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Indian Rupee Will Struggle Along With India's Troubled Banking Sector

Indian Rupee Will Struggle Along With India's Troubled Banking Sector

2019-10-22 03:00:00
David Cottle, Analyst
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Indian Rupee, Weak Banking Sector, Talking Points:

  • India’s Rupee has not risen very far from last year’s all-time lows against the Dollar
  • Even the prospect of lower US interest rates has not helped it much
  • The currency will remain hard to love while India’s banks languish

Join our analysts for live, interactive coverage of all major economic data at the DailyFX Webinars. We’d love to have you along.

The Indian Rupee remains relatively close to its all-time low against the US Dollar, despite the prognosis that US interest rates have further to fall.

US Dollar Vs Indian Rupee, Monthly Chart.

On one hand that looks a little strange. China is mired in a growth slowdown and trade conflict with the US. Its government has taken a more authoritarian turn. In such circumstances the investment opportunities offered by democratic India, Asia’s other titan, ought to loom large.

There are many reasons why they don’t, of course, but prominent among them now are the woes of India’s stricken bank sector. So crippling had rumors of bad loans and other credit difficulties become that the country’s central bank was obliged to try and steady the ship earlier this month. It said on October 1 that the banking system was ‘safe and stable’ and that there was no need for panic based on rumors.

Investors duly panicked anyway, sending Indian banks sharply lower. For, whatever the Reserve Bank of India may say, the sector is in a lot of trouble. The Economist recently estimated that about 10% of all bank loans in the country are duds, with fraud and lax lending standards going back more than a decade getting the blame.

Public Policy Hasn’t Helped So Far

2016’s abolition of large bank notes by the state saw cash flood into banks and mutual funds. They did what bankers do and lent this on, often unwisely. Now credit is growing at its slowest pace in twenty years. This starves legitimate businesses and honest individuals of desperately needed development cash, weighing on overall economic growth.

Investors are very used to hearing about the woes of Europe’s banks, but the sector’s problems in India are much less discussed in global media.

However, this will probably change unless the crisis in Indian banking can be firmly addressed, and there’s little sign of that at this point. A banking system so clearly in disrepair will remain a crushing weight for the Rupee to carry for a long time to come. Expect this story to move closer to the top of investors’ in-trays.

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--- Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!

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