<p>Around the time of the collapse of Silicon Valley Bank, Signature Bank and the imminent failure of Credit Suisse, there was genuine trepidation of a banking contagion spreading across Europe, America and even to emerging markets. Mercifully, Swiss regulators scurried through the merger of Credit Suisse with the Union Bank of Switzerland, and the markets heaved a sigh of relief. Be that as it may, fundamental problems remain. The mark-to-market balance sheets of most US lenders puts them in a troubling spot and had it not been for the Fed’s intervention, many would have succumbed to depositors knocking on doors seeking to hastily withdraw their money. What the Fed did was the creation of a new emergency lending facility that would allow banks to deposit high quality assets in exchange of a cash advance worth the face value of the asset rather than its market value. American banks that had stacked up on US treasuries have thus been protected from a tragic death. Basically, the Fed just kicked the can along.</p><p>Going forward, we expect tighter lending conditions and a liquidity squeeze as major central banks across the globe, including the Fed and the ECB, continue to hike interest rates defying market expectations. It is now becoming clear that monetary policy authorities see inflation as the bigger worry and its control consequently becomes more important than GDP growth. The Bank of Japan (BoJ) under Ueda Kazuo, the new Governor, may change tack from the very dovish to a more balanced stance. After all, the previous incumbent Kuroda Haruhiko’s unprecedented monetary easing policies have not only been ineffective, they have in fact been conspicuously harmful. China, unlike Europe and America is defying gravity, with growth figures jumping. We expect China’s GDP to swell by 6.3%, backed by a strong credit push. The PBoC has a lot more elbow room with inflation lingering around the 1% mark.</p><p>US bond markets have behaved jerkily in line with expectations on the Fed’s stance and yields dropped. We foresee volatility to continue, given the uncertainty as to how far US policy makers would be prepared to go, in balancing the needs of a failing banking system with those of price stability. Equity markets in America, too, face headwinds with a drop in earnings, the consequence of weakening consumption. For now, some American households are protected because of fixed interest mortgages, but this will not last long as the impact of higher interest rates is bound to kick in over the coming years. America is heading towards choppy waters.</p><p>As we have previously explained, India’s banking system is better placed than their global peers by virtue of first, better quality deposits; second, a lower impact in the mark-to-market value of their bond holdings. The bulk of Indian deposits, unlike those in America, are held by households and tend to be stickier. In a happy turn of events, a couple of weeks ago, despite expectations to the contrary, the RBI kept interest rates unchanged. A poll of economists had previously suggested a hike of 25 bps. Be that as it may, the RBI hedged its position by declaring that the fight against inflation was far from over and hinted at possible rate hikes in the weeks ahead. As of now, we do not subscribe to the view that interest rates have peaked and a quarter percentage increase will possibly take place. Bond yields, on the other hand, are close to their peak and treasury managers should consider locking in their investments for now. CFOs must also keep an eye on liquidity, should external conditions cast a shadow upon the Indian financial market place.</p>
<p>Around the time of the collapse of Silicon Valley Bank, Signature Bank and the imminent failure of Credit Suisse, there was genuine trepidation of a banking contagion spreading across Europe, America and even to emerging markets. Mercifully, Swiss regulators scurried through the merger of Credit Suisse with the Union Bank of Switzerland, and the markets heaved a sigh of relief. Be that as it may, fundamental problems remain. The mark-to-market balance sheets of most US lenders puts them in a troubling spot and had it not been for the Fed’s intervention, many would have succumbed to depositors knocking on doors seeking to hastily withdraw their money. What the Fed did was the creation of a new emergency lending facility that would allow banks to deposit high quality assets in exchange of a cash advance worth the face value of the asset rather than its market value. American banks that had stacked up on US treasuries have thus been protected from a tragic death. Basically, the Fed just kicked the can along.</p><p>Going forward, we expect tighter lending conditions and a liquidity squeeze as major central banks across the globe, including the Fed and the ECB, continue to hike interest rates defying market expectations. It is now becoming clear that monetary policy authorities see inflation as the bigger worry and its control consequently becomes more important than GDP growth. The Bank of Japan (BoJ) under Ueda Kazuo, the new Governor, may change tack from the very dovish to a more balanced stance. After all, the previous incumbent Kuroda Haruhiko’s unprecedented monetary easing policies have not only been ineffective, they have in fact been conspicuously harmful. China, unlike Europe and America is defying gravity, with growth figures jumping. We expect China’s GDP to swell by 6.3%, backed by a strong credit push. The PBoC has a lot more elbow room with inflation lingering around the 1% mark.</p><p>US bond markets have behaved jerkily in line with expectations on the Fed’s stance and yields dropped. We foresee volatility to continue, given the uncertainty as to how far US policy makers would be prepared to go, in balancing the needs of a failing banking system with those of price stability. Equity markets in America, too, face headwinds with a drop in earnings, the consequence of weakening consumption. For now, some American households are protected because of fixed interest mortgages, but this will not last long as the impact of higher interest rates is bound to kick in over the coming years. America is heading towards choppy waters.</p><p>As we have previously explained, India’s banking system is better placed than their global peers by virtue of first, better quality deposits; second, a lower impact in the mark-to-market value of their bond holdings. The bulk of Indian deposits, unlike those in America, are held by households and tend to be stickier. In a happy turn of events, a couple of weeks ago, despite expectations to the contrary, the RBI kept interest rates unchanged. A poll of economists had previously suggested a hike of 25 bps. Be that as it may, the RBI hedged its position by declaring that the fight against inflation was far from over and hinted at possible rate hikes in the weeks ahead. As of now, we do not subscribe to the view that interest rates have peaked and a quarter percentage increase will possibly take place. Bond yields, on the other hand, are close to their peak and treasury managers should consider locking in their investments for now. CFOs must also keep an eye on liquidity, should external conditions cast a shadow upon the Indian financial market place.</p>
