Financial Markets and the Economy - Intersections

As discussed with A Rajagopal (Scient Capital), Ratnesh Kumar (BOB Capital), G Padmanabhan (Chairman, BOI) and N. Damodharan (ED, BOI) Suggested options for equity infusion into Indian banks by Government of India (GOI), under the Bank Recapitalization plan. 1) The Options There are four possible routes that can be adopted by GOI (either directly or indirectly through an intermediate entity), for infusion of equity into Indian banks under the Bank Recapitalization plan. These are: a) Preferential Allotment of Shares (PAS) to GOI b) Rights Issue c) Combination of PAS and a Qualified Institutional Placement (QIP)  d) Additional Tier I (AT1) issuance 2) Principles for evaluating the options Suggest the objectives for evaluating the alternatives should be: a) Try and obtain fresh infusion from other investors alongside GOI, to fill the INR 58k external requirement, and to maintain GOI stake in Indian Banks at current levels. Getting external funds woul...

Suggested principles for structuring of the Recapitalization (Recap) Bonds issued by Government of India (GOI) to fund equity infusion into Indian banks. In structuring Recap Bonds, I believe it’s important we adhere to transparent, objective principles. 1) Should Recap Bonds count towards the holding bank’s statutory Liquidity Coverage Ratio (LCR) or Statutory Liquidity ration (SLR)? I believe they should not, and the rationale for this is described below. The principal aim of the Recap Bond is to provide funding to GOI to infuse as equity into banks. This is cash-neutral both for banks and GOI. (There is, of course, substantial risk transformation in the process – GOI takes on significant equity risk, thus increasing the capacity of banks to absorb risk) As a principle, Reserve Bank of India (RBI) has to accept GOI bonds from banks under Liquidity Adjustment Facility (LAF) repo, when there is a net system liquidity deficit. Such systemic deficit can arise in two...

Written on 28th September 2017 morning.. Commentators have expressed surprise at the sharp move up in USDINR, from 63.80 just 20 days ago, to over 65.80 now. What has caused this sharp move up? Who has been buying USD? We were just celebrating the rapid rise in RBI's FX reserves t beyond $400B, what has changed the past 3 weeks? All legitimate questions, and am sure answers will emerge. However, I believe that to understand the sharp move up, we have to understand the vulnerability that built up over time. A pertinent question to ask is - who was selling USDINR earlier? Since the beginning of 2017, RBI has net purchased over $25B in the spot market, in addition to over $30B in the FX forward market. Where has all this FCY come from?  India's current account deficit is barely covered by our FDI net inflows and FPI investments in equity. These are the closest to permanent sources of FCY into any country. So if permanent net sources of FCY cannot explain the $55B of ...