Rupee dancing to market tunes than fundamental notes: CARE Ratings
Volatility in the rupee has continued to persist as the rupee has breached all psychological levels starting 60, 62 and even 65--Business Standard 23.08.2013
Domestic rating outfit agency CARE Ratings on Thursday said the Reserve Bank India (RBI) has limited scope to directly intervene in the market to stem the rupee's slide, thus allowing the rupee's "free fall" .
Volatility in the rupee has continued to persist as the rupee has breached all psychological levels starting 60, 62 and even 65. Repeated efforts of the RBI and the government to cap the fall in the rupee have yielded limited results, the rating agency said.
As a step to curb the sharp fall in value, the central bank and government have tweaked interest rates to curb outflow of funds and initiated moves to attract foreign investments through foreign direct investment/foreign institutional investor (FII) routes and non resident indian deposits. They have also imposed restrictions on gold imports and policy actions to boost investor confidence.
Though FIIs continue to maintain negative net investment positions, it has not resulted in sharp outflows.
There is definitely more than fundamentals that is driving the adverse move in the exchange rate, CARE said.
"We expect such volatility in the rupee rate to continue. With the exchange rate crossing the Rs 65 to a dollar mark and limited scope for the RBI to intervene directly (given constraints on forex reserves), such free fall might persist amidst uncertainty," said Madan Sabnavis, its chief economist.
The US Federal Reserve's meet would perhaps bring more clarity. As uncertainty fades and growth prospects shape clearly, the rupee is expected to revert and stabilise in the range of Rs 58-60 to a dollar by the end of this financial year. This we believe would still be the level based on fundamentals. Amongst available options on strategies to curb the fall in rupee, the Indian government and monetary authorities are expected to favour quasi-sovereign and sovereign bond issues to shore up forex reserves, rating agency said.
Pledging of gold and approaching the International Monetary Fund for assistance or line of credit might be viewed as being the last resort, it added.
Volatility in the rupee has continued to persist as the rupee has breached all psychological levels starting 60, 62 and even 65. Repeated efforts of the RBI and the government to cap the fall in the rupee have yielded limited results, the rating agency said.
As a step to curb the sharp fall in value, the central bank and government have tweaked interest rates to curb outflow of funds and initiated moves to attract foreign investments through foreign direct investment/foreign institutional investor (FII) routes and non resident indian deposits. They have also imposed restrictions on gold imports and policy actions to boost investor confidence.
Though FIIs continue to maintain negative net investment positions, it has not resulted in sharp outflows.
There is definitely more than fundamentals that is driving the adverse move in the exchange rate, CARE said.
"We expect such volatility in the rupee rate to continue. With the exchange rate crossing the Rs 65 to a dollar mark and limited scope for the RBI to intervene directly (given constraints on forex reserves), such free fall might persist amidst uncertainty," said Madan Sabnavis, its chief economist.
The US Federal Reserve's meet would perhaps bring more clarity. As uncertainty fades and growth prospects shape clearly, the rupee is expected to revert and stabilise in the range of Rs 58-60 to a dollar by the end of this financial year. This we believe would still be the level based on fundamentals. Amongst available options on strategies to curb the fall in rupee, the Indian government and monetary authorities are expected to favour quasi-sovereign and sovereign bond issues to shore up forex reserves, rating agency said.
Pledging of gold and approaching the International Monetary Fund for assistance or line of credit might be viewed as being the last resort, it added.
RBI sees FY14 gross NPAs at 4.4%, but no systemic risk
System wide gross NPAs rose to 3.42% in FY13 from 2.94% in FY12
Despite foreseeing a possible spike in gross non-performing assets to 4.4 per cent of total advances by March 2014 from 3.42 per cent a year ago, the Reserve Bank of India on Thursday ruled out any systemic risk to the system, saying banks will still be having higher capital adequacy.
“Our stress tests suggest that under a severe stress scenario, the gross NPA ratio of banks may rise to 4.4 per cent by March 2014 but even under such a scenario the system level capital adequacy ratio of banks will be 12.2 per cent only, which is well above the required nine per cent,” RBI said in its annual report. The RBI follows an accounting period of July-June.
"The system wide gross NPAs rose to 3.42% in FY13 from 2.94% in FY12. This is likely to touch 4.4% in FY14 (March '14)," RBI said.
The asset quality of banks has deteriorated on account of slowdown in the economy and emergence of sector-specific issues amid structural bottlenecks in economy.
The ratio of gross NPA to gross advances for commercial banks rose from 2.36% in March 2011 to 3.92% in June 2013, the report noted.
While public sector banks accounted for the disproportionate share in this increase in NPAs, the new private sector banks managed to lower their NPA ratio, the report highlighted.
Out of the total NPAs of 3.42%, public sector banks' NPAs stood at 3.84% in FY13, up from 3.17% in FY12, while that of private banks came down to 1.91% from 2.18% and that of foreign banks rose to 2.97% from 2.68%.
The RBI report said restructured standard assets as a percentage of gross advances rose to 5.83% in FY13 from 4.69% in FY12.
The slippage ratio jumped from 2.55% in FY12 to 2.79 in FY13, the report said.
The central bank further said apart from the deterioration in asset quality, a medium to long-term challenge for the Indian banking sector is the smooth transition to the Basel III framework for improved risk assessment and management.
"Despite the fact that banks appear well-capitalised with an overall CAR at 13.5% as at June 2013, the challenges in implementing Basel III cannot be underestimated," RBI said.
“Our stress tests suggest that under a severe stress scenario, the gross NPA ratio of banks may rise to 4.4 per cent by March 2014 but even under such a scenario the system level capital adequacy ratio of banks will be 12.2 per cent only, which is well above the required nine per cent,” RBI said in its annual report. The RBI follows an accounting period of July-June.
"The system wide gross NPAs rose to 3.42% in FY13 from 2.94% in FY12. This is likely to touch 4.4% in FY14 (March '14)," RBI said.
The asset quality of banks has deteriorated on account of slowdown in the economy and emergence of sector-specific issues amid structural bottlenecks in economy.
The ratio of gross NPA to gross advances for commercial banks rose from 2.36% in March 2011 to 3.92% in June 2013, the report noted.
While public sector banks accounted for the disproportionate share in this increase in NPAs, the new private sector banks managed to lower their NPA ratio, the report highlighted.
Out of the total NPAs of 3.42%, public sector banks' NPAs stood at 3.84% in FY13, up from 3.17% in FY12, while that of private banks came down to 1.91% from 2.18% and that of foreign banks rose to 2.97% from 2.68%.
The RBI report said restructured standard assets as a percentage of gross advances rose to 5.83% in FY13 from 4.69% in FY12.
The slippage ratio jumped from 2.55% in FY12 to 2.79 in FY13, the report said.
The central bank further said apart from the deterioration in asset quality, a medium to long-term challenge for the Indian banking sector is the smooth transition to the Basel III framework for improved risk assessment and management.
"Despite the fact that banks appear well-capitalised with an overall CAR at 13.5% as at June 2013, the challenges in implementing Basel III cannot be underestimated," RBI said.
CRR, SLR could come down further: Subbarao
RBI recently tightened monetary conditions by raising short-term interest rates and draining cash in a bid to defend the rupee
Outgoing RBI Governor D Subbarao, who had disagreed with bankers' call to further trim the cash reserve ratio or pay interest on these deposits, today said "perhaps" there is a need to reduce these rates.
"I do recognise that there is a demand, and perhaps a need, for further reduction (in CRR and SLR)," he told the FIBAC summit, the premier annual banking summit here.
The Governor, however, added RBI has "progressively" brought down mandatory ratios on both CRR, or the portion of deposits banks park with RBI as a solvency buffer, and SLR, another solvency tool under which banks have to subscribe to government bonds and other liquid assets, over the years.
Subbarao, after a five-year tenure, will demit office on September 4 and new Governor Raghuram Rajan will assume office the next day.
Currently, the CRR is pegged at a low of 4%, while SLR that includes securities such as government bonds, stands at 23%, down from 25% in 2010.
There have been demands from bankers for further reduction of CRR.
Describing CRR as "dead money", SBI Chairman Pratip Chaudhuri had earlier said that if RBI could not reduce this requirement further, at least banks should be paid interest on this deposit.
While RBI has brought down short term lending rates by 125 bps since March 2012, there was only a 30 bps reduction by banks in their lending rates, as they have to attract deposits by paying high interest rates.
Though CRR and SLR have been retained at low level, to prop up rupee availability, the RBI since last month has increased the call money rates by 300 bps to 10.25%.
"I do recognise that there is a demand, and perhaps a need, for further reduction (in CRR and SLR)," he told the FIBAC summit, the premier annual banking summit here.
The Governor, however, added RBI has "progressively" brought down mandatory ratios on both CRR, or the portion of deposits banks park with RBI as a solvency buffer, and SLR, another solvency tool under which banks have to subscribe to government bonds and other liquid assets, over the years.
Subbarao, after a five-year tenure, will demit office on September 4 and new Governor Raghuram Rajan will assume office the next day.
Currently, the CRR is pegged at a low of 4%, while SLR that includes securities such as government bonds, stands at 23%, down from 25% in 2010.
There have been demands from bankers for further reduction of CRR.
Describing CRR as "dead money", SBI Chairman Pratip Chaudhuri had earlier said that if RBI could not reduce this requirement further, at least banks should be paid interest on this deposit.
While RBI has brought down short term lending rates by 125 bps since March 2012, there was only a 30 bps reduction by banks in their lending rates, as they have to attract deposits by paying high interest rates.
Though CRR and SLR have been retained at low level, to prop up rupee availability, the RBI since last month has increased the call money rates by 300 bps to 10.25%.
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