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First Published: Mar 24 2023 | 1:31 PM IS
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On the 23rd local time, the Swiss National Bank announced an interest rate hike of 50 basis points to 1.5% in response to rising inflationary pressures. In addition, Swiss National Bank President Thomas Jordan said on the same day that the next few weeks will be critical to UBS’s successful acquisition of Credit Suisse.
SNB raises interest rates by 50 basis points, and the next few weeks will be crucial to UBS’s successful bid for Credit Suisse
On the 23rd local time, the Swiss National Bank announced an interest rate hike of 50 basis points to 1.5% in response to rising inflationary pressures. In addition, Swiss National Bank President Thomas Jordan said on the same day that the next few weeks will be critical to UBS’s successful acquisition of Credit Suisse.
Market participants and analysts broadly expect a rate hike of 25 basis points (bps) on April 6, when the country’s monetary policy committee (MPC) ends its three-day meet.
The MPC has so far increased the policy repo rate by 250 bps since May in its fight once morest stubborn inflation, which came in at 6.44% in February, and has been above the higher end of the central bank’s target range of 2%-6% for a large part of the fiscal year.
“While we are sympathetic to the view that a rate hike might be needed to nudge real policy rates firmly into neutral territory, we think risk-management considerations call for a pause in rate hikes,” A. Prasanna, head of research at the primary dealership wrote.
Earlier this week, the U.S. Federal Reserve raised rates by 25 basis points (bps), with policymakers saying they believed bringing down inflation may require only one more rate hike this year.
The hike was smaller than the 50 bps rise markets had expected from the Fed before the banking turmoil in the U.S. and Europe. The Fed has now raised interest rates by a total 475 bps since March last year.
“Should the developments in U.S. worsen simultaneously with a rate hike by the MPC then the RBI and MPC will not be able to reverse course quickly and financial conditions might tighten far more than intended,” Prasanna said.There is “no need” for a significant upward revision to the RBI’s inflation estimate of 5.3% for 2023/24 announced in the February policy, he added.
The RBI would always have the option of raising rates in its June policy should the banking turmoil in U.S. prove short-lived and domestic inflation continues to rise, Prasanna said.
The MPC is likely to retain its stance of ‘withdrawal of accommodation’ in April even as it pauses rate action, he added.
The finance minister will also assess the performance of public sector banks (PSBs) as FY23 draws to a close, besides their capital requirements, if any, said a person with knowledge of the matter.
Though experts have ruled out any possible spillover impact on domestic banks given their strong balance sheets, the government wants to know from the lenders whether any policy intervention is required. “A review will be undertaken likely on Saturday,” said the person cited above. The government has already been in touch with financial sector regulators. Any local impact has been ruled out with banks’ key parameters remaining robust, the person said. The government wants to make a deep-dive assessment to take pre-emptive steps if needed, the person said.
The finance ministry has already asked all state-run banks to draw up a strategic roadmap for three years starting FY24. The government is also likely to approve the next generation of reforms in public sector banks under the Ease 6.0 programme in the first week of April.
The collapse of two regional banks in the US – Silicon Valley Bank and Signature Bank – and the forced merger of Credit Suisse Group AG with rival UBS Group AG have fanned panic over a domino effect on the global banking sector.
Cautious approach taken
The rapid rise in interest rates in the US and Europe has imposed large mark-to-market losses on banks holding long-maturity debt. Worried depositors pulling out funds, as happened in the case of Silicon Valley Bank, might lead to more failures.The US administration is pushing to save First Republic Bank, which has lost almost 40% of its deposits.
Reserve Bank of India governor Shaktikanta Das has said that the Indian banking system continues to be stable and resilient but cautioned banks once morest any excessive asset-liability mismatch.
“We’ve strengthened our engagement with the senior management and boards of banks. The focus is more on identifying the root cause of vulnerabilities, rather than dealing with the symptoms alone,” he said in a speech last week.
The offsite supervision of banks has also become more intense and frequent, he said.
The gross non-performing assets (NPAs) of all scheduled commercial banks dropped to 5.8% of gross advances at the end of March 2022 from 11.2% at the end of March 2018.
In a reply to a question in Parliament on Monday, the government pointed out that all public sector banks were profitable. Aggregate profit was Rs 66,543 crore in FY22 and has risen to Rs 70,167 crore in the first nine months of the current financial year.
The capital adequacy ratio of public sector banks improved significantly to 14.5% in December 2022 from 11.5% in March 2015. Also, Indian lenders have passed the central bank’s stress tests.
