Rupee losses deepen on macro-economic worries

The rupee fell further on Friday to hit a new four-month low against the US dollar, but pulled back from session lows on suspected RBI intervention. The rupee weakened as domestic oil refiners continue to buy the greenback amid high crude oil prices. Rising trade and current account deficits, besides dwindling FII inflows are also weighing on the partially-convertible Indian currency. FII flows have turned weak over the past few weeks, as overseas investors have been put off by the Government's proposed new regulations on capital gains and Vodafone-like tax disputes. The rupee ended at 53.4750 per dollar after being as low as 53.9225 and as high as 52.4350. It had opened at 52.6850 versus the previous close of 52.4150.

The rupee dropped below 53 this week for the first time since January 5 after government data showed that exports fell in March - first drop since Sept. 2009. According to certain media reports, the Bank of India'> Reserve Bank of India (RBI) intervened in the currency market on Wednesday and Thursday to check the rupee's depreciation after it dropped under the 53 per dollar mark. The RBI steps in in the currency market to prevent sharp volatility and has a policy of not commenting on rupee movements. This was the ninth such RBI action in 2012, reports said. The rupee - Asia's worst performing currency in 2011 - hit a record-low of 54.30 against the US dollar in mid-December. The Indian currency then recovered to 48.67 to the dollar in February before turning weaker again on a whole host of domestic problems.

The rupee has been under pressure lately amid concerns that foreign capital inflows will moderate given the slowdown in the Indian economy and worsening situation on the twin deficits - Budget and External account. Last week, Standard & Poor's cut the outlook on India's ratings, citing the downturn in the economy, deteriorating external account, high budget deficit and policy impasse. But, Tom Byrne, a senior vice president of rating agency Moody's Investors Service, said this week that India has some leeway to get reforms back on track with its long-term growth prospects firm.

"There is no imminent funding crisis because of policy slippages," Byrne told reporters at the Asian Development Bank's (ADB) annual meeting in Manila. The euro was set for the biggest weekly decline in a month amid concern that possible changes in leadership in France and Greece will derail the region’s austerity efforts. France and Greece are both scheduled to hold elections on May 6. The 17-nation currency was within sniffing distance of a two-year low versus the British pound before a report that may confirm that the euro region’s output of services and manufacturing shrank for a third month. The Dollar Index was poised for a weekly gain before US jobs data forecast to show rise in employment last month.

Volatile global commodities hurting BoP, rupee: FM

Banks fall as RBI issues Basel-III capital norms

Shares of banks came under pressure on Thursday after the Reserve Bank of India (RBI) announced tighter capital norms for domestic lenders for the implementation of Basel III international standards. The Basel III norms were conceived after the 2008 financial crisis to strengthen the lenders’ capital base and improve their ability to withstand shocks. Announcing to the guidelines on Wednesday, the RBI said that capital needs for the implementation of Basel III guidelines may be lower during the initial periods and higher during the later years. "While undertaking the capital planning exercise, banks should keep this in view," RBI said. Banks in India may need at least US$30bn (~Rs 1.6 trillion) as capital over the next six years to comply with the norms, according to some analysts.

The norms come into effect in a phased manner starting January 1, 2013 and have to be implemented fully by March 31, 2018. There is not much change in the norms from the draft guidelines that were issued by the RBI in December 2011. The key capital adequacy parameter has been stipulated at 9% in the guidelines posted on the RBI website, higher than the international norm of 8%, and unchanged from what the regulator requires in India currently. Both public sector banks as well as private sector banks will have to come to the market to raise equity capital. The Government will need to infuse capital in state-owned banks in line with its holdings in these lenders. For the fiscal year ending March 2013, banks will have to disclose capital ratios computed under Basel II and Basel III. Banks' returns on assets (RoA) will drop since they will now need additional capital for doing the same level of business, according to Credit Suisse. The transition to Basel III would likely result in a moderation in the return on equity of the banks by 200-300 basis points for PSU banks and around 100 basis points for private banks, the Swiss investment bank said in its report.

RBI announces guidelines for Basel III capital norms

Indian banks may need significant capital under Basel III: Fitch

Indian banks may need to raise up to US$50bn of additional equity under the Basel III capital regulations announced by the Reserve Bank of India, on top of retained earnings. Most of the requirement is back-ended - with over 75% needed to be added between FY16 (financial year ended March 2016) and FY18. The additional equity reflects growth capital as well as a buffer above the regulatory minimum. The guidelines released on 2 May 2012 do not yet provide for a counter-cyclical capital buffer or additional capital for systemically important banks. Fitch's calculations add half a percentage point of additional common equity to the regulatory minimum, which banks may like to maintain to avoid breaching the conservation buffer - with attendant restrictions on dividends and other payouts. The immediate impact of the Basel III capital regime is benign, with the common equity Tier 1 ratio for many Indian banks already close to 8% or higher. However, the shortfall mounts up between FY16 and FY18, mostly for government banks - with loan growth outpacing internal capital generation, and the minimum capital ratios stepping up. The largest requirement is by State Bank of India and its associate banks, reflecting their significant share in the banking system; followed by the mid-sized and small government banks with weaker internal capital generation. The large private banks fare better, due to their higher capital ratios and stronger profitability.

About half of the US$40bn needed by government banks is likely to be injected by the government based on its stated intent of maintaining majority shareholding. Government's support has been boosted since 2008, and it has budgeted for a USD2.5bn injection of equity in FY13. The requirement will however accelerate in FY16 - and needs to be planned. Similarly, the remaining equity of up to US$20bn that may need to be raised from the markets represents a significant addition for banks. To put this in perspective, Indian banks raised only about USD2.5bn of common equity from the markets in FY11 and FY12 combined. Unless planned, government banks may face the risk of a sudden shortfall in capital during FY16, requiring additional support by the sovereign and putting further pressure on government finances. The need for fresh capital comes at a time when the performance of Indian banks is clearly being affected by the economic slowdown, together with asset-quality pressures from concentrated exposure to infrastructure companies and weak state-owned entities. The Viability Ratings (the standalone financial ratings) of some government banks may be downgraded unless these pressures ease, though their IDRs should remain unaffected at the Support Rating Floor - due to expectations of continued support from government.

ICRA Note on Basel III Guidelines

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