The latest Financial Stability Report (FSR) published by the RBI has observed that the asset quality of banks has deteriorated and that the NPAs had sharply deteriorated during the current financial year. Poor asset quality, low profitability and weak liquidity conditions have added to the risk of the Indian banks. The Gross NPAs of the bank system has gone up sharply from 7.8% in March 2016 to 9.1% in September 2016. The overall stressed advances ratio was also up at 12.3%. The PSU banks were the worst affected with GNPAs of nearly 11.8% and an overall stressed ratio of 15.8%, a highly unsustainable scenario.

The Samajwadi Party in Uttar Pradesh may be headed for a vertical split between the factions led by the father Mulayam Singh Yadav and the son Akhilesh Yadav. Both are likely to release a parallel list of candidates ahead of the assembly elections in UP in the first quarter of 2017. Many Akhilesh loyalists have been denied tickets by the Mulayam faction, which has made matters worse. While Akhilesh continues to be extremely popular among the people of UP, there are people like Amar Singh who want to cut Akhilesh Singh to size.

Minister of State for Finance, Santosh Gangwar, has reiterated that the cash withdrawal limit may not be required after December 30th as nearly 30 crore notes were being printed on a daily basis. However, most banks have complained that they have not got access to liquidity to meet any surge in demand after the demonetization period ends on December 30th. The second problem was that the government had printed large quantities of 2000-denomination notes, which by itself was very liquid as the next available denomination was only Rs.100. There is a severe shortage of the Rs.500 note for now.

According to data released by the RBI, a total of 60 lakh depositors have deposited Rs.700,000 crore in the bank since the demonetization was first announced. Nearly 50% of these deposits were by individuals while the balance was from corporates and businesses. The government has also clarified that merely depositing cash in banks will not make them legitimate. The Financial Intelligence division will be doing a system driven check of all large deposits and cross verify them with their tax returns and known sources of income and take action accordingly.

Jobless claims in the US declined for the third time in the last 4 weeks. Lower jobless claims are an indication of a higher level of employment. In the US, the unemployment ratio is currently below 5% which is as close to full employment as is practically feasible. Full employment is one of the pre conditions set by the US Federal Reserve to justify rate hikes. In fact, the US has been reporting the best employment data consistently after almost 40 years.

Tata Sons has given Cyrus Mistry 2 days time to return all the confidential documents back to the Tata Group. According to the legal notice sent by Tata Sons, Mistry had illegally removed confidential documents from the office premises and had them in his possession. The Tatas have alleged that Cyrus was relying on such confidential information to file his case with the National Company Law Tribunal (NCLT). It may be recollected that Cyrus Mistry chose to opt out of the all the boards of the Tata Group companies while Nusli Wadia was removed by a vote at the EGM.

The RBI has today warned that the total quantum of bad loans may surge to above the 10% mark by March 2018. It is currently at around 9.2% as of September 2016. The caveat is that if macroeconomic conditions continue to deteriorate, then this NPA levels could get much worse from here on. The RBI has already reduced its full year growth forecast from 7.6% to 7.1%, while most large broking houses feel that even this may be hard to achieve. The recent stress caused by demonetization may be a double whammy for the banks as it has weakened cash flows of industry and has also impacted credit growth of banks.

With traders speculating about a windfall gain for the government from the demonetization process of nearly Rs.100,000 crore, the yields on bonds were depressed during the day. Once the old notes are extinguished, the RBI will be able to pay out the non-extinguished portion as a special dividend to the government of India. The 10-year benchmark (new) yields fell from 6.58% to 6.52% during the day.

RBI has extended the repayment relief window for small borrowers by 30 days to take care of the pain caused by demonetization. On November 21st, the government had allowed a 60-days grace period to small borrowers and that period now stands extended by another 30 days and therefore the benefits will last till the end of February. This will also be beneficial for banks. Under the existing dispensation, banks need to classify an asset as an NPA if it is overdue for 90 days. Under the new rule for small borrowers, this limit stands extended to 180 days.

The US Dollar had one of the best quarters since 2008 as the dollar rallied on the back of a hawkish note by the RBI as well as Donald Trump’s election. Trump has promised across-the-board cuts in taxation for individuals and corporates and has also promised to invest nearly $1 trillion in infrastructure. This is likely to create a virtuous cycle of growth, spending and capital investment and result in the return of inflation to the US economy. While sceptics are already warning that the rally may be running out of steam, the real impact of the story will only be known once Trump takes over the president’s chair in late January next year.