Resilience of Indian Financial Market
Sudden financial crises which have struck many parts of the world due to pandemic Covid-19, with extensive consequences for the countries concerned and the global financial system, have prompted attempts to identify ways of preventing unexpected shocks of Covid-19 in national and global finances. It is considered important to ensure effective supervision of financial institutions’ operations and monitor the stability of the financial system as a whole due to standstill of the Economic Activities for a period of 4 to 6 months due to Pandemic. Central Banks have increasingly begun to monitor in particular factors which concern the stability of the financial system as a whole. Read on…
The soundness of the financial system is a necessary pre-condition for favourable economic developments and effective monetary Policy. Central banks are turning their attention to the strength and efficiency of the Financial System, the macroeconomic environment and the risks to financial stability that may be concealed in it. It is crucial for Central Banks and financial supervisory agencies to collaborate closely in promoting a solid foundation for the Financial System and its healthy operations in view of challenges such as Covid-19 disaster. As of 22 November 2020, there have been 57,882,183 confirmed cases of COVID-19, including 1,377,395 deaths, worldwide (World Health Organization website, https://covid19.who.int/). This pandemic has severely impacted the world’s economies including Indian Economy with second largest number of cases.
The Indian Financial System is having capacity to recover quickly from difficulties. A brief on Market-wise of Indian Financial System, measures taken by the Regulators and Government of India due to Covid-19 and its impact mentioned below:
Selected Economic Indicators of India like Primary, Secondary and Tertiary Sectors for the Financial Year 2019-2020, Last Quarter of Financial Year 2019-2020 and the First Quarter of Financial Year 2021 (Lockdown Period) is mentioned below:
Selected Economic Indicators of India: Real Sector (% Change)
Industrial Production and Inflation Indicators (2020)
Financial markets in India comprise in the main, the credit market, the money market, the foreign exchange market, the debt market and the capital market. Most of the financial markets were characterised till the early ‘nineties by controls over the pricing of financial assets, restrictions on flows or transactions, barriers to entry, low liquidity and high transaction costs. These characteristics came in the way of developments of the markets and allocative efficiency of resources channelled through them.
Actions undertaken by financial sector regulators and the government to mitigate the impact of Covid-19 eased operational constraints and helped in maintaining market integrity and resilience in the face of severe risk aversion.
a) Credit Market Structure & Regulatory Interventions
In the context of relatively underdeveloped capital market and with little internal resources, firms or economic entities depend largely on financial intermediaries for their fund requirements. In terms of sources of credit, they could be broadly categorised as institutional and non-institutional.
The major institutional purveyors of credit in India are banks and nonbanking financial institutions, i.e., development financial institutions (DFIs) and other financial institutions (FIs) and non-banking financial companies (NBFCs) including housing finance companies (HFCs).
While banks and NBFCs predominantly cater to short-term needs, FIs provide mostly medium and long-term funds. However, the actual time-length of the credit availed would depend, inter alia, on the production-sale cycle.
The Credit Market: Steps Taken by RBI to Counter the Coronavirus Impact on Economy
- Repo Rate: RBI announced that it was cutting the Repo Rate by 75 Basis Points or 0.75% to 4.40%. The Repo Rate was earlier 5.15, last being cut in October 2019.
- Reverse Repo: The Regulator also announced that it would cut the Reverse Repo rate by 90 bps, or 0.90%. On a daily average, Banks had been parking INR 3 lakh crore with the RBI.
- Loan Moratorium: In a massive relief for the middle class, the RBI Governor also announced the lenders could give a moratorium of 3 months on term loans, outstanding as on 1 March, 2020.
- CRR: The RBI also announced that the Cash Reserve Ratio (CRR) would be reduced by 100 bps, or 1%, to 3%. This would be applicable from March 28, and would inject INR 1,37,000 Crores.
- LTRO: The RBI will also undertake Long Term Repo Operations (LTRO) allowing further liquidity with the Banks. The Banks however are specified that this liquidity will be deployed in Commercial Papers, investment grade Corporate Bonds and Non-convertible Debentures.
- Ease of Working Capital Financing: Lenders were allowed lending to recalculate drawing power by reducing margins and / or by reassessing the working capital cycle for the borrowers. The RBI also specified that such a move would not result in asset classification downgrade.
- Working Capital Interest: A Three-month interest moratorium shall also be permitted to all lending institutions.
- Deferment of NSFR: The Net Stable Funding Ratio (NSFR), which reduces funding Risk by requiring Banks to fund their activities with sufficiently stable sources of funding was postponed to October 1, 2020. The NSFR was earlier supposed to be implemented by April 1, 2020.
- MSF (Marginal Standing Facility): Marginal Standing Facility (MSF) has also been increased to 3% of SLR, available till June 30, 2020. “This measure should provide comfort to the banking system by allowing it to avail an additional INR 1,37,000 crore of liquidity under the LAF window in times of stress at the reduced”.
- Fresh Liquidity: The RBI also added that since February 2020 it had injected INR 2.8 lakhs crore of liquidity, equivalent to 1.4 percent of GDP.
Money, Banking & Money Stock Measures (% Change - Scheduled Commercial Banks)
Banking System Ratios (%)
India Domestic Credit Growth
India’s Domestic Credit increased 8.4 % YoY in Sep 2020, compared with an increase of 9.9 % YoY in the Previous Month. It averaged 15.2 %, available from Mar 2000 to Sep 2020. The data reached an all-time high of 27.1 % in Jul 2009 and a record low of 5.6 % in Nov 2017.
In the latest reports, India’s Domestic Credit reached 2,370.7 USD bn in Sep 2020. Money Supply M2 in India increased 18.0 % YoY in Sep 2020. The country’s Non-Performing Loans Ratio stood at 9.1 % in Mar 2019, compared with the ratio of 11.2 % in the previous year.
What was India’s Domestic Credit Growth in Sep 2020?
b) Money Market Structure & Interventions
Money markets perform the crucial role of providing a conduit for equilibrating short-term demand for and supply of funds, thereby facilitating the conduct of monetary policy.
While inter-bank money markets and central bank lending via repo operations or discounting provide liquidity for banks, private non-bank money market instruments, such as, commercial bills and commercial paper provide liquidity to the commercial sector. Unlike in developed economies where money markets are promoted by financial intermediaries out of efficiency considerations, in India, as in many other developing countries, the evolution of the money market and its structure has been integrated into the overall deregulation process of the financial sector.
The Money Market: Steps Taken by RBI to Counter the Coronavirus Impact on Economy
- The RBI has been injecting additional Liquidity in the Banking system to keep down Bond yields.
- In its February Policy Review, the RBI said it will provide INR 1 Trillion of one-and three-year cash at the Policy Rate via long-term Repo Operations to help Monetary Transmission (Feb. 6).
- Two variable rate Repo operations of 500 billion Rupees to fine-tune liquidity at the financial year end.
- Enhanced a Temporary Liquidity tap for Primary Bond underwriters to INR 10,000 Crores from INR 2,800 Crores.
- INR 1 Lakh Crore of LTROs.
- Open market purchase of govt bonds worth INR 100 Billion March 20, another total INR 30,000 Crores of OMO Purchases March 24 and March 26.
- INR 1 Trillion via 16-Day Variable Rate Repos.
Interest Rates Trajectory (%) (2020)
Call Money Market Growth
Call Money amount data was reported at INR 82,596.300 mn in 12 Nov 2020. This records a decrease from the previous number of INR 85,770.500 mn for 11 Nov 2020. Averaging INR 120,850.950 mn from Apr, 2006 to 12 Nov, 2020, with 4208 observations. The data reached an all-time high of INR 410,780.000 mn in 09 Dec 2016 and a record low of 0.000 INR mn in 08 Nov 2020.
What was India’s Call Money Market-12 Nov 2020?
c) Foreign Exchange Market Structure & Actions
The Foreign Exchange Market in India Comprises Customers, Authorised Dealers (ADs) and the Reserve Bank. With the transition to a market determined Exchange Rate system in March 1993 and the subsequent gradual but significant Liberalisation of restrictions on various external transactions, the Forex Market in India has acquired more depth.
Foreign Exchange Market: Steps Taken by RBI to Counter the Coronavirus Impact on Economy
- Voluntary Retention Route (VRR): ‘Voluntary Retention Route’ (VRR) for Foreign Portfolio Investors (FPIs) Investment in Debt Relaxations.
- Foreign Portfolio Investors (FPIs) shall invest at least 75% of their ‘Committed Portfolio Size’ (CPS) within three months from the date of allotment. In view of the disruptions caused by COVID-19, it has been decided to allow FPIs that have been allotted investment limits, between January 24, 2020 (the date of reopening of allotment of investment limits) and April 30, 2020, an additional time of three months to invest 75% of their CPS.
- Directions on the participation of Banks in Offshore Non-deliverable Rupee Derivative Markets issued vide will come into effect from June 1, 2020.
- The time period for realization and repatriation of export proceeds for shipments before July 31 extended to 15 months to provide greater flexibility to exporters in negotiating future export contracts with buyers abroad.
- India opened up a wide swath of its Sovereign Bond Market to Overseas Investors, taking its biggest step yet to secure access to Global Indexes as the Government embarks on a record borrowing plan.
- More Dollars: RBI pledged to inject Dollars through Dollar-Rupee Swaps—Two USD 2 Billion Swap Lines each for March 16 and March 23 provided USD 2.7 billion.
Reference Rate, Forward Premia & Foreign Trade (2020)
India Foreign Exchange Reserves
India’s Foreign Exchange Reserves was measured at 502.2 USD bn in Sep 2020, compared with 498.9 USD bn in the Previous Month. The data reached an all-time high of 502.2 USD bn in Sep 2020 and a record low of 1.1 USD bn in Jun 1991. The Reserve Bank of India provides monthly Foreign Exchange Reserves in USD. The Foreign Exchange Reserves equalled 16.6 Months of Import in Sep 2020.
What was India’s Foreign Exchange Reserves in Sep 2020?
d) Structure of Debt Market & Fiscal Relaxations
The domestic debt market comprises two main segments, viz., the Government securities and other (mainly corporate) securities comprising private corporate debt, PSU bonds and DFIs bonds. The government securities market is pre-dominant, while the other segment is not very deep and liquid.
The Debt Market: Steps Taken by Government of India to Counter the Coronavirus Impact on Economy
- State administrations have been permitted to borrow as much as half their annual target for the year starting April 1 whenever they choose. In a typical year, strict rules would govern the timetable, which would include cash transfers from the federal government that are now under threat as the lockdown erodes revenue.
- RBI decided to increase the Ways and Means limit -- short term funding cap -- by 60% for all States to enable them to “Tide over the Situation.” Revised limits came into effect in April, and will be valid for Six Months.
- Eases States’ Overdraft Rules through 30th Sept. to handle Cashflow mismatches.
- Shorter Trading Hours: Trading in sovereign debt and the rupee will be held from 10 a.m. to 2 p.m. Mumbai time starting April 7 through April 30. These markets normally worked from 9 a.m. to 5 p.m.
India National Government Debt
India’s National Government Debt reached 1,336.4 USD bn in Jun 2020, compared with 1,306.0 USD bn in the previous quarter. The data reached an all-time high of 1,336.4 USD bn in Jun 2020 and a record low of 233.0 USD bn in Dec 1998. CEIC converts quarterly Government Debt into USD. The Ministry of Finance provides Government Debt in local currency. Federal Reserve Board average market exchange rate is used for currency conversions. Government Debt covers Central Government only. India’s Nominal GDP reached 502.1 USD bn in Jun 2020.
What was India’s National Government Debt in June 2020?
e) Capital Market Structure & SEBI Relief Measures
Capital market structure has evolved over time with the market practices and conditions generally reflecting the policies put in place. As the process of price formation has to be efficient for the growth and stability of the market, it was considered necessary to orient the Securities and Exchange Board of India (SEBI) to undertake the tasks of regulation and supervision.
The Capital Market: Steps Taken by Securities and Exchange Board of India (SEBI) to Counter the Coronavirus Impact on Economy
- Allows Companies additional 45 days for declaring their quarterly and annual results; extends the date for submission of corporate governance report by a month; Company Boards exempted from provision of maximum time gap between two meetings (March 19).
- Trading Margin in Stocks increased, market-wide position reduced to ease volatility in Stocks (March 20).
- Compliance requirements relaxed for ReITs, InVITS, extends deadline for Risk management rules for liquid mutual funds; timeline for filing debenture and preference share issues extended (March 23).
- Raised the threshold of defaults needed to trigger insolvency proceedings to 10 million rupees from 100,000 rupees (March 24).
- Capital, Debt market services exempt from lockdown (March 25).
- Allows Top 100 listed Companies another month to comply with the requirements of holding Annual General Meeting (March 26).
- Shareholders allowed 45 more days to disclose their consolidated shareholding in Companies for the Financial year ending March 31 (March 27).
- Relaxed the recognition of default by local credit rating companies if a delay in payment of interest or principal is due; allows foreign portfolio investors relaxation in document processing (March 30).
- Eased rules to fast-track Rights Issues, and also extended the validity of its observations on public issues by six months from the date of expiry to help companies raise funds amid the coronavirus pandemic (April 17).
India Market Capitalization Capital Market
India’s Market Capitalization accounted for 75.8 % of its Nominal GDP in Dec 2019, compared with a percentage of 76.8 % in the previous year. The data reached an all-time high of 149.5 % in Dec 2007 and a record low of 45.9 % in Dec 2003.
In the latest reports, SENSEX recorded a daily P/E ratio of 29.5 in Oct 2020. SENSEX closed at 38,067.9 points in Sep 2020.
What was India’s Market Capitalization: % of GDP in 2019?
Conclusion
Various positive factors characterize the Icelandic Financial System at the moment. Economic growth is slowly increasing and profitability of industries generally appears to be average even though the months of shutdown of some sectors. Defaults with credit institutions appear to have increased considerably. Asset prices have fallen but there seems to be little probability of a sudden general reversal this year. Credit institutions therefore do not appear to face any particular risk. The financial system would be better equipped to tackle sudden changes.
Lastly “every cloud has a silver lining”, the world has recovered its economy from various past crisis and this will hopefully be no exception ∎∎∎