Will try to be make this a short one...
Some opinion on USD-INR have been discussed before...you may want to go through it once...
INR @ 60-65
Just to kind of put the situation as it is right now....
- gold imports have stabilised after the initial fall, which happened on the announcement of the customs duty on gold imports....now that has been raised to 6%. Gold imports may possibly trend downwards for some time from here on.
For the last 3-4 months the avg trade deficit on monthly basis is around
20 bn USD.
That would make it approximately 240 bn USD on an annual run rate basis.
70 bn USD can be covered by IT/ITES.
Another 70 bn USD can be covered up by private transfers or remittances.
So we are left with 100 bn USD. (Current account deficit - CAD)
Assuming ECBs + NRI deposits will support another 30-35 bn USD...it still leaves 60-70 bn USD to be covered by FII + FDI.
That roughly works out to a required inflow of around 5-6 bn USD per month.
FDI is stagnating and thus will have to be compensated by FIIs.
25-30 bn USD of FII inflows was considered fantastic, but now it seems we will be requiring closer to 50 bn USD just to keep semblance of balance. Or our external debt may shoot up assuming forex reserves are to be maintained at the current levels.
There is a lot of talk about how gold imports are creating serious imbalances in the balance of payments.
Gold imports are at around 50 bn USD. If they are reduced by 30-40%, we will probably save 15-20 bn USD. And correspondingly the pressure on required inflows will also be lower.
But looking at the overall CAD of 100 bn USD, savings from gold import reduction seem to be of help but not great help.Even after adjusting for the savings on gold imports, we would still be requiring 4-5 bn USD of FII + FDI monthly. That is not going to be easy to manage and this too is just to maintain status quo on the external front.
Sounding like a treadmill..is it??!!
(Standard Disclaimer : The probability of my opinions going horribly wrong are closer to 1 than to zero!1)
In this article I have put forward some data on the Indian banking system sourced from Bloomberg.
Before I do that, its better to put some caveats.
1. Data and numbers are dynamic.These numbers are as of given date and time, liable to change.
2. The data is from the listed space only.
3. All debt is not from Indian banks.A part of it,my guess is 10-12%, would have come from overseas. So please keep that in mind, when inferring anything for the Indian banks.
In the inquisitiveness to get a sense of the leverage amongst the Indian corporates, Bloomberg helped us run a query to come up with companies whose Debt/Mcap ratio is above is particular level.
Debt/Mcap instead of Debt/Networth is to reflect market realities.
Here is a short summary of that query.
(debt in Rs. cr.)
( "> 20" is a subset of "> 5")
The table above shows the total debt on the books of companies in various brackets of Debt/Mcap ratio.
As can be seen, companies with Debt/Mcap ratio > 5 have almost 4 lac cr of debt on books.This list has all kind of companies, whether its infra, textiles, metals etc.
Debt/Mcap > 5 should normally raise eyebrows and concerns on the capability of the company to payback, assuming that Mcap represents the ability of the company to run profitably. In fact within that group the avg Debt/Mcap is much higher at 9.3. That should ring alarm bells.
The total debt on the books of companies which have Debt/Mcap > 2.5 is around 8.8 lac cr.
And this is only from the listed space. Its difficult to estimate the similar number for the unlisted domain, but given that SMEs are a big driver of Indian economy that number MAY not be small.
Considering total advances of the banking system at around 50 lac cr, above numbers are concerning to say the least.
And of course, this list does not include agri loans or other individual loans, where there is a certain percentage of bad assets.
I am not suggesting that all of these are going to turn into bad assets for banks. Also this is not an entirely new set of probable bad assets.
In fact some of them would have already been recognised as bad.
But surely all of these can be put into the "troubled assets" category.
And for them NOT to turn bad would require a few things to fall in place.
For Example:
- Power companies struggling with coal issues will require some resolution on the tariff as well as the coal supply and pricing front.
- Metal companies will require their respective commodities to do well in terms of prices for them to be able to earn profits and do well.
- Infrastructure companies will probably require government to pay up dues and then spend lots of money on new projects.
Practically all solutions are highly inflationary.And that is not surprising.
Inflation is normally the way out of hugely indebted situations, unless you want to go through a period of "depression".
XII Five Year Plan has inherently assumed a 7-8% inflation in the system, almost imperative to fund the kind of spending the government is contemplating.
As Finance Minister prepares his budget for FY14,he cant be hoping for anything lesser. Else he can hardly keep his deficits under control.
As everybody keeps hoping for lower and lower inflation, just wondering if that is what is required.
Wont the debt trap get even further entrenched if prices become stagnant?
The other theory could be, kill prices, lets take 2-3 year pain or maybe longer,and then start afresh.
But is that an option India can afford given overall demographics and social situation? And what would that mean for the banking system, currency markets and so many others? And how long pain would last is anybody's guess.
I dont have answers to any of these...so I finish with a question...
is high inflation the only way out?
(Standard Disclaimer : The probability of my opinions going horribly wrong is closer to 1 than zero!!)
