Source :Nagaland post:10 Oct. 2011 2:11 AM IST
The US-Euro crisis is shaking Asian and Indian economy. The latest shock of State Bank of India downgrading by Moody indicates a grim scenario. It has not only shaken confidence in the banking system but also in the stock market.
It is not an isolated incident. Banks in India have been facing crisis for some time with their non-performing assets (NPA) - losses- rising, fall in credit offtake and repayments affected.
But the US-Euro crisis has greater impact on currencies. Rupee, Korean Wan, Brazil’s Rial, Russian Rouble, Polish Zolti and South Africa Rand are losing their strength against dollar. This is what Fed Reserve Chairman Ben Bernanke’s “operation twist” is doing to world economy.
Brazilian finance minister G Matenga says a “currency war” is being waged. He says there is an overflow of dollars to wreck the strength of other currencies.
India has started feeling it. Rupee has slid to around Rs 50 to a dollar. It could have slid further had not RBI intervened. Till July 27 one dollar used to cost Rs 43.85.
Since then not only rupee but all other currencies are facing severe pressure. Countries like Korea, Turkey, Thailand, South Africa, Brazil and India are perturbed at the sudden rise in demand for dollar. The observers in these countries had a feeling that the US dollar would not be able to regain strength. But the US Fed Reserve policy has changed all that.
Bankers are finding the situation untenable and on October 4 met at Mumbai. They called upon RBI to ease the interest rate regime. Chief executive of Indian Banks Association K Ramakrishnan says bankers want a pause to rate hikes
The credit growth during this period was of 20.1 per cent or by Rs 31,490 crore. But it is not reassuring. It was mostly due to disbursals of outstanding credit order by the petroleum, coal and nuclear sectors.
The emerging economies are unable to match the US operation twist. Even a year back the emerging economies were supposed to be the global engine. They had growth, flow of money towards share market and other investments. They were seeing investments at the cost of withdrawals in due to weakening US dollar and Euro.
The currencies in the emerging economies were strengthening, sometimes causing worries in these countries. The added advantage was the large flow of investments as interest rates were rising in many of these countries.
The US googly has upset all that. The US Fed unlike many other economies has not increased interest rates. It has also not called a stop to spending and its policy of strengthening the bond market has given a severe shock to the emerging countries like India. The Global Emerging Market index has lost 18 per cent in September, the highest since the 2008 Lehman Brothers crisis.
The US Citi Bank believes that 40 per cent of it is contributed by the falling currencies in these countries. There is large selling in the share market in these economies. Since the Fed Reserve operation twist foreign investors retracted investment worth $ 220,000 in India alone.
The bond market is equally seeing the crisis. Investments in bonds of companies were coming largely from European banks. Now they are withdrawing their investments. Even the Chinese and East European corporate bond bazaars are in a tizzy.
Till this new crisis, India, Brazil, Russia and Korea were supposed to have three security rings. It was believed that US-Euro crisis were more a touch and go affair for them. The first was growth, which was the greatest strength of these countries. The second was an attractive share market. The investors used to invest in these countries with loans available on low interest. This was providing stability in the currency market. This was the third security ring.
Now all the three rings are dissipating. The growth is gradually coming down. It may go down to 6.5 per cent this year, much less than the revised 7.8 per cent target. Fitch Ratings had revised downward growth projection of Indian economy to 7.5 per cent. Next year these economies may further slow down to 6.1 per cent. Slowdown is a reality.
Investors are on a flight from these share markets adding to weakening of currencies like rupee. Countries like India are facing severe inflation. This means a further fall in currency value. The weakening rupee further fuels inflation.
This does not stop here. A weak rupee makes petroleum, mineral and other imports expensive. A larger dollar flow is upsetting many economic calculations.
A weak currency should raise hopes for higher exports. This is difficult as global demand is slackening.
It may lead to another difficult scenario. As investors withdraw their investments in dollar and export market remains weak it might lead to another difficulty. The forex reserves may come down and add to other problems.
In a scenario like this Moody’s downgrading of SBI indicates another danger. Its deterioration of NPAs is due to very high exposure to infrastructure companies. These borrowers are facing severe problems in the form of high infrastructure exposure, high interest rates and implementation delays in the wake of the slowing economy leaving more scope for rise in NPAs. Bounce back by SBI does not seem to be easy particularly when a further fall may not be unlikely.
The SBI has led the fall of other banking stocks - ICICI Bank, HDFC Bank, Axis Bank and Yes Bank at stock market. Is the malaise spreading?
SBI is awaiting government funding for bailing it out of crisis. This may be welcome for SBI but it affects government finances and reserves and may lead to larger borrowings. That is a criticality. It is certain to increase fiscal deficit, something that may cause further anxiety as not money is left with banks for credit purposes squeezed by high interest rates and NPAs. Would that further cause another slowdown?
Not absolutely unlikely unless RBI comes with a policy to match the googly of US Fed Reserve. It is a difficult proposition.
The US Fed Reserve has still the backing of a strong political system despite many crises being faced by the US economy. The RBI decision to throw a googly would have political repercussion. It needs the consent of the government. In a critical geo-political situation it would not be easy.
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