The gradual improvement in financial conditions that was setting in with the receding of tail risks in the global
economy due to policy actions, has been interrupted by the recent turbulence in financial markets. Risk-off flights
to safety triggered by apprehensions of global liquidity contracting with the Federal Reserve (Fed) indicating a
phased withdrawal from its bond buying programme commencing later in 2013, has fuelled large scale sell off of
financial assets in emerging markets leading to sharp downward movements in their equity, bond and currency
markets. These developments have accentuated the spillover risks from unconventional monetary policies (UMPs)
of advanced economy (AE) central banks posing new challenges to emerging economies.
On the domestic front, growth remains below trend and vulnerabilities on the external front have risen. The high
current account deficit (CAD) and its financing remain stress points for the Indian economy as evident from the
recent depreciation of the rupee on global cues. On the other hand, there are indications that inflation is moderating,
the growth slowdown appears to be at a trough and measures taken to dampen import demand for gold are taking
hold. Credible progress has been made on the fiscal front, which has been reflected in the upgrading of the outlook
by credit rating agencies. Going forward, improvement in the quality of fiscal consolidation will be crucial for
ensuring macroeconomic stability and sustainable higher growth.
Foreign institutional investors (FIIs) were net purchasers in the equity and debt markets until recently and have
turned net sellers in June 2013. Resources raised from the equity market have remained low and activity in the
private placement market for debt has witnessed an increase. Domestic saving as a percentage of GDP, although
high, has fallen and this could further curtail the availability of investible resources. Corporates remain stressed as
reflected from the lower growth in sales and profits. Given the weakness of the rupee in recent times, unhedgedexposures
may further increase the vulnerabilities of the corporate sector.
Global
Growth
1.1 Policy actions in stressed advanced economies
have reduced tail risks globally, although fiscal drag
in the US, austerity fatigue and incomplete financial
repair in the Euro Area, low credibility of the proposed
structural reforms in Japan and subdued growth in
major emerging economies continue to pose downside
risks to a return to resilient and sustained recovery.
Global growth remains sluggish, multi-paced and
subdued (Chart 1.1). In view of the lack of fiscal space
and slow traction associated with structural reforms,
monetary policies remain the first line of defense in
the onerous job of stabilising economies.
1.2 In the US, firm indications of the recovery
taking hold are evident in the Fed’s policy
announcement made on June 19, 2013 of gradual
withdrawal from asset purchases commencing by the end of 2013. Growth in the US improved during Q1
2013 and the Fed expects growth to be between 2.3
per cent and 2.6 per cent in 2013. Though
unemployment has fallen to around 7.6 per cent, it
remains above the Fed’s comfort level. Growth, on
the whole, in the US is expected to remain vulnerable
to the adverse impact of the budget sequestration
which could gradually gain pace in the months ahead.
Future growth prospects in the US and global financial
stability hinge around a credible resolution of the US
debt ceiling debate.1
1.3 GDP growth in the Euro Area continues to
remain in contraction mode. Among the larger Euro
Area economies Germany, France, Spain, Italy and
Netherlands witnessed negative y-o-y growth in GDP
during Q1 2013. Credit growth to the private sector
is still shrinking. Banks are reportedly repaying funds
borrowed under the Long Term Refinancing Operations
(LTRO). Unemployment has been increasing and it is
currently high at 12.2 per cent. Youth unemployment
at almost 24 per cent is a significant risk to socioeconomic
stability.
1.4 Growth in the UK has been low but positive for
the last three quarters and is expected to be moderate
in the near term. Higher consumer spending spurred
by positive wealth effects brought about by
unprecedented policy action has boosted Japan’s
growth to an annualised 3.5 per cent during Q1 2013,
though structural issues remain a concern. Economic
growth in China has been lower than anticipated
during Q1 2013 raising apprehensions that economic
activity could slow down further. In addition, financial
stability concerns have emerged over the rapid
increase in domestic credit in China. The other BRICS
countries are also experiencing low growth.
Unconventional Monetary Policies - Exit
1.5 UMPs in advanced economies were undertaken
to restore normal functioning of financial market and
to reduce the domino effects emanating from the global financial crisis. What started as a response of
monetary policy to address the liquidity induced
solvency issues in the financial system had been
persisted with to counter recession and boost
economic growth. This reduced immediate tail risks,
though continuance of such monetary policy over a
prolonged period may have led build up of risks
(Box 1.1).
1.6 The market reaction to the recent Fed
announcement could be indicative of the risks to the
markets in the medium term as different central
banks eventually wind up accommodative monetary
policies. The inevitability of exit has shaken up
markets which were lulled into comfort by the ample
liquidity available in the system. Such bouts of
volatility may recur frequently as tightening gets
phased out over the next few years. The fragile
confidence of the markets is also evidenced by the
strength of the market reaction. The emerging
economies have been highly affected as capital flows
have reversed impacting their currencies as also equity
and bond markets. In general, risks from UMP exit
stem from, among other things, timing, sequencing,
and speed of exit. An added challenge is managing
expectations in the face of differential economic
conditions between and within geographies.
1.7 Bond yields in advanced economies and Euro
Area periphery have increased sharply after the Fed’s
June 19, 2013 announcement. The persistence of this
trend could jeopardise the progress made by stressed
Euro Area countries and credit growth to the private
sector could also fall further as liquidity recedes.
1.8 Risks from UMP exit are elevated even in the
US as increasing yields could increase the cost of funds
and threaten recovery. Even though communication
from the Fed stated clearly that withdrawal from bond
purchases was not pre-determined and would depend
upon incoming data and evolving outlook, the markets
appear to have interpreted it to mean an imminent withdrawal of bond purchases. The gap between what
was stated by policy makers and how that is
interpreted by markets may lead to heightened
volatility in the global financial markets.
Box 1.1: Unconventional Monetary Policies - Risks
Asset Price Bubbles : Low interest rates may have pushed
investors into riskier activities in search of yield building
up asset prices and encouraged corporates to build excess
leverage. House prices in some countries have already
witnessed sharp increases in the last few years and the
fears of a housing bubble have re-emerged. Rapid asset
price inflation, particularly in the housing market, can
lead to problems for financial stability as witnessed during
the sub-prime crisis in the US. While house prices have
fallen in the US after the crisis and are currently below
the pre-crisis levels, they have increased elsewhere
(Chart 1) due to, among other reasons, search for yield
and increase in credit.
Singapore, Canada and Hong Kong have taken measures
to reduce inflation in house prices. Measures include
reduction in the loan to value ratio, capping gross debt
service ratio, reducing loan to value for mortgage
refinancing, reducing the amortisation period, tightening
of mortgage underwriting rules, removal of interest
absorption schemes and transaction taxes for multiple
houses.
Adverse Selection: The issuances of non-investment grade
corporate bonds in the US have seen a significant increase
in the recent past (Chart 2). Low interest rates could have
influenced non price factors such as credit standard and
quality of credit appraisal. The demand for noninvestment
grade corporate bonds is evident from their
downward trending yields (Chart 2).
Reduced Incentive to Repair Balance-sheets: Extended
period of low interest rates could reduce the incentive for corporates and sovereigns to undertake the necessary
balance-sheet repairs. Macroeconomic policy, at the
current juncture, is faced with the challenge of ensuring
short term survival without compromising on long term
sustainability.
Market Distortions and Mispricing of Risk: Sovereign
bond yields have been kept artificially low and since
sovereign bonds act as pricing benchmark for many
financial products there could be under-pricing of risks
in those markets. The ability of markets to price risks can
fall and markets may find it difficult to function when
unconventional policies are eventually withdrawn.
Building up of Risks: Low interest rates in the period just
after the dot com bubble bust are believed to have led to
excesses in financial markets which eventually fuelled
the global financial crisis (Chart 3). There is, thus, a
possibility that the current extended period of low
interest rates may once again have led to a build-up of
similar risks.
1.9 Uncertainty about the nature and timing of the
exit is the dominant factor that is causing instability
in financial markets. Increasing interest rates before
reducing the size of the bloated central bank balancesheets
could inflict capital losses on central banks and
holders of fixed income assets. Reducing balance-sheet
size could impair the market for assets sold by central
banks. Another issue with the eventual exit is that it
is difficult to isolate the impact of individual polices
on observed outcomes such as improvement in
growth. Hence, it may not be possible to know which
policy worked and which did not, or whether the
synergies between policies worked or not. In this
context, pulling the wrong policy lever could
jeopardise growth and stability.
1.10 Lack of coordination among central banks in
exiting from UMPs could increase the spillovers from
such exits as capital flows could be de-stabilising.
While it may be desirable to coordinate policy actions,
it may not be possible to do so given the multi-paced
nature of global growth.
Domestic
1.11 Overall macroeconomic risks facing the Indian
economy appear to have increased since the
publication of the previous Financial Stability Report
(FSR) in December 2012 (Chart 1.2i). Domestic growth
risks, external risks, and corporate vulnerabilities
have increased, while, risks from global growth,
domestic inflation, fiscal stance and households have
receded. Based on the Financial Market Stability Map2,
risks seem to have increased in the Indian foreign
exchange market, equity markets and banking
sector while it has receded in the debt market
(Chart 1.2ii).
Growth
1.12 Against the backdrop of subdued below trend
global growth and an uncertain global environment,
the Indian economy is faced with several challenges,
both internal and external. During Q3 2012-13, growth
in the Indian economy slowed to a fifteen quarter low
of 4.7 per cent. Though growth improved marginally
to 4.8 per cent during Q4 2012-13, it touched a 10 year
low of 5 per cent for the year 2012-13. Domestic
supply bottlenecks, policy uncertainty, consequential
dampened investment sentiment and slackening
external demand contributed significantly to the
slowdown though fall in inflation has provided some
relief. Going forward, growth has been projected to
be relatively higher at 5.7 per cent during 2013-14 by
the Reserve Bank of India. India is, however, expected
to grow faster than the other BRICS nations excluding
China (Chart 1.3). It is also reassuring that some rating
agencies have recently revised India’s rating outlook
to stable given the recent policy initiatives aimed at
improving investment sentiment and growth.3
CAD and External Sector Vulnerability
1.13 Non-disruptive financing of the high CAD and
containing its size within sustainable levels has
become the key challenge in managing the external
sector and especially in mitigating its vulnerability to
global shocks. In addition to the magnitude of flows
needed to finance the CAD, the composition of flows,
particularly dependence on portfolio and short-term
debt flows represent an added source of concern
(Chart 1.4). While lower commodity prices and
moderation in gold imports could have a positive
effect on the current account balance, high CAD in a
sluggish economy poses difficult macroeconomic
policy challenges.
1.14 Rise in India’s overall external debt is an added
source of concern. Short term liabilities have also been
increasing. The ratio of short term debt to total debt
(both residual and original maturity) increased in Q2
and Q3 of 2012-13 from its level in Q1. Reflecting the
widening CAD, net IIP-GDP ratio increased to 15.4 per
cent at end-December 2012 from 15.1 per cent at end-
September 2012. In general, the external sector
vulnerability indicators have shown a worsening
trend (Table 1.1).
1.15 A number of policy measures have been taken
in the recent past to boost investor sentiment and
augment capital inflows. Some of the measures are
further liberalisation of the FDI policy4, rationalisation
of FII debt limit allocation norms, integration and
simplification of FII investments in Indian debt
securities, allowing long term investors like sovereign
wealth funds (SWFs), multilateral agencies,
endowment funds, insurance funds, pension funds
and foreign central banks to invest in government
securities within the overall limit, increasing the
limits for FII investment in government securities
and corporate bonds, deregulating the interest rates
on NRE deposits, increasing the ceiling of the FCNR(B)
deposits, and increasing the all-in-cost ceiling for
external commercial borrowings (ECB). Apart from these measures the government is also envisaging a
review of the extant FDI policy to tap the immense
potential for FDI. A number of announcements have
been made by the government to boost exports and
revive investors’ interests in Special Economic Zones
(SEZs) in the Annual Supplement 2013-14 of the
Foreign Trade policy 2009-14 released in April, 2013.
1.16 Rising gold imports have been a continuing
concern (Chart 1.5). The share of gold in total imports
has been increasing since 2007-08 and was close to 3
per cent of GDP in 2012-13.5
1.17 Several policy measures aimed at reducing
vulnerabilities arising from gold imports have been
taken. Import duty on gold has been raised. Banks
and NBFCs have been advised not to lend for the
purchase of gold in any form. Banks have also been
advised not to lend against gold coins weighing more
than 50 grams. Import of gold on consignment basis
has been restricted for domestic use of gold. Further,
all Letters of Credit (LC) to be opened by Nominated
Banks / Agencies for import of gold under all categories
has been allowed only on 100 per cent cash margin
basis. In addition, all imports of gold will now
necessarily have to be on documents against payment
(DP) basis.
Table 1.1: External Sector Vulnerability Indicators |
(Per Cent) |
Indicator |
End-Mar
2011 |
End-Mar
2012 |
End-June
2012 |
End-Sep
2012 |
End-Dec
2012 |
1. Ratio of Total Debt to GDP* |
17.5 |
19.7 |
19.7 |
19.3 |
20.6 |
2. Ratio of Short-term to Total Debt (Original Maturity) |
21.2 |
22.6 |
23 |
23.2 |
24.4 |
3. Ratio of Short-term to Total Debt (Residual Maturity)# |
42.2 |
42.6 |
42.9 |
43.7 |
44.1 |
4. Ratio of Short-term Debt to Reserves+ |
21.3 |
26.6 |
27.8 |
28.7 |
31.1 |
5. Reserves Cover of Imports (in months) |
9.6 |
7.1 |
7 |
7.2 |
7.1 |
6. External Debt (US$ billions) |
305.9 |
345.5 |
349.1 |
365.6 |
376.3 |
7. Net International Investment Position (IIP) |
-209.8 |
-248.5 |
-224.1 |
-271.5 |
-282 |
8. IIP/GDP ratio |
-12.3 |
-13.3 |
-12.2 |
-15.1 |
-15.4 |
*: Annualised GDP at current market prices; #: RBI Estimate; +:Original Maturity |
1.18 The rupee which was largely range bound
during January – April 2013, started weakening in
May 2013. Among other factors, strengthening US
dollar and relatively high trade deficit during April-
May 2013 exerted pressures on the Indian rupee.
1.19 Viewed from a different perspective, against
the backdrop of tepid global growth, other emerging
economies are also experiencing similar external
sector challenges, in terms of both size of the CAD
and pressure on the exchange rate (Chart 1.6).
Fiscal Consolidation
1.20 High fiscal deficit has been a concern for India.
In the post crisis period even the advanced economies
have been pushed to relax their fiscal policies to
support growth. In the annual budget for 2013-14 the
Indian government has reiterated its commitment to
fiscal consolidation and accordingly, the gross fiscal
deficit (GFD) as percentage of GDP has been pegged
at 4.8 per cent for 2013-14, and the same has been
projected to come down to 3.0 per cent by 2016-17.
During 2012-13, the fiscal deficit has been estimated
to have come down to 4.9 per cent of GDP from the
earlier estimate of 5.2 per cent.
The Government Borrowing Programme – Impact
on Yields
1.21 The likely impact on yields and cost of
borrowings depends upon the size of the total
borrowing requirements, which includes refinancing
of the maturing debt amidst other things, such as
credit demand from the non-government sector and
interest rate cycle. Government’s net market
borrowing has been pegged at about `5.04 trillion for
2013-14, lower than the same at `5.13 trillion in 2012-
13(RE). At the same time, the trajectory of projected
gross fiscal deficit (GFD) given in the statement on
“Fiscal Roadmap and Consolidation” made by Finance
Minister in October 2012 indicates that the net market
borrowing requirement may come down in the coming
few years. The benefits of lower net borrowings, however, are likely to be negated by the higher
refinancing needs given the sharp rise in the
redemption pressures over the next few years (Chart
1.7). The buyback/ switches of government securities
(G-Sec) will be used to reduce the redemption pressure
and minimise the rollover risk over short-to-medium
term. Union Budget 2013-14 has already announced
such a programme for `500 billion during the current
fiscal year.
1.22 The meticulous debt management strategy of
the past reduced the refinancing risk and the risks of
a confidence crisis significantly by increasing the
average time to maturity (ATM) of the outstanding
portfolio of G-Secs, although the strategy could have
imposed a trade off of higher duration risks on the
investors. In terms of debt/GDP ratio, India’s position
is relatively better, but sustainable level of sovereign
debt is a country specific issue, and depends, among
other things, on tax to GDP ratio. (Chart 1.8).
Equity Markets
1.23 Equity markets in India had generally
witnessed an upward trend since mid 2012 on the
back of FII support albeit some intermittent
correction. The recent announcement on the
tapering/withdrawal of bond purchase in the US had
led to volatility in global equity markets including
the Indian equity market. FIIs which were net
purchasers have turned net sellers in June (up to June
20, 2013) and there is a risk that the capital flows
could reverse on a large scale if the risk off sentiment
intensifies causing increased volatility in the Indian
markets. The markets have been exhibiting knee-jerk
reactions to any news about possible exit from
unconventional monetary policy.
1.24 Even though the secondary markets have
witnessed strong performance until recently, there
has been no concomitant improvement in the primary
equity markets. The performance of the BSE IPO index
has been relatively weaker compared to the BSE
Sensex (Chart 1.9).
Table 1.2: Resource Mobilisation in the Equity Market : Public and Rights Issues |
Type of issue |
2009-10 |
2010 - 11 |
2011 -12 |
2012- 13 |
No. of issues |
Amt.
(` Billion) |
No. of issues |
Amt.
(` Billion) |
No. of issues |
Amt.
(` Billion) |
No. of issues |
Amt.
(` Billion) |
Public |
44 |
467.4 |
58 |
486.5 |
35 |
104.8 |
33 |
65.3 |
Rights |
29 |
83.2 |
23 |
95.0 |
16 |
23.8 |
16 |
89.4 |
Total |
73 |
550.6 |
81 |
581.6 |
51 |
128.6 |
49 |
154.7 |
Source: SEBI |
1.25 Weak macro-economic performance and
subdued investment climate reduced the incentives
for the corporate sector to raise resources via the
equity market (Table 1.2).
1.26 As a result, the resource mobilisation activity
has increased in the private placement market for
corporate bonds (Chart 1.10) even as debates continue
over the under-developed corporate debt markets
(Box 1.2)
Box 1.2: Corporate Bond Markets in India: Some Persisting Issues
There has been a lot of debate over the last two decades,
more intense in the recent past, about the need for the
existence of and developing a vibrant corporate bond
market in India. While significant efforts have gone into
the development of corporate bond markets in India,
substantial progress has not been made yet. The
fundamental question that, hence, emerges is that
whether the markets for specific products evolve or that
they need to be developed. One way of tackling such a
dilemma is to generally let the markets evolve unless the
economic costs are more than the socio-economic benefits
of having markets for such products.
When the erstwhile long term financing institutions were
either allowed to morph into full-fledged commercial
banks or become defunct with regard to supply of long
term financing, it was possibly believed that banks in turn
would take the role of providing such long term resources
to companies and projects, despite the fact that banks
were expected to go through stringent asset liability
matching norms. Later when the government undertook fiscal reforms and India’s new growth trajectory required
massive investments in infrastructure (including power)
for its sustenance, the need for providers of long term
finance has once again been felt. It is interesting to note
that elsewhere massive public works have been financed
seamlessly by the governments (e.g. Japan and China)
and not through bond markets.
In India, banks predominantly provide for funding
requirements and the debt market has catered mainly to
the government. Banks hold government bonds in their
portfolio because of statutory requirement and also due
to sovereign status of bonds. While banks have been
meeting the needs of financing infrastructure (including
power) currently, there may be some further constraints
on such long term financing once the Basel III bank
liquidity norms such as the Liquidity Coverage Ratio (LCR)
and Net Stable Funding Ratio (NSFR) are implemented.
Which in turn means that in the absence of alternative
arrangements (such as securitisation, take out finance etc.,), banks may not be in a position to undertake long
term project financing.
There are concerns over the provision of credit
enhancements/guarantee by banks to corporate bond
issuances which has been suggested as one measure to
aid the development of bond markets in India. Credit
enhancements will hamper the development of a
corporate bond market on corporates’ own financial
strength and could possibly distort the pricing mechanism.
In addition, reliance on credit enhancements provided by
banks will keep most of the risks in the banking system.
Countries like China, Korea and Egypt attempted to
develop corporate bonds markets by encouraging banks
to offer bank guarantees, but couldn’t achieve much
success.
A recent RBI Committee has made recommendations to
enable banks to tap the bond market and lend long term
at fixed rates.6 Banks are currently permitted to raise long
term bonds with a minimum maturity of 5 years to the
extent of their exposure to the infrastructure sector of
residual maturity of more than 5 years. The committee
was of the view that banks which have not issued long
term bonds to the extent of their said exposure to the
infrastructure sector could utilise the room available to
issue more of long term bonds which would help release
resources for extending long term fixed rate loan products.
Another recommendation of the Committee was offering
of fixed rate long term loan products with periodic interest
reset provision (every 7-10 years) in addition to the plain
vanilla fixed rate loan products for long tenor.
In this context it is interesting to look at how the
financial markets are positioned in the US and the Euro
Area (EA) in terms of bank financing and bond financing
and why the practices differ widely. It has been argued
that corporate finance practices are largely explained by
the extant legal and institutional settings (La Porta et al.
1997) and that countries like US and UK which practice
the common law where more protection is offered to
shareholders and creditors have seen better and faster
growth of capital markets than civil law countries such
as France and Germany.
In other words, other things remaining same, the level
of legal protection to creditors is a dominant factor in
deciding the dominance of dis-intermediated markets
over the intermediated markets. Thus we can see
dominant securities markets in the US, where more than
80 per cent of the funding comes from outside the
banking sector, and a dominant bank credit market in
the EA. Others have argued that the legal protection
regime alone does not explain the different practices in
the US and the Euro Area (EA) and that the EA position
has been explained by the relatively lower availability of
public information about firms’ creditworthiness and
higher need for the flexibility and information acquisition
role offered by the banks (Fiorella De Fiore and Harald
Uhlig, 2011).
There is also a major difference between the equity and
debt issuances by various entities. While reissue of
equity generally is done in a way that the reissued equity
is fungible with the original, in the case of bonds, since
the issuance depends upon the needs of the issuer,
prevailing interest rates etc., it is quite difficult to
develop an identical class of bonds that can have similar
trading liquidity as the bonds being reissued. In this
context it may be interesting to see the emerging interest
in corporate bonds in Europe which is developing
because the borrowers for, obvious reasons are, replacing
bank loans with bonds. With new Basel liquidity norms
then, do we see a collateral benefit to the financial
system i.e., the evolution of more vibrant bond markets?
Or with the implementation of these new norms taking
quite some time, is there a need to rebuild the structure
similar to the erstwhile Developmental Financial
Institutions in a big way to take care of the long term
financing needs?
References
De Fiore, F. and H. Uhlig (2011), “Bank Finance versus
Bond Finance”, Journal of Money, Credit and Banking, 43
(7), pp. 1395-1418
La Porta, Rafael, F.L.De Silanes, A. Shleifer and R.W.Vishny
(1997), “Legal Determinants of External Finance, National
Bureau of Economic Research, WP - 5879
Saving in the Economy
1.27 Gross Domestic Saving as a proportion to GDP
has fallen from 36.8 per cent in 2007-08 to 30.8 per
cent in 2011-12 (Chart 1.11). A large part of this decline
has been due to fall in financial savings of households
which have declined from 11.6 per cent of GDP to 8
per cent of GDP over the corresponding period. Of
late, the shift from financial assets to real estate and
gold has become stark. inflation, low penetration of
banking services across the country, credibility of the
financial institutions in the wake of mis-selling of
products and financial frauds, low post tax return on
bank deposits, negative/low real interest rates etc.
could be some of the issues that need to be addressed
to redirect non-financial savings towards financial
savings. The government has been taking steps to
increase the financial savings in the country; one such
step is the issuance of inflation indexed bonds (IIBs).
Housing Market
1.28 Housing is a high value decision for most
households in an emerging market economy. The
housing sector is said to have linkages with about 250
sub-sectors in the Indian economy. Given the
importance of the housing sector in the Indian
economy, monitoring of this sector is necessary.
House prices in some Indian metropolitan cities have
witnessed significant increases in the recent past
(Chart 1.12). Growth of bank credit to this sector has,
however, been moderate7 (Chart 1.13). Further, the
share of credit to the housing sector fell to 9.5 per
cent as at end March 2013 from 13.3 per cent at end
April 2007 (Chart 1.14). NPAs in the home loan
category have also fallen in the last three years. Some
of the concerns, however, are complete up-fronting
of construction finance by home buyers to developers
in some cases and availability of construction finance
to developers at rates on par with those for home
buyers.
1.29 There is a need to closely monitor this sector
since there are indications that price to annual rent
ratios in some parts of metro-cities like Mumbai are
as high as 50. In addition, there is also a need to
develop indicators other than price and volume
indices and credit to the housing sector to gauge the
trends in and the overall health of the sector.
Indicators such as house price to household disposable
income ratio, household financial obligations to
household disposable income ratio, land price indices,
index of construction costs, and price to rent ratio,
information on ownership of houses, among other
indicators need to be developed. The demand-supply
mismatches in various price segments could also
provide useful policy inputs.
1.30 More transparency in real estate transactions
gains importance both from the view of consumer
protection and prevention of money laundering. A
law to regulate the real estate sector in order to
improve the information flow, transparency, protection
to home owners and to aid healthy and orderly growth
is on the anvil. The proposed National Housing Bank
(Amendment) Bill, 2012, accords powers to register
and regulate housing finance companies to the
Reserve Bank of India.
Liquidity: Banking and Systemic
1.31 Liquidity conditions in the banking system
exhibited mixed trends during 2012-13 with
alternating phases of comfortable liquidity and bouts
of tightness. The liquidity situation eased at the
beginning of the financial year 2012-13 but overall,
the liquidity deficit in the banking system during the
first quarter of 2012-13 remained above the indicative
comfort zone of the Reserve Bank (i.e., +/- 1 per cent
of NDTL of the banking system). The situation,
however, improved significantly in the second quarter
of 2012-13, but came under significant stress during
the third quarter, especially after mid-October 2012,
on the back of persistently high government balances
with the RBI coupled with rise in currency in
circulation. The tight liquidity condition prompted
the Reserve Bank to resume OMO purchase auctions after a gap of over 5 months. Tight liquidity conditions
continued in the fourth quarter of the year as well.
On the whole, liquidity conditions in the banking
system were much tighter in the second half of the
year as compared to the first half. Despite tight
liquidity conditions, government bond yields have
come down significantly. During the current financial
year, the banking system liquidity has generally
improved from early June 2013 onwards.
1.32 However, the Systemic Liquidity Index (SLI),
which is based on a multiple indicator approach that
aims to capture the overall funding scenario in the
financial system viz., the banking, non-banking
financial, the corporate sectors and liquidity in foreign
exchange market, shows that the liquidity conditions
improved during Q4 of 2012-13 (Chart 1.15).
Corporate Performance
1.33 The corporate sector in India has come under
stress in the recent past. Analysed on the basis of a
few key variables such as Sales, Profit Margin [EBITDA
(Earnings before Interest, Tax, Depreciation and
Amortisation) to Sales], EBIT (Earnings before Interest,
Tax), Interest Expenditure, Net Profits among other
variables, the corporate sector shows increasing stress.
In general, growth rate of sales and profits have fallen
during Q3 2012-13 (Table 1.3).
Table 1.3: Corporate Sector Performance |
|
Q3FY12 |
Q4FY12 |
Q1FY13 |
Q2FY13 |
Q3FY13 |
|
Growth Rate (Y-o-Y) Percent* |
Sales |
19.2 |
15.5 |
13.9 |
11.6 |
9.3 |
Operating Profits (EBITDA) |
-4.8 |
-0.5 |
-3.5 |
11.3 |
7.8 |
Gross Profits (EBIT) |
0.8 |
4.1 |
-2.6 |
18.9 |
5.5 |
Interest** |
58.8 |
39.9 |
38.6 |
11.5 |
17.4 |
Net Profits |
-28.8 |
-7 |
-11.1 |
23.8 |
23.6 |
|
Ratios in Per Cent |
Interest Burden |
30.2 |
27 |
33 |
27.6 |
33.6 |
EBITDA to Sales |
12.8 |
13.3 |
12.9 |
13.2 |
12.6 |
EBIT to Sales |
11.7 |
12.6 |
11.6 |
12.8 |
11.3 |
|
Growth Rate (Q-o-Q) Percent# |
Sales |
6.1 |
9.6 |
-4.7 |
0.7 |
3.9 |
Operating Profits (EBITDA) |
2.4 |
13.7 |
-7.5 |
3.5 |
-0.9 |
Gross Profits (EBIT) |
2.9 |
18.5 |
-12.3 |
11.1 |
-8.7 |
Interest** |
5.6 |
5.9 |
7.3 |
-7 |
11.2 |
Net Profits |
-15.1 |
51.2 |
-17.9 |
17.4 |
-15.3 |
Note: *: Refers to 2473 companies **: Some companies report interest on net basis # Common Companies
Source: RBI |
1.34 Indian corporates have been increasingly
accessing international debt markets to raise resources
(Chart 1.16). While this is presumably in response to
improvement in international financing conditions
to take advantage of the low interest rates in the
international markets, un-hedged exposures and an
eventual increase in interest rates could put pressure
on Indian corporates. Banks have already been advised
to rigorously evaluate the risks arising out of unhedged
foreign currency exposure of their corporate
clients and price them in the credit risk premium
while extending fund based and non-fund based
credit facilities to them as this has implications for
the asset quality of banks and their profitability. Banks
have also been advised to consider stipulating a limit
on un-hedged position of corporates on the basis of
bank’s Board approved policy.
|