Readings: High yield spreads, Rupee trend, Forex derivative NPAs
The TED Spread remains above 4.5. Not many signs of relaxation in credit markets.
- Morgan Stanley: Heightened Alert on Many AXJ Currencies
. . . the adjustment of hedging strategies by local economic agents has been the single-most powerful driver behind the recent weakness in KRW, INR, BRL, and MXN. For countries that have experienced persistent currency strength in recent years, it is likely that the exporters are over-hedged (i.e., bought the local currency at the earliest opportunity for both the carry and the expectation that it will strengthen over time) and importers are under-hedged (i.e., sold the local currency at the latest opportunity).
The USD/INR’s price action is starting to accelerate, in our view. Indeed, we believe the risk is that the INR could trace out a similar price path to that of USD/KRW: both currencies share similar negative fundamentals, namely a negative macro-dynamic and rising banking concerns.
On top of this, India also faces fiscal risks in the form of: 1) the lack of fiscal flexibility to cushion the economic downturn; and 2) a potential credit downgrade, leading to 3) portfolio-rebalancing outflows. Moreover, we are also concerned about the macro deterioration in the South Asia region (especially in Pakistan), which is also likely to add to the poor sentiment for the INR.
- Economic Times: RBI cracks whip on fear mongers
RBI has told banks that overdue receivables from corporate clients on account of mark-to-market (MTM) value of a derivative contract will be treated as a non-performing asset, if these remain unpaid for 90 days or more. This would mean that all other funded facilities granted to the client will also be classified as NPA, following the principle of borrower-wise classification as per the existing asset classification norms.
. . . banks will now be allowed to take short positions in interest rate futures. This, in turn, will enable banks to hedge against interest-rate risks on their government securities portfolio. In its original guidelines on interest rate futures, the central bank had allowed only primary dealers to go short.
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