Jul 20, 2007|
Economy: Debt weighed policy
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
Source: Ministry of Finance
||Debt (US$ bn)
||% of reserves
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.
More Views on News
Jul 25, 2017
Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?
May 27, 2017
What happens when minority shareholders are short-changed in the normal course of business?
Feb 15, 2017
PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.
Aug 24, 2016
And here's your chance to claim a free copy of this book...
Aug 12, 2016
And Why India's demographic dividend could turn out to be a doubtful debt...
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407