Recent Developments in Financial Markets and emerging ...
Transcript of Recent Developments in Financial Markets and emerging ...
Recent Developments in Financial Markets and emerging scenario-
Implications for Treasury Managers
CAFRAL , Hotel Taj Mahal
Mumbai
September 5, 2013
Structure of the presentation
The markets today
The macroeconomic backdrop
Global scenario
Global regulatory changes affecting forex markets Challenges for Risk Management
Current concerns and measures taken
Mitigating factors
Implications for Treasury Managers
Markets Today
• For the last four months, the focus is on Forex markets
• Heightened volatility with sharp depreciation
• The other markets - G-Sec, money and credit - have also been turbulent – but mainly in response to developments in the Forex market
• Global developments the trigger, impact magnified due to our macroeconomic vulnerability
The Rupee against the $....
45
50
55
60
65
70
USDINR
55.64 on May 24th
….but we are not alone, many EM currencies have weakened (from May 1, 2013 till Aug 28, 2013)
Global scenario
• Taper Trouble : Impending US exit from QE; from accommodative monetary policy too?
• US Debt Limit problem
• Flight from emerging market assets
• Geopolitical Issues
• US & European Recovery : Hardening commodity prices, particularly oil ?
US 10 year….. Daily QUS10YT=RR 12/31/2012 - 8/30/2013 (GMT)
Line, QUS10YT=RR, Bid Yield(Last)
8/30/2013, 2.7890
Yield
.1234
1.7
1.8
1.9
2
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.82.7890
02 16 01 19 01 18 01 16 01 16 03 17 01 16 01 16Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13
The US yields have moved sharply after Fed comments regarding ‘taper’
Yield curve steep…….. Q0#USBMK= 1M - 30Y
YC, Q0#USBMK=, Native Bid, Realtime
30Y, 3.716
Yield
0
0.5
1
1.5
2
2.5
3
3.53.716
1M 6M 1Y 3Y 5Y 7Y 10Y 30Y
US sovereign yield curve has steepened even as the front end rates remain anchored
Crude has been stronger this year…. (WTI Crude futures)
Hardening crude prices inflate our import bill leading to further pressure on the Rupee
Yield Movement in major EM Govt 10 year bond versus US
0
2
4
6
8
10
12
14
Yield movement in major EM govt 10 year bond versus US
% India
Brazil
Indonesia
USA
Malaysia
Yields have risen in all Emerging markets including India
Macroeconomic vulnerability
– Growth had decelerated to a four year low of 4.4 per cent in Q1, 2013 (previous was at 4.8 per cent)
– During 12-13, Inflation has been stubborn. Persisting inflation was eroding the competitive efficiency of the economy and lowering the financial savings of households with its adverse consequences for the CAD, investment and long-term growth.
– High fiscal deficit
– Underperformance of exports
– CAD at a historic peak of 4.8 per cent of GDP on top of an already high level of 4.2 per cent in the previous year
Macroeconomic Vulnerability - Inflation
0.00
2.00
4.00
6.00
8.00
10.00
12.00
CPI
WPI
CPI and WPI since April 12 in
Price levels have been moderating but remain elevated
Macroeconomic Vulnerability - Growth Quarterly QINGDPQ=ECI 12/31/2010 - 9/30/2013 (UTC)
Line, QINGDPQ=ECI, Economic Indicator(Last), (S1, S2)
6/30/2013, 4.400, N/A, N/A
5
5.5
6
6.5
7
7.5
8
8.5
4.400
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2010 2011 2012 2013
Macroeconomic Vulnerability - CAD
-0.4
-1.2 -1
-1.3
-2.3
-2.8 -2.7
-4.2
-4.8
-6
-5
-4
-3
-2
-1
0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Current Account Deficit (%)
Macroeconomic vulnerability -Fiscal deficit
While the government finances remain a concern as of now the deficit is moderating
FII Net Investments in USD Million
(Source: Reuters)
-10000
-8000
-6000
-4000
-2000
0
2000
4000
6000
8000
10000
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13
NetEquity
NetDebt
Total
FII Net Investments in USD Million
USD mm
Month 2013
FIIs have sold Indian assets but mostly after Fed Reserve’s talk of ‘taper’
Consequence of Forex Market Developments
• Financing CAD
• Imports expensive – Impact on CAD
– Impact on growth
– Impact on Inflation
• Cost of servicing unhedged debt
• Erosion of foreign investor return
• Rundown of reserves
• Some impacts may accentuate the problem
What have we done so far……..
1. Banks are usually unaffected, unless they have proprietary positions
2. On December 15, 2011, Banks’ position limit reduced – intraday as well as overnight
3. Objective : Prevent banks from speculating, even at the cost of some illiquidity in the market
4. Some relaxation since effected
What we have done so far….
• Restriction on flexibility in hedging by corporates….. – Rebooking of cancelled contracts – Past performance basis
• Need and freedom to hedge in a volatile market well recognized, but freedom should not be used to game the system
• No restriction on hedging of a genuine exposure • Sub-accounts and PNs/ODIs only if mandated by
the account/instrument holder
What we have done so far……
• Restriction on Futures market
• No entry restriction in Futures market, no underlying exposure required
• Cash settled, no delivery obligation
• Conceived of in better times, is it justified today?
• Three exchanges, (fourth on the wings); more than 16,00,000 registered participants
What we have done so far……… • Restriction on Futures Market
– Position limit curtailed : is it effective, with three exchanges and thousands of users ? What about dummy users?
– Margin increased : Is it sufficient to have a deterrent effect, when rupee has been moving so sharply on a day?
– Banks’ proprietary position prohibited
What we have done so far……. • Non-Market measures : Gold
• Import of gold linked to export of jewellery
– Indian appetite for gold insatiable : high imports, need to restrain
• Alternatives to Gold : IIBs, Gold linked products that replicate returns on gold without gold imports
• Gold ETFs and Gold deposit schemes no answer
• Products based on Gold derivatives abroad ?
What we have done so far?
• Automatic Route for ODI capped at 100% of NW : Approval route open beyond that
• LRS capped at USD 75000
• Measures had been introduced at the height of unmanageable inflows
• Does modulating the measures constitute capital control?
What have we done so far…
• Monetary measures
– MSF rates raised
– Cap on LAF
• Standard measure to address a depreciating currency
• How long to take have effect?
• Channels for transmission?
Some concern : NDF and Rupee trading offshore
• The inevitability of international attention on Rupee recognised
• NDF market thriving; Rupee futures traded on three exchanges
• With capital account not fully convertible what are the implications?
• When rupee is stable, these markets do not pose any threat
• But in times like now, potential for speculative bets on Rupee
Some concern : NDF and Rupee trading offshore
• No concern if there is no arbitrage with onshore market
• What are the channels for arbitrage?
• Banks and corporates with presence in both markets ?
• Indian futures market?
• How to cope with it ? – Legal measures ?
– Stricter regime for derivative contracts in India?
Global regulatory changes affecting markets
• G-20 Pittsburgh Declaration, 2009 – Moving to Exchanges
– Moving to Central Clearing
– Trade repositories
– Higher capital for un-cleared trades
• Focus on Consumer protection
• Firewalls between commercial and Investment banking - Return of Glass - Steagal Regime?
• Volcker Rule under the Dodd-Frank Act of the USA (Section 619 of the Act), the Vickers Commission on Banking (ICB) in the UK and the High-level Expert Group (HLEG) on reforming the structure of the EU banking sector all aim to intensify banking regulation – Focus on Treasury Activities
Implications for Treasury Managers
Forex volatility and the Banks........ • Banks insulated from direct impact of exhange volatility : because of
position limit (thanks to RBI) • What about indirect risk because of clients’ forex exposure? • If clients have unhedged forex liability, what happens to the banks’
credit exposure to such clients? • Imperative for banks to assess vulnerability on this count
– Review of clients’ rish management framework – Sensitivity of clients liquidity and financial health to Rupee decline:
Scenario analysis? – Focus not only large borrowers or those with large forex exposure : even
small borrowers can be adversely affected and this can add up at bank’s level
• Banks have an advisory role : Corporates need to better manage currency mismatch between their FC payables and FC receivables
• What is the optimum hedging strategy for a customer? • Recourse to equity over debt ?
The Indian G Sec curve: A clear case of inversion
10 year g-sec
The rates portfolio....
• The G Sec curve has inverted, banks with less robust deposit base have been forced to access liquidity at adverse rates • Wholesale funding and associated risks • Remember the Savings and Loan crisis?
• G SEC curve has also moved upwards across the tenor.......MTM loss
• RBI has permitted banks relief on their SLR portfolios and the depreciation on the non-SLR portfolios may be spread over the rest of the year
• How long the banks would require regulatory forbearance - the HTM shield?
The rates portfolio....
• No HTM shield for Corporate debt : What about the risk management framework?
• Under proposed accounting framework, HTM to be a conscious decision based on intention and ability to hold an asset to maturity...with a tainting clause – Are we prepared?
• Funding risk and market risk on fixed income assets to be properly assessed, measured and managed
A crisis is a laboratory for ideas: Two thoughts
• Many corporates have foreign exchange exposures on both sides of balance sheet often almost matching : eg: an oil refiner, a diamond processor
• The net exposure is marginal • What is the optimum strategy? Mostly, swaps : to
bridge the time gap between receivables and payables
• Should we allow only swaps for the matched portion and forwards, etc., for only the net portion?
A crisis is a laboratory for ideas: Two thoughts
• We find co-existence of an underlying-based OTC and a free-for-all Currency futures market an anomaly
• Why not have only the currency futures market? • G-20 (Pittsburgh, 2009) also wants a move to the
exchanges • Anybody needing a hedge shall access the futures
market • There will be still be speculators and arbitrageurs in the
futures market • But there will be hedgers also – and will they not
outnumber the speculators and arbitrageurs ?
Final thoughts
• The need for better risk management for both banks and corporates cannot be overemphasised enough at present when both the external and internal conditions are challenging
• Internationalisation of Rupee : not perhaps the right time
• Banks and corporates should desist from gaming the system
Let me end on a positive note
• Comparison may be tempting but 2013 is not 1991…..
• Growth impulse strong, seems to have bottomed out…..
• Exports looking up, to be buoyed by a depreciated currency and recovery in the developed world…
• Reserves strong…… • Measures taken by GoI and RBI to take effect…. • Banks have role to play in containing panic……
Let us hope, with H G Wells, that
The crisis of today is the joke of tomorrow……
Thank You