Cheap deposits are bane of Indian market; Policy shift must

Indian economy is on a roll. Stocks are crashing, rupee touches critical level, infrastructure projects rob bank deposits and banks are writing off large loans and reducing interest rates. It hits the common man. Everyone plays with his hard earned money.
The stocks are tumbling since the beginning of the New Year to lose a high of 807 points in a day on Dec 11 to touch a low 22,951 points. A major reason is poor performance of State Bank of India’s profit dip by 62 per cent because of rising NPAs and writing off of loans. The SBI profit fell to Rs 1115 crore from the Rs 2910 crore a year ago.
Another reason is attributed to firming of the US economy, possible rise in interest rates and almost $ 2 billion or Rs 14,000 crore sell off by foreign institutional investors (FII) since January this year. The trend has hit the mutual funds – dealing with common man’s money – hard. Average investors are to get far less returns.
It also hits the National Pension Scheme (NPS) where government employees’ savings are parked. Exposure of the employees’ money to stock market is a dangerous risk not only to the employees but even to the government as it remains its guarantor. All other pension funds have also been affected for similar reasons. Any subscriber to such funds needs to be cautious.
RBI governor Raghuram Rrajan has made the correct noise. He wants deeps surgery of the banking sector to free it of the lump of bad loans.
One needs to understand that the public sector banks have taken the burden of financing infrastructure. If PSU banks had not financed infrastructure, growth in the Indian economy would not have taken place. The SBI and Punjab National Bank are stated to have the highest exposure to infra finance and Syndicate and HDFC the lowest.
According to the RBI figures, stressed loans of the infra sector increased to 24 percent of total advances by June 2015 from 22.9 percent till June 2014. Over the past ten years, bank lending to the infrastructure sector has grown at the rate of 28 percent, higher than the overall credit growth. Infrastructure’s share of bank credit has doubled from 7.5 percent in 2005 to 15 percent in 2015.
This means over Rs 2 lakh crore of loans are stressed out of the total infra exposure of Rs 8.4 lakh crore. The RBI notes that some of the loans extended by banks in the last few years have already become bad assets. “Big corporate infrastructure players have taken too much debt”, says Rajan.
The reason is not economic slowdown. Several promoters, according to PSU banks, who pushed for big loans during the past ten years, overestimated their demand-supply position, worse they inflated project costs and many diverted funds. The banks faltered too as their appraisal systems inadequate and there were some bankers also in league with the swindlers.
Today this is taking a heavy toll on the banks, economy and poor man’s deposits. It is hitting everyone hard and may even hit the budgetary process.
A Crisil study says India needs Rs 6 lakh crore of investments every year till March 2020. In short, Rs 30 lakh crore is need in about five years to provide power, improve roads, telecom, transport and other urban infrastructure.
Is not the country stretching it a bit too far? If the growth and production rise happens at a rate of even 5 percent, it is not that large a figure. But that is not happening. The demands are constricted. High consumer inflation prevents people from making purchases. Almost 70 percent families even do not have spare as their average income is between Rs 4,000 and 7,000 a month. Yes, low purchasing power is a bane. The targets in comparison to that are too ambitious and inflated.
It calls for a systematic planning. The NITI Aayog needs to do the research, find out faultlines and correct the path. Is that happening?
The global economic scenario is also unsupportive. The IMF has noted the slowdown. India has been a comparative brighter spot. But slippery global markets have hit Indian exports forcing to cut its production at many points. The global stocks, too, have been on sliding with most Asian indices losing considerable ground on February 11. Hong Kong closed 3.8 percent lower. Major European indices fell sharply over oil price concerns and after US Federal Reserve chief Janet Yellen raised concerns about the global economy.
The continuous fall in risky assets across the globe, the trend in liquidity moving towards safe haven assets like bonds and gold are also expanding the negative implications on the Indian market. The turmoil in the domestic market also does highlight the possibility of margin pressure, which may continue to disturb the market.
Oil also slid further indicating further slowing world economy. Brent crude was at $ 30.53 and US West Texas Intermediate (WTI) at $ 26.76, close to its lowest since 2003. This trend, however, should become the normal as world is taking to renewable energy in a big way.
In this mayhem, everybody ignored rupee. It plummeted to Rs 68.30 as dollar demand for foreign capital outflows – more FII outgoes – increased. It is a warning for those who say that falling rupee would boost exports. It may or may not it make inflation a reality. The benefit of low oil prices is also lost for Indians as dollar becomes expensive.
Again NITI Ayog has to do deeper studies. Rupee cannot remain anaemic for long. A weak rupee has severe repercussions. To be a global player, India has not only to export but also be a robust consumer. The Ayog needs to get deeper into the problems and suggest solutions so that Indian market emerges out of the woods. It also has to give the road map for a stronger rupee in the next two years not only for a stable market but also for a stable polity.
India has to look for the safety of the poor man’s savings that fueled its growth since Independence, decide on high deposit rates and lending rates so that nobody inflates demand and can divert funds. Shift the policy. Else economy and the market would be in turmoil.

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