There was a sense of optimism in global markets on hopes that the US and China may be really close to a trade deal. Analysts are now positive on a trade deal between the US and China happening as early as this month itself. The US will roll back its higher tariffs on $200 billion of goods while China will live up to its commitment to increase purchase of American products and also undertake structural reforms in a gradual and phased manner. The deal is expected to be sealed during the Summit on March 27th 2019 and that should come as a major relief to world markets and also to world GDP growth.
Private Banks continued to chip away the core base of PSU banks as they continued to gain deposit share in calendar year 2018. Private lenders have invested the last few years building their retail books and focusing on CASA deposits. That seems to have paid off for private banks with a higher incremental growth share. In fact, as of December 2018, the share of private banks in total deposits went up from 24% to 26.23%, At the same time, PSU banks saw their deposit share shrink from 68.50% to 65.73%. A huge gap in terms of market capitalization has already been built up by private banks.
If you are wondering why the 10-year benchmark yields are not budging despite rate cuts, here is why. India’s long term funding costs have actually behaved in quite a paradoxical manner. The rate of inflation is sharply down and so are the repo rates. However, long term lending costs are still the same. The 10-year rate is stuck at 7.4% and that is largely attributed to the huge $90-100 billion fiscal deficit that is expected this year. Yields have stayed high, according to India Ratings; due to substantial off-balance sheet funding that has happened in petroleum and food products.
Banks may not get access to more credit creation capacity from the new RBI norms. RBI’s NBFC risk weight move is expected to release Rs.1.40 trillion of funds for banks. According to a note put out by CRISIL, the recent RBI announcement in the monetary policy statement to allow banks to risk weight NBFC loans based on credit rating, will release lendable resources to the tune of Rs.140,000 crore. At least a part of this limit will translate into enhanced lending by banks. CRISIL was of the view that this move will also open up the funding avenues for NBFCs, which is the big constraint today.
Markets in Asia buoyant on trade rapprochement hopes but SGX Nifty came under pressure on Monday.SGX Nifty showed weakness on worries of MSCI downgrading India’s weight subsequent to China’s upgrade. MSCI downgrade typically leads to selling by ETFs that rush to align their portfolios with the MSCI benchmark. In the meanwhile, Brent crude continued to remain sticky at $65.56/bbl on the back of trade war optimism. After getting near $65 on Friday, Brent Crude bounced back nearly 75 bps on Monday as the US-China trade rapprochement optimism started building up. Brent crude had been hardening on the back of sanctions on Venezuela and Iran. Now the trade deal will mean a revival in demand for crude and that will be positive for crude. OPEC may defer policy decisions till June 2019.
In a scathing report on the practices at IL&FS, audit firm Grant Thornton has termed 1/3rd of IL&FS arm’s lending as unsecured. Grant Thornton observed that nearly 33% of the borrowings of one of the IL&FS subsidiaries had either given unsecured loans or had inadequate collateral. Grant Thornton also observed circular routing of funds where some of the loans by IL&FS had ended up in the coffers of the IL&FS group companies. Even after nearly 6 months since the crisis first broke out last year, there seems to be no solution in sight. IL&FS owes nearly $13 billion to the Indian banks.
