Economy: Debt weighed policy - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Economy: Debt weighed policy

Jul 20, 2007

The first quarterly review of the FY08 Monetary Policy, due later this month, will carry the weight of political and economic prejudices with regard to the extent of foreign debt feasible in the economic system in a scenario of sharp fluctuations in interest and exchange rates.

External debt of private corporate sector
Year Debt (US$ bn) % of reserves
1996 5.0 23.0
2001 15.6 36.9
2006 32.4 21.4
Source: Ministry of Finance

Private corporate external borrowing has been liberalised substantially in India. The stock of private external debt rose from about US$ 5 bn in 1996 to US$ 15.6 bn at end of 2001 and further rose to US$ 32.4 bn in 2006 (10-year CAGR of 23%). Going forward, corporates are expected to borrow more and hence, could be susceptible to the consequences of global imbalances. If there are sharp fluctuations in interest rates and exchange rates, corporates that have borrowed at variable rates would be subject to both exchange and interest rate risks, depending on the magnitude and efficacy of the risk mitigation activities. However, without full capital account convertibility in India, both the Government and the Reserve Bank of India (RBI) would administer the overall incremental debt exposure and put ceilings on total external commercial borrowings (ECBs), more meaningfully through the monetary policies.

In India, the exposure of the financial intermediaries (banks and financial institutions) to external debt is also limited and regulated. Their foreign currency borrowings had been subject to the prudential limit of 25% of their Tier-I capital. With a view to enabling banks to raise resources overseas (borrowing funds from their overseas branches), the mid term Monetary Policy of FY07 enhanced this limit to 50% of their Tier I capital, or US$ 10 m, whichever is higher. With a move towards fuller capital account convertibility, banks are likely to increasingly access forex markets, underscoring the need for further enhancement of the risk management capabilities of the banking system.

The utility of the foreign funds, so amassed, also needs equal introspection. What needs to be noted is that the banks in India have been incrementally financing investment in riskier assets, such as real estate and equities, both of which have witnessed a bubble in the recent past. Should there be any reversal of capital flows, asset prices could potentially decline, thus hurting the system's delinquency (NPA) levels. The most significant impact on banks' balance sheet, however, could be felt through their investment portfolio. Banks in India hold substantial investments in GSecs and other fixed income securities. To the extent, a rise in international interest rates impacts the domestic interest rates, it would entail marked-to-market losses on the banks' investment portfolios.

To prevent any unforeseen eventualities, the RBI has been constantly monitoring the banks' exposure to risky assets and has put ceilings on their exposure to equity markets. In addition to a higher risk weightage, specific steps have been taken to meet the interest rate risk.

The forthcoming monetary policies will be more complex and as the central bank will have now to take into account, among other issues, developments in the global economic situation, the international inflationary situation, interest rate scenario, exchange rate movements and capital flows while formulating the monetary policy. Besides, in a developing country like India, considerations relating to maximising output and employment weigh equally upon monetary authorities as price stability. Having said that, any significant re-adjustment of the currencies and rise in interest rates could affect global growth and in turn affect the growth prospects of several emerging economies including India. The conduct of monetary policy will have to factor in these downside risks to inflation and any kind of turbulence to financial markets due to re-pricing of risks, while maintaining the delicate balance in terms of growth vis-a-vis price stability.

Equitymaster requests your view! Post a comment on "Economy: Debt weighed policy". Click here!


More Views on News

Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

Jun 1, 2020

Is too much data hurting your quest for market beating returns?

Quantum Mutual Fund: Hum woh nahi hain (The Honest Truth)

Apr 29, 2020

Ajit Dayal on how the mutual fund industry robs you of your wealth.

This One Trigger Could Turnaround Yes Bank's Stock Price (The 5 Minute Wrapup)

Oct 16, 2019

If Yes Bank manages to do this, it could be the start of a much-needed turnaround for the bank.

Gold could Hit 40,000 Sooner Than Expected (Profit Hunter)

Aug 16, 2019

Domestic gold prices are firing on both engines now. Gold prices could touch 40,000 faster than you could imagine.

3 Rebirth of India Opportunities Are Racing Ahead in These Gloomy Times... (Views On News)

Jun 28, 2019

Tanushree Banerjee shares an update on the Rebirth of India and reveals her top 3 trends...

More Views on News

Most Popular

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

I Believe These Stocks Will Deliver the Most Outsized Returns in 2021 and Beyond (Profit Hunter)

Sep 23, 2020

Rules of the racetrack can help you bag the biggest gainers of the coming decade.


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms