Indian Economy faces Brexit heat; FSDC calls for Brexit situation monitoring

As the global financial markets are grappled with the decision taken by the UK to exit the European Union (EU), it is clear that the question of future referendums in other EU member-countries and potential exits will likely dominate the headlines in the coming months for India as well.

The Indian economy has seen its total exports decline for 18 straight months, hurt by an overvalued exchange rate as well as a weak global economy.

The uncertainty that will likely unfold in the major EU countries and especially the eurozone will add to the headwinds for a recovery in India’s exports. The challenges India now faces will be two-fold: the direct impact of any slowdown in eurozone and the policy response that may be unleashed in China, Japan and other countries to counter their own economic slowdown, both domestic as well as external. The EU is China’s largest export destination after all, and China’s currency, the renminbi, already faces depreciation pressures from capital outflows. A move by the Chinese authorities to allow their currency to depreciate further will continue to hurt India’s domestic industry unless reciprocated via a weaker rupee.

Highlighting the economical risk factor due to Brexit, the Financial Stability Development Council (FSDC) meeting convened on July 5 discussed the nation’s preparedness to guard against global financial threat.

India will not lower its preparedness in dealing with external economic vulnerabilities, including those arising from the recent British vote to exit the European Union, the Financial Stability Development Council (FSDC) chaired by Finance Minister Arun Jaitley said on Tuesday.

The FSDC convened here for its 15th meeting since inception in December 2010 to discuss India’s macro-economic situation, as well as financial developments globally.

Its members include heads of financial sector regulators — the Reserve Bank of India, Securities and Exchange Board of India, Pension Fund Regulatory Development Authority, Insurance Regulatory Development Authority and commodity futures markets regulator Forward Markets Commission.

Among the subjects discussed at the FSDC meeting were the rising bad loans of state-run banks.

In this connection, gross non-performing assets (GNPAs), or bad loans, of commercial banks may rise to 8.5 per cent of total assets by March 2017, from 7.6 percent in March 2016, the RBI said last week based on “stress tests” it has conducted.

“Risks to India’s banking sector have increased since the publication of the last Financial Stability Report (FSR) in December 2015, mainly on account of a further deterioration in asset quality and low profitability,” RBI said in its latest FSR 2016.

“The gross non-performing advances rose sharply to 7.6 per cent of gross advances in March 2016 from 5.1 per cent in September 2015, largely reflecting re-classification of restructured advances to NPAs following an asset quality review (AQR).

“If the macro situation deteriorates in the future, the GNPA ratio may increase further to 9.3 per cent by March 2017,” the report said.

Banks are currently focusing on cleaning their balance sheets following the AQR that showed up around $35 billion of new bad loans since September, pushing gross bad loans to 7.6 per cent in March from 5.1 per cent in September 2015.

Overall stressed assets – consisting of bad loans as well as restructured assets – rose to 11.5 per cent in March from 11.3 percent six months earlier.

“The stress in the banking sector, which mirrors the stress in the corporate sector, has to be dealt with in order to revive credit growth,” RBI Governor Raghuram Rajan, who had ordered the banks’ AQR last year, wrote in the report.