The Indian rupee tumbled to a 3-month low of Rs.65.03 on Thursday as the banking crisis led to a run on the INR. The situation worsened when importers rushed for cover after it became clear that the Fed rate hikes could begin as early as March and go up to 100 bps during the year. The last time the INR closed so low was in the 3rd week of November last year. The INR impact worsened after the Monetary Policy Committee (MPC) minutes made it clear that the RBI may adopt a more cautious approach to rates considering that the IIP and the GDP are just about showing green shoots of recovery.
The CBI arrested Vikram Kothari and his son for the Rs.3700 crore bank defaults by their company, Rotomac Pens. While the principal amount owed to banks was nearly Rs.3000 crore there was also a huge interest outstanding on these loans. Among the PSU banks, Bank of India and Bank of Baroda have the largest exposure to Rotomac Pens followed by other PSU banks like IOB, Union Bank, Allahabad Bank, OBC and Bank of Maharashtra. The banks had expedited the filing of cases against Mr. Kothari fearing that they too may flee the country like Nirav Modi and Mehul Choksi.
In the aftermath of the PNB fiasco over Nirav Modi, it has emerged that many Indian banks have contingent liabilities that are larger than their assets. In the Nirav Modi case, the entire scam is based on the LOU (guarantees) given by PNB based on which other banks had extended loans to Nirav Modi. Contingent liabilities are a worry for banks as they are not reflected in the balance sheets and the risk is always contingent upon a set of circumstances. While PNB had contingent liabilities to the tune of 50% of its assets, it was above 74% for Canara Bank. In the case of many smaller banks the ratio is worse.
A day after the bid for Bhushan Steel by Liberty House of UK was struck down, the Liberty Group of UK has decided to approach the National Company Law Tribunal (NCLT) to challenge the rejection of its bid. The complaint of Liberty House is that its bid was higher than that of Tata Steel and should therefore have been put up for consideration. Tata Steel had bid quite aggressively for Bhushan Steel as the acquisition will help Tata Steel take its total steel capacity in India to over 21 million tonnes making it the largest steel producer in India. Liberty is of the way that creditors are being denied recovery.
Oil prices in the Brent Crude market headed higher and settled above the $65.88/bbl mark on Thursday. The WTI crude was quoting at around $62.12/bbl. The price of Brent crude had touched $70/bbl in early February before correcting on fears that US crude inventories and its shale supply could actually push prices down further. However, the 1.8 million barrels of supply cut by the OPEC and Russia appears to be having its impact and it is acting as a base for oil prices. Also, with Trump betting heavily on expanding shale output, it would be in US interests also to let oil prices remain on the higher side. Markets are also of the view that the US will not be able to expand shale production rapidly if the Fed hikes rates and cost of borrowing goes up. US inventories fell by 1.62 million barrels last week.
In the midst of the entire furore over the Nirav Modi case, PNB may be largely counting on the quick settlement of the Bhushan Steel sale. PNB has already provided nearly Rs.4900 crore towards outstanding dues from Bhushan Steel. The successful sale of Bhushan Steel will enable PNB to write back this amount and that will largely help to shore up the capital base of this company. In addition, PNB may also look to sell its Delhi headquarters apart from selling its stake in PNB Gilts and PNB Housing. Time may be running out for PNB as it faces a possible rating downgrade if this deadlock continues.
