Rupee looking strong, bank capitalization program successful

October 27, 2017 Finance Talk Valli Sarvani No comments

According to Goldman Sachs, the global financial services major, the bank capitalization program made by the government will be very positive for the Indian economy. It is aimed at reducing the drag on PSU (Public Sector Undertaking) banks by a significant amount and boosting investment and GDP (Gross Domestic Product) growth.

According to Sachs, it will lower the drag on bank credit growth and support the rupee in the medium term.

Yesterday, the government revealed a ₹2.11 lakh crore two-year road map to strengthen the public-sector banks hit by NPA (Non-Performing Assets). This includes recapitalization bonds, equity dilution, and budgetary support.

Sachs stated that for every incremental ₹100 billion of capital infusion by the government, credit will increase by 1% and GDP growth will increase by 0.5%.

This infusion will therefore entail the mobilization of capital, with maximum allocation in the current year to the tune of about ₹211,000 crore over the two following years.

This will be done through budgetary provisions of ₹18,139 crore and recapitalization bonds to the tune of ₹1.35 lakh crore.

Thus, as both credit growth and investment growth rebound, there will be a re-rating of growth expectations in India in the coming quarters.

Thus, this substantial improvement in growth outlook will be positive for equities and supportive of the rupee. Although near-term risks are skewed toward fiscal deterioration, in the medium-term, fiscal fundamentals can improve.

There are a couple of key downside risks, which are any possible delays in the implementation of the recapitalization of banks, and the possibility of any other banking sector reforms being less effective.

However, overall, this program will be very beneficial to the Indian economy in the future.

It will benefit the Indian GDP, the rupee, and the state of the Indian economy as a whole.

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