Synopsis
Standard & Poor’s(S&P) has downgraded India’s credit rating to BBB-.India is the first of the BRIC countries to be downgraded. There is also a possibility of further downgrade to junk status. Fitch has also downgraded India’s sovereign credit outlook to negative from stable. Corruption and lack of reforms have been cited as the reasons. There has also been an detrimental effect due to increased risk exposures to commercial real estate, capital market, venture capital funds and systemically important non-deposit accepting Non Banking Finance Companies (NBFCs). Indian banks have proven to be vulnerable to exposure in government debt. A sovereign downgrade of banks could impact the capital base of banks which could lead to increased cost of funding by banks and an eventual asset quality deterioration which has been one of the major concerns for RBI, as it poses a significant risk to the financial system. Even though the sovereign investment in government assets/securities for meeting SLR requirements is a safe 24%, the size of the net government borrowings is huge. Could this eventually create an unprecedented liquidity pressure within the system? Also the gross NPA of commercial banks has increased to 3.2% as per end of March 2012. As a result, to cope up with the high loss estimates, the interest rates and capital infusions may have to be increased. This could again possibly lead to liquidity pressure within the system. Further, because of the negative investment outlook, there is a possibility of FII pull out from banks or a reduced FII inflow into the system. Rupee depreciation for last one year and falling IIP numbers for continuous three quarters is also adding to the current situation. Under these conditions, has India’s economic and fiscal prospects weakened? How hedged is India towards systemic risk? Can we expect regulators and supervisors to take appropriate macro-prudential measures, pre-emptively, decisively and proactively, rather than reactively to ensure consolidation process and create a more positive environment with regard to the growth outlook, material improvement in inflation and an improvement in the investment climate? The forthcoming articles present views by our distinguished panelists on this contentious issue.
DISTINGUISHED SPEAKERS:
Dr. K.C. Chakrabarty
Dy. Governor RBI Executive Director Union Bank of India
Shri S. K. Jain
Dr. Gurbachan Singh
Professor ISI, Delhi
Dr. Manoranjan Sharma
Chief Economist & GM Canara Bank
Dr. Rupa Rege Nitsure
Chief Economist & GM Bank of Baroda
February 2013
4