wise. As Vishwanathan points out, a smaller capital base only makes banks more vulnerable to defaulting on their obligations in the event of unexpected losses. Adequate levels of capital need to be maintained and the higher the capital, the more the skin in the game for shareholders.
Potentially, this results in better appraisal of credit and screening. Indeed, until the Asset Quality Review (AQR) was initiated in Q4FY16 by RBI, stressed assets were not classified properly and consequently hugely under-provided for. The upshot was an increase in loans by banks which did not have the required levels of capital and 11 of these needed to be brought under the prompt corrective action (PCA) framework. The government must understand how precious capital is—and this is entirely the taxpayers’ money—and that it cannot simply be frittered away. Since 2005, the government has needed to infuse more than `2.3 lakh crore in PSBs, more than half of which has gone into banks under the PCA framework. Had the capital adequacy norms been tighter all these years, things might not have come to such a pass. It is understandable that the government should want more credit growth in the system, and to that extent, the PCA norms look like they are hindering credit growth; and, after the IL&FS debacle which has hit lending by NBFCs, this growth will be further constrained. But, as the credit growth data shows, the larger banks—including the privately-owned ones—have raised their lending and, as a result of this, India’s overall bank credit growth is quite robust. Unless the government has very good data on the probability of default behaviour in India being much lower than what RBI says, it simply has to let the regulator do its job. And since this results in banks remaining solvent, the Central government should want this even more than RBI.
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The Union government might consider more incentives for textile exporters, to bridge the gap between costing of products originating from the world’s least developed countries and India. Under the global preferential treatment rules, textiles imported from countries such as Bangladesh, Pakistan and Vietnam are preferred over those from India. Earlier extension of lower import duty in developed countries including America, to Indian exporters, is no longer valid. Reason: growing size of Indian economy — it has crossed the threshold size and became the world’s six largest economy in 2017.
The total in differential duty works out to nearly 9 per cent between products from India and the other smaller economies. With the present incentives offered by the government and the rupee’s recent depreciation, the total duty differential works out to 5 per cent, on which the government announced a two per cent export incentive under the Merchandise Exports from India Scheme.
The US government has complained about the Indian incentives at the World Trade Organisation (WTO), as legally unsustainable. WTO has set up a committee on the issue.
Under the package, MSMEs registered under the goods and services tax will get a two per cent interest rebate on incremental loans up to Rs 10 million. A web portal has been launched through which such units may avail of loans up to this size. The segment accounts for about 45 per cent of the sector’s manufacturing output and around 40 per cent of export.
On Thursday last week, President Trump hinted that he was close to agreeing on a trade deal with China after a phone call with President Xi. On Friday, Bloomberg reported unnamed sources in the White House saying the President had asked key officials to start work on a draft of a potential trade agreement with China. Stock markets were on the up and up.
This optimism did not last. Later the same day, White House economic adviser Larry Kudlow dampened expectations of a quick deal in a CNBC interview. The US stock market reacted negatively and ended a run of three consecutive days of gains.
The goal of forcing trade talks with China through tariffs is to reduce the trade deficit with China and establish fairer trading terms for US companies. However, the US government’s other aim of bringing some manufacturing home may not be realistic. The reality is that production and distribution supply chains of products and their components are so integrally linked, it is more likely companies will find countries in Asia overall less costly to shift production to.
As the US trade dispute with China gained momentum earlier this year, analysts were putting forth suggestions about which countries would benefit most.
Countries like Taiwan, Thailand and Malaysia are luring more electronics and computer companies to their shores. Cambodia, Philippines and Bangladesh are seeking more opportunities to increase their market share in the production of apparel and footwear. Likewise, Thailand and Vietnam for household consumer goods like washing machines and refrigerators.
Indeed, in a study by American Chamber of Commerce South China (AmCham South China) published on October 29, where 219 companies were surveyed on the impact of US and China tariffs, less than one percent indicate any plans to relocate manufacturing to North America. In September, a joint study of 430 firms by AmCham China and AmCham Shanghai, found only 6 percent of respondents saying they may consider relocating production to the US.
The same report mentions that Southeast Asia and the Indian Subcontinent were the destination of choice should relocation occur.
There are however some limitations to how much production can be moved out of China.
Through years of establishing China as “the world’s factory”, it has nurtured a highly trained, skilled and disciplined workforce.The infrastructure, roads, ports and integrated logistical support is second to none in terms of its ability to handle the volume of goods produced. This makes China an efficient and effective production centre. Furthermore, China’s workforce is more than double that of all Southeast Asia combined. So, even if there are cost benefits of moving production out of China, there simply isn’t enough capacity elsewhere to takeover what China can produced.
A study by India’s Department of Commerce identified about 100 products where India can replace US exports to China due to higher import tariffs imposed by China on US farm products. These include corn, grain sorghum, oranges, cotton, almonds and durum wheat.
Another report by the Confederation of Indian Industry (CII) concluded that with concerted effort, India can increase its exports of products like pumps, parts of taps, parts for the defence and aerospace industry, vehicles, automobile parts and engineering goods among others.
India if it plays its cards right, might even be a major part of the re-shaped global supply chain.
At the moment, this is still an aspiration.
Recently released data including the Purchasing Managers Index (PMI) by various Asian countries and trade deficits numberscould suggest which countries could be benefiting from the US-China trade dispute at the moment.
The Singapore Institute of Purchasing and Materials Management (SIPMM) published its monthly Purchasing Managers Index (PMI) for October on November 2. It declined by 0.5 points from 51.9 in September and came in below the 52.2 forecast of economists polled by Bloomberg.
A reading above 50 indicates that the factory activity is generally expanding and below 50 that the activity is contracting.
Similar manufacturing PMIs published by neighbouring countries show similarly dismal numbers.
Indonesia PMI last month was down to 50.5 from 50.7 the previous month, Malaysia’s was lower at 49.2 compared with 51.5 a month earlier, Taiwan, 48.7 from 50.8, Thailand 48.9 from 50, Hong Kong 47.9 from 48.5, South Korea 51.0 from 51.3.
China saw a minute increase from 50.0 the prior month to 50.1 last month and in the Philippines the same 0.1 point increase to 52.0.
While India gained 0.9 points from a month ago to 53.1, Vietnam saw largest gain among major Asian economies reaching 53.9 from 51.3 in the previous month. This is not surprising considering Vietnam has been consistently identified by certain US companies as the preferred location in Southeast Asia should they relocate production from China.
Contrary to what the US hopes to achieve, the trade war it initiated with China saw its trade deficit with China widen by 1.3 percent in September to a seven-month high.
If anything, these figures indicate that in general no one gains from increased protectionism. Overall global economic growth will shrink to the detriment of all. The pain for China manufacturers will spread to its partners, for example, in South Korea and Taiwan for chips to textile suppliers in Myanmar. The trade war is expected to have negative impact not only in the US and China but also on various industries, companies and countries.
India’s cotton textile exports grew by 26 per cent at USD 6,235 million in the first six months ended September 2018 and the on-going trade war between US and China will open up new export opportunities, the Cotton Textiles Export Promotion Council (Texprocil) said here.
The country had exported cotton textiles (raw cotton, yarn, fabrics and made-ups) worth USD 4,917 million in April-September 2017-18, the association said in a statement.
However, exports of textiles and clothing declined by 3 per cent with exports of readymade garments registering a steep decline of 16 per cent during H1FY19.
India held a special place in global textile trade as the second largest textile exporter in the world. Today, cotton yarn & fabric exports account for over 23 per cent of India’s total textiles and apparel exports.
Ujwal Lahoti, chairman of Texprocil, stated that the ongoing trade war between the US and China would possibly open up new opportunities for cotton textile exports from India and we should be ready to explore them.
The government was also in the process of putting in place alternative schemes to promote exports which would improve competitiveness, he said.
Lahoti welcomed the package for the MSME sector announced by the government. Interest subvention on pre-shipment and post-shipment finance for exports by MSMEs has been increased from 3 per cent to 5 per cent.
These measures would provide much needed support and encouragement to the MSME sector, which contributed significantly to the textiles exports. Under the package, GST- registered MSMEs would get 2 per cent interest rebate on incremental loan up to Rs 1 crore, he added.
He also noted that the jump in India’s ranking in the World Bank’s Ease of Doing Business will help boost exports.
Lahoti acknowledged that for textiles exporters, remarkable improvements are visible at the ports, customs and regional offices of DGFT EDI systems.
The Indian industry has hailed the recent launch of a “historic” Support and Outreach Initiative for the micro, small and medium enterprise (MSME) sector.
Industry body ASSOCHAM, in a press statement, most heartily welcomed the measures announced by Prime Minister Modi for MSME sector today.
“These measures are very comprehensive, covering the whole gamut of issues faced by the MSMEs in India,” said ASSOCHAM secretary general, Uday Kumar Varma.
“We are confident that these measures will certainly go a long way in mitigating the pains of the MSME sector and also give them new energy and vigour,” said Varma.
He added, “These are Deepawali gifts in the true sense of the term to the MSME sector in the country.”
Exporters’ body FIEO has also expressed satisfaction over increase in Interest equalization rate from 3% to 5%, adding that it will provide competitiveness and level playing field to MSME exporters.
Hailing the announcement, made by the Prime Minister Narendra Modi, FIEO said increasing the Interest Equalization from 3% to 5% is very timely move and will help the exporters to get credit at competitive rates close to international benchmark.
Coming at a time when interest rates are moving northwards, the deeper support of 5% would provide much needed relief to MSME exporters who were burdened by increasing cost of credit, FIEO added.
This move shows that government is very keen to lend a helping hand to MSME to boost exports and create jobs in the country, it said.
Before the launch of the programme, ASSOCHAM, terming the programme as the much needed step to boost the confidence of trade and industry, said that the move would not only promote development of MSMEs but also help generate employment countrywide.
“Timely, easy and adequate finance is lifeline for the SME sector which is the most powerful engine of India’s economic growth,” said ASSOCHAM president Goenka.
Highlighting the importance of the MSME sector, Goenka also said that it is the backbone of Indian economy as it contributes about 30 per cent of India’s gross domestic product (GDP) and 49 per cent of exports.
With the hike in the US Federal Reserve’s interest rate, most of the dollars invested in emerging and European markets have returned home. This deeply appreciates the significance of the dollar as hard currency and eventually makes the dollar pricier. To add to this woe of developing countries are the extreme protectionist and incoherent policies of US President Donald Trump, which are sending out confused signals to the world economy, as it was understood with the establishment of the World Trade Organisation (WTO) that performance of the global economy henceforth will be free and fair.
With a such situation in sight, India, like many other emerging markets such as Turkey and Argentina, has experienced serious fiscal issues such as current account deficit (CAD), rise in debt, inflation in fuel and market constraints for commercial transactions. The rupee has depreciated 13-14%, along with the currencies of other emerging economies like Brazil and South Africa, which witnessing fall in the range of 10-12%. Even Australian and Chinese currencies have experienced depreciations of 8% and 5%, respectively. This level of depreciation experienced by different economies suggests how investors perceive their different fundamental macroeconomic conditions, especially the level of their current account, fiscal deficits and policy outlooks. In effect, it suggests that the rising dollar raises questions about the capacity of emerging economies to service their dollar-denominated debts and the vulnerabilities this could expose their financial systems to.
Such hike in interest rate and restrictive policies of Trump are making conduct of global trade uncertain and unstable. What could be done to save the world trade from such uncertainty is an area of concern and needs to be examined.
Looking at the current situation, it is apparent that global uncertainty is raising its ugly head since Brexit, Trump’s ascendancy, contagion effect of the EU crisis, and the withdrawal of the US from mega trading blocs such as the Trans-Pacific Partnership (TPP). Unpredictable and restrictive trade policies adopted by Trump to even out the trade deficit that currently the US is witnessing are proving to be an addendum in further uncertainty of the world trade. But he looks to be convinced that unfair trade is meted out to the US with the rise of China as an exporting hub, and such trade practices by China are completely non-transparent and manipulated through a systematic depreciation of the yuan. In response to such non-transparent policies of China, the US followed a ‘tit for tat’ policy by imposing tariffs on imported solar panels and washing machines, and then aluminium and steel.
Since March 2018, these trade skirmishes and conflicts are rising, without showing any signs of abating between the US and China. America’s imposition of 25% tariffs on China’s $55 billion exports to the US was further retaliated by China with same sized tariffs on the same amount of trade from the US. To take further revenge, the US escalated trade conflict by imposing 10% tariffs on $200 billion worth of China’s exports to the US.
This conflict is having a significant effect on trade and investment flows across the world as both are huge trade players in the global economy. If such a situation persists, China will look for new markets and, therefore, can have destabilising trade relations with some of its established trade partners. This new arrangement and uncertainty will continue to influence trade and investment, as businesses evaluate how increased restrictions will indirectly affect their supply chains.
The worry is that the country which has been the harbinger of free trade for the last 80 years is turning out to be its greatest critique. The US is emerging as a big threat to a rules-based trading system, which was duly acknowledged by most of the countries to engage in trade.
The current fluid situation is neither giving any definite signals to the progress of trade nor about the intention of Trump. Is it ‘America first’ or is it that the rules of the trading game need to be changed? If it is America first, then Trump needs to make America completely self-reliant and independent of any country’s existence, and make America grow economically and politically, not to have any negative impact on its well-being. Such a perspective could be megalomaniac as America itself meddles with other nations’ internal politics and policies, such as in the Middle East, in South Asia and in Latin America, to make its own position secured and strong. After all, it’s all globalisation and an interdependent world.
If it is about the rules of the game, then the WTO framework may be strengthened by firmly institutionalising the dispute settlement mechanism instead of doing away with it, as was recently mentioned by Trump. Secondly, opening of economies needs to continue, as this will establish global competitiveness of countries. Lastly, unilateral reforms may be encouraged, especially for countries like China to initiate, so that structural reforms in Chinese economy are done to demonstrate to the outside world about its competition policy, IPR, currency management, etc. This would convince the US and the world economy about the fairness in the Chinese system, which has been a bone of contention for some time now, and the world economy will be more stable.
Since India has reached that GDP threshold, textile units in the country no longer enjoy the soft duties applicable to the competition in Bangladesh, Pakistan and Vietnam
The central government might consider more incentives for textile exporters, to bridge the gap between costing of products originating from the world’s least developed countries and India. The industry has given a representation.
Under the global preferential treatment rules in this regard, textiles imported from countries such as Bangladesh, Pakistan and Vietnam are preferred over those from India. The earlier extension to Indian exporters of lower import duty in developed countries, including America, is no longer available. The reason is the growing size of the Indian economy — it has crossed the threshold size in this context, of $3 trillion in Gross Domestic Product. We had become the world’s six largest on this measure in 2017.
The total in differential duty works out to nearly nine per cent s between products from India and the other smaller economies. With all the present incentives offered by the government and the rupee’s recent depreciation, the total duty differential works out to five per cent, on which the government recently announced a two per cent export incentive under the Merchandise Exports from India Scheme.
The US government has complained about the INdian incentives at the World Trade Organization (WTO), as legally unsustainable. WTO has set up a committee on the issue.
“We want this MEIS incentive to be doubled to at least four per cent. Given the marketing skill of ndividual exporters, India would be able to bridge the gap fully, enabling us to boost shipment. Without this increased MEIS, the industry would not be able to compete with the preferentially treated countries, including Bangladesh, Sri Lanka and Pakistan,” said Siddhartha Rajagopal, executive director, The Cotton Textile Export Promotion Council (Texprocil). He said the industry had given the government a representation in this regard.
At an awards ceremony, Union textiles Minister Smriti Irani asked Texprocil to reach out to the micro, smll and medium-sized (MSME) units in the sector, about a third of the Council’s membership. She wanted these businesses to know, she said, that banking institutions have been given only 59 minutes for in-principle approval to loans for small traders and organisations.
Expressing joy at the 26 per cent growth of cotton textiles this year, the minister stated this sets a benchmark to double the growth next year. She noted the interest subvention on pre-shipment and post-–shipment finance for export by MSMEs had been increased from three to five per cent.
Under the package, MSMEs registered under the goods and services tax will get a two per cent interest rebate on incremental loans up to Rs 10 million. A web portal has been launched through which such units may avail of loans up to this size. The segment accounts for about 45 per cent of the sector’s manufacturing output and around 40 per cent of export.
“The announcements have certainly come as a huge relief for the MSME sector. The majority of them being in the informal sector, they find it extremely difficult to raise funds for their business activities, as credit appraisal is a major challenge,” said Ujwal Lahoti, chairman of Texprocil.
The Centre wants a cut of what it thinks are the burgeoning reserves of the RBI. The central bank says it is an emergency buffer not meant to be shared. Who’s right?
There are many issues on which the Reserve Bank of India (RBI) and the Centre disagree but the most significant one is over the treatment of the sizeable reserves in the central bank’s balance sheet.
If the reserves are mouth-watering for the Centre, they’re a source of security for the RBI and not up for bargaining.
The Centre’s views
Let’s look at this from the Centre’s angle first. The outlay for recapitalisation of banks is continuing to grow. After coughing up over Rs. 2.11 lakh crore over the last year, the government finds itself in the unenviable position of having to cough up even more as the skeletons keep tumbling out of bank lockers.
Second, the Centre is still smarting from the return of all the cancelled notes in the demonetisation exercise. Remember, it was banking on a large part of the notes not returning which would have accrued to its account.
Third, throw in the fact that it’s an election year when it would like to push up spending to create a feel-good factor with voters, and the picture is complete. Now you know why the government is salivating over the booty in RBIs vaults.
How RBI sees it
Let’s now look at this from the central bank’s angle. As of June 30, 2018, the RBI had Rs. 10.46 lakh crore in reserves, bulk of it under two heads — currency and gold revaluation reserve (Rs. 6.91 lakh crore) and contingency reserve (Rs. 2.32 lakh crore).
The currency and gold revaluation reserve (CGRA) accounts for 19.11% of total assets and the contingency reserve for another 6.41%. Back in 2004, a committee under Usha Thorat, then Deputy Governor, examined the question of what should be the ideal size of RBIs reserves.
It suggested that the CGRA should be 12.26% of total assets while the contingency reserve should be 5.5%, totalling 17.76% in all. But the RBI Board did not accept the recommendation and preferred to continue with the level set by an earlier committee in 1997. That committee, under V. Subrahmanyam, had set a contingency reserves level of 12% of total assets. The reserves are built through transfers from the annual surpluses in the profit and loss account of RBI. The balance surplus after transfper to reserves is given to the Centre as dividend.
In 2013-14, then governor, Raghuram Rajan, decided to transfer the entire surplus in the RBI’s profit and loss account to the Centre without appropriation to reserves. He was acting on the recommendation of another committee under Y.H. Malegam which said the existing reserves were in excess of the needed buffer and hence no transfers from the profits were necessary.
So, what were the reserves then? The CGRA was 21.81% of total assets and the contingency reserve was 8.44%. The corresponding numbers now (2017-18) are 19.11% and 6.41% respectively. By imputation, it can therefore be concluded that the buffer is now inadequate going by the Malegam Committee’s recommendation.
Aim of keeping reserves
But what’s the object of these reserves? They are fourfold. The CGRA is meant to cover a situation where the rupee appreciates against one or more of the currencies in the basket — and the basket has several currencies ranging from the dollar to the euro and the yen — or if there is a decline in the rupee value of gold.
The level of CGRA now covers about a quarter of the total currency reserves of the RBI.
The contingency reserve is meant to cover depreciation in the value of the RBI’s holdings of government bonds– domestic and foreign– if yields rise and their prices fall. The reserve is also meant to cover expenses from extraordinary events such as demonetisation (you could argue that like the tsunami, an exercise like demonetisation hits the country once in several generations), money market operations and currency printing expenses in a year of insufficient income. Most important of all, the contingency reserve supports the mother of all guarantees — the central bank’s role as the lender of the last resort. The reserve is also a cover for the deposit insurance fund given that the Deposit Insurance and the Credit Guarantee Corporation (DICGC) is a wholly-owned subsidiary of the RBI.
The RBI’s position, therefore, is that it would be imprudent to consider sharing any part of the reserve with the Centre. The Centre’s view is that the technocrats in RBI are too conservative and the money belongs to it.
The reserves have been built from higher seigniorage income (the difference between the value of new notes printed by the RBI and the costs of printing and distribution) and interest paid by the Centre to the central bank on the latter’s holdings of government securities.
A committee is in order
So, what’s the solution to this? Simple. When in doubt, set up a committee.
Such a committee should have representatives from government, the central bank, academicians and the market. The committee should go into all aspects of the RBI’s balance sheet, suggest a safe buffer in reserves and set out a fair method of sharing the reserves, if at all they should be.
In his book Advice & Dissent — My life in public service , former Governor Y.V. Reddy narrates the story of the Subramanyam Committee and its recommendation. When he took the issue to then Finance Secretary Montek Singh Ahluwalia, the latter just asked him one question: “If you were in the Finance Ministry in my position, would you agree to this proposal?” When Dr. Reddy nodded, Mr. Ahluwalia immediately gave him the go-ahead.
Dr. Reddy quotes this to show the mutual trust and level of respect that the two had for each other.
Admittedly, the present scenario is a far cry from that. But is it too much to expect for mature individuals to respect each other as professionals and act in the best interests of the nation shedding their egos?
Over the past two years, India’s performance on the World Bank’s ease of doing business has improved spectacularly. As seen in Chart 1, India has jumped 53 spots in two years, from 130th rank in 2016 to 77th in 2018.
In large parts, India’s improvement in rankings stems from better performance on indicators such as starting a business, dealing with construction permits and trading across borders. As seen in Chart 2, on starting a business, India has moved up to 137th rank in 2018, from 156th the year before. Similarly, on dealing with construction permits too, India has moved up to 52nd rank this year, up from 181st last year.
Much of the improvement on both these parameters, as seen in Chart 4, stems from a decline in the number of procedures that are involved in both these indicators, as well as the time taken to complete these procedures.
Similarly, on trading across borders too, India fares better, with its ranking improving to 80th in 2018, up from 146 in 2017. As seen in Chart 5, improvement on this indicator is also a consequence of a fall in time and costs related to border compliance. However, the country’s performance on registering property has worsened (Chart 6) due to an increase in the number of procedures required, as well as the time and costs involved therein.
India has continued to make modest improvements on indicators such as getting electricity and credit, though surprisingly, on resolving insolvency and paying taxes, the country did not make the expected gains (Chart 8). Presumably, as more data is available by the time next year’s rankings are calculated, the impact of the reforms enacted in these areas will be visible then.
Rupee may touch 76 a dollar in next 3 months due to elevated crude: UBS
With global crude prices remaining elevated, the rupee is likely to be under pressure, and may touch the 76 levels against the US currency over the next three months, says a report.
The domestic currency has already crossed the 74 mark owing to continued strengthening of the dollar, lack of foreign flows and higher crude oil prices.
The unit lost over 15 percent since the beginning of the calendar year.
“Assuming global crude prices stay elevated (slightly above $80/a barrel), we retain our bearish view on the rupee and see it plumbing to 76 over the next three months,” says a weekend report by the Swiss brokerage UBS.
From April to the first week of August 2018, the RBI has been intervening in the forex markets to contain volatility, which lead to a massive drop in the forex reserves that plunged by $ 25 billion to $ 393 billion last week.
This has led to two successive repo rate hikes to the tune of 50 basis points in total.
By keeping policy rates on hold in October, the RBI hinted that it will not use interest rate defence as a tool to manage currency weakness, the report said.
Between April and October, the forex reserves has come down by $ 32.78 billion, while foreign exchange reserves stood at $ 392.078 billion as on October 26.
“Unlike in 2013, even as the rupee has weakened by 15 per cent calendar year-to-date against the dollar, it remains outside that group of most vulnerable currencies and the countrys forex reserves position is still reasonable,” UBS analyst Gautam Chhaochharia said in the report.
He said while the country remains vulnerable in its external position, there is no need to press the panic button for NRI bond issuances, to stabilise the rupee, yet unless it becomes a political issue in the run-up to the 2019 general elections.
“However, in case external stress continues to rise from here (Brent continue to rise towards $ 100/a barrel and/or the rupee weakens towards the 80 levels, the option of raising dollar deposits ($ 30-35 billion) could be explored to stabilise the rupee,” Chhaochharia said.
The report said the loose monetary and fiscal policy pursued by the policymakers five years ago led to exacerbated macroeconomic imbalances when the US Fed announced the start of tapering.
This caused the rupee to be amongst the “fragile five” currencies.
It believes that the macro fundamentals compare favourably with those in 2013 as policy buffers have been created.
“The inflationary pressures are manageable thanks to lower food prices, and the government remains committed to fiscal discipline although the deficit targets are quite stretched, and even as we expect the CAD to widen to 2.7 per cent of GDP in FY19, it is well below the 4.8 per cent peak registered in FY13,” the report said, adding the RBI’s policy tilt is no longer accommodative.
The report further says the current liquidity shortage triggered bydefault by IL&FS and group companies on their debt obligation is a liquidity squeeze and not systematic risk.
“We expect the RBI to neutralise the liquidity squeeze but think that an ‘easy money’ period is not coming back in a hurry,” it added.
