Most event risks this year have turned in INR’s favour so far, starting from the budget and RBI policy to US Fed, Trump Presidency, French elections and finally oil prices (down 15% CYTD). USD/INR is now 5% below the previous peak in Feb 2016, and at 64.2 presently it is in line with the average for 2015.
In all fairness, strengthening of the INR (& FX reserve build up over this period) not only reflects favorable sentiment but also improved competitiveness (affects valuation). To a large extent, current INR appreciation also reflects terms-of-trade improvement brought about by a fall in international commodity prices; whether this improvement in the external balance is cyclical or structural remains to be seen.
As we know, sentiment can always veer prices off their fundamentals. For the INR, either fundamentals need to catch up or prices have to correct.
Speaking of fundamentals, the new ordinance which intends to bring speedy resolution to bank NPAs worth ~INR 10trn could be just the medicine that the doctor ordered. The law gives RBI the authority to direct banks to initiate insolvency against NPA accounts; thereby a third party takes politically difficult decisions.
Though details were not known yet at the time of writing, press reports suggest that each stressed asset would be referred to an oversight committee. And, liquidation of the underlying asset, particularly in steel, cement and power, could involve take over by PSUs. Banks obviously cannot avoid a hair-cut on these assets and recapitalization of PSU banks on the back of this exercise would come with conditions attached. The real fly in the ointment here, is the yet to determined value of the underlying asset on these loans!
Watch out for: News on GST rates around the weekend, though the final decision is likely on 18 & 19 May. A new IIP series with 2011- 12 base (9 May) and April CPI (12 May) and Mar Qtr GDP (31 May).
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