scorecardresearch
Friday, Jun 02, 2023
Advertisement
Premium

Govt assesses if and how global financial turmoil will hit India

According to policy experts working alongside the government, there is comfort in the prevailing macroeconomic situation.

global financial turmoil, Inflation, mass layoff, emerging stress in the financial sector, macroeconomic situation, Finance Ministry, Russian-Ukraine war, Indian ExpressIndia is amongst a small set of countries that have been able to reduce their debt burden from Q3 2008 to Q3 2022. (Express Photo)
Listen to this article
Govt assesses if and how global financial turmoil will hit India
x
00:00
1x 1.5x 1.8x

The government is closely tracking the potential channels through which the turmoil in the global financial sector may be relayed to the Indian economy.

According to policy experts working alongside the government, there is comfort in the prevailing macroeconomic situation, and the Finance Ministry was cognisant of the exogenous risks emanating from two key issues — the continuing Russian-Ukraine and the emerging stress in the financial sector on either side of the Atlantic.

“The focus has been on macroeconomic stability; the Budget for the next year was an attempt at consolidation of government finances while being aware of continuing uncertainties in the external sector and an impending global slowdown,” a policy expert who interacts closely with the government said.

Various wings of the government including the Prime Minister’s Office, the Finance Ministry and the Economic Advisory Council are monitoring the global events and assessing their impact on India, the latest being the UBS takeover of Credit Suisse facilitated by the Swiss government and its regulator.

Meanwhile, the Finance Ministry in its monthly economic review for February noted that tightening of financial conditions by central banks to tame inflation has raised concerns regarding the exacerbation of corporate debt vulnerabilities, with corporates being already highly leveraged. “However, in the case of India, the concern seems limited. India’s private non-financial sector debt has witnessed a steady decline since mid-2021, along with an improvement in the quality of debt. India’s corporate sector credit-GDP ratio is also below its historical trend, implying sufficient space for the corporate sector to borrow further. The strong debt profile portrayed by corporates will prove to be critical in maintaining the macroeconomic stability of the economy going forward,” it said.

The tightening of monetary policy tends to create new vulnerabilities in economies where debt levels are low and exacerbate existing vulnerabilities where debt is already high, precipitating significant disruptions to the functioning of the financial system, it said. Citing data from the Bank for International Settlements (BIS), the ministry said the core debt of the corporate sector increased in both advanced economies (AEs) and emerging market economies (EMEs), reaching 175 per cent of GDP in EMEs and 185 per cent of GDP in AEs at the end of 2020, adding that India is amongst a small set of countries that have been able to reduce their debt burden from Q3 2008 to Q3 2022. “This is a result of the banking sector’s balance sheet clean-up and the corporate sector’s deleveraging exercise undertaken over the last decade. India’s relatively lower debt burdens will help limit the impact of financial contagion that may arise as rising borrowing costs trigger debt sustainability concerns,” it said.

In India, despite the Swiss regulators’ intervention to protect the global financial system, investor sentiment remained shaky with the benchmark Sensex falling over 900 points at one stage before closing 0.62 per cent, or 361 points, down at 57,628.95 and the NSE Nifty Index falling 112 points at 16,988.40 on Monday.

Advertisement

The fear of contagion continued to roil the global financial sector and stock markets on Monday even after Swiss bank UBS agreed to buy its banking rival Credit Suisse in a $3.25 billion takeover over the weekend. The pessimist mood prevailing across the global markets triggered a major sell-off in global markets, including India, as investors are still battling a slew of negative news from turmoil in large global banks to macro-economic concerns and falling commodity prices.

The Indian stock markets have now plummeted 9.36 per cent with the Sensex plunging from the 52-week high of 63,583.07 recorded on December 1, 2022

Global markets, including India, are now awaiting the outcome of the US Federal Reserve meeting to see how they will respond to the ongoing crisis, particularly in terms of rate hikes. Investors expect the central bank to raise interest rates by 0–25 basis points to calm the turbulent markets and the financial system. After UBS announced its takeover deal, the Fed joined with other central banks in a joint liquidity operation. The group of central banks — including the Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank — agreed to increase the frequency of their US dollar swap line arrangements from weekly to daily.

Advertisement

On March 16, the Reserve Bank had injected Rs 1.1 lakh crore liquidity into the financial system in the largest infusion since April 2019.

The banking turmoil led to erosion in investor wealth in stock markets. “Traders are also cutting down their equity bets ahead of the US Federal Reserve meeting on interest rate this week, as any aggressive hike in interest rates could spell more trouble for equity markets worldwide,” said Shrikant Chouhan, Head of Equity Research, Kotak Securities Ltd.

The Hang Seng index led losses in the region, falling 2.74 per cent and in mainland China, the Shanghai Composite was down 0.48 per cent. In Australia, the S&P/ASX 200 fell 1.38 per cent to close at 6,898.5. Japan’s Nikkei 225 was down 1.42 per cent, and the Topix dropped 1.54 per cent. South Korea’s Kospi fell 0.69 per cent.

Prashanth Tapse, Senior VP (Research), Mehta Equities, said Indian markets trimmed some of its losses on two big positive catalysts — Fed’s likely dovish stance, and WTI oil sluggish at $68 a barrel.

Silicon Valley Bank is the biggest US bank collapse since 2008 and Credit Suisse has joined financial crisis peers such as Bear Stearns that were sold at cheap prices. What has unnerved investors and depositors is the parlous banking situation with many US banks potentially at risk of a run.

Advertisement

Amid the ongoing US banking crisis, the Indian banking system continues to remain resilient and stable, Reserve Bank of India Governor Shaktikanta Das said last week. “We have been engaging with the banks over the last several years and I am happy to report that the way the Indian banking system has evolved and the way it is positioned today, the Indian banking system continues to be resilient and stable,” Das said

He, however, cautioned lenders against build-up of any asset-liability mismanagement and asked them to keep conducting internal stress tests to ensure proper risk assessment.

Advertisement

The proposed takeover of Credit Suisse by UBS – both Swiss banks – is expected to witness consolidation of the Indian operations of both the banks. While UBS and Credit Suisse are present in India in the investment banking and wealth management areas, the latter has a banking licence with just one branch operating in Mumbai.

UBS Securities India Pvt Ltd is a Securities and Exchange Board of India (SEBI) registered stock broker and holds membership on the NSE and the BSE. UBS provides corporate, institutional and wealth management clients with expert advice, innovative solutions, execution and comprehensive access to international capital markets in India. India is one of the technology hubs of UBS with a sizeable workforce.

Advertisement

Credit Suisse Securities (India) Pvt Ltd, incorporated in December 1996, is involved in activities auxiliary to financial intermediation, except insurance and pension funding. It already offers wealth management, investment banking and asset management in India, serving high net worth, corporate and institutional clients.

These two firms are likely to be integrated as the global merger process takes shape in the coming months. Neelkanth Mishra, Co-head of Asia-Pacific strategy of Credit Suisse Securities, recently decided to step down from his role and move to head the research wing at Axis Bank.

As many as 45 foreign banks are present in India, but they have a relatively smaller presence in India with 6 per cent share in total assets, 4 per cent in loans and 5 per cent in deposits. They are more active in the derivative markets (forex and interest rates) where they have 50 per cent share. Most of them are present as branches of the parent bank with only a few present as a wholly-owned subsidiary.

Also Read
india economy morgan stanley report
India Q4 GDP growth
manufacturing-1
India coal production

Nevertheless, they retain capital, liquidity and make similar annual report disclosures as Indian banks, it said. Top five foreign banks in India by assets are HSBC, Citibank (it has now sold its consumer business to Axis), Standard Chartered, Deutsche Bank and J.P. Morgan Chase which is also the largest US bank.

First published on: 21-03-2023 at 05:05 IST
Latest Comment
Post Comment
Read Comments
Advertisement
Advertisement
Advertisement
Advertisement
close