If crude prices go above $70-80, all the math goes out of the window: R Sreesankar, Prabhudas Lilladher
ET Now|
Jan 17, 2018, 02.36 PM IST
Talking to ET Now,
R Sreesankar
, Head-Institutional Equities,
Prabhudas Lilladher
, says this year, with an election budget, the government could throw caution to the winds as far as fiscal consolidation is concerned.
Edited excerpts:
What could be the impact of this spike on banks in the treasury portfolio because private banks have had it easy. There has been no credit growth but the profits have looked good because of the huge impact of falling bond yields?
Let us put this across two separate thought processes here. If you look at the credit growth for better part of the last nine months, you probably saw the credit growth of around 6%, closer to 7%.
Only towards December, it spiked to around 10.6%. Now, it has actually come in towards the month of December. It happened because this is an year-on-year phenomenon. You had your demonetisation in November of 2016 so that impact carried over to better part of the year and the higher base effect and as a result of it you probably saw a credit growth being very low in Q3 and Q4 of last year and that the lower base is probably catching up right now so you saw a credit growth that is number one. Now from a year on year perspective in the deposit side also, a lot of banks are have access to SLR and so any kind of incremental sale issues which keeps coming in the yields are bound to move up as the price is about to fall at that point of time.
Third is on the fiscal part they will come and say that you may reduce your borrowing to Rs 20000 crore but as the crude prices keep increasing, we have no clue from now to March 31st where the crude price is going. If the crude price increases, then you are going to see an even bigger pressure on the current account deficit on the fiscal side.
This year, it is an election budget which is coming out and I anticipate the government is probably going to be throwing caution to the winds as far as fiscal consolidation is concerned.
It is going to be more loose from that point of view because of agriculture related and the farmer related sops or whichever way benefits probably will be there in that budget. This is going to be something the market is anticipating. That is one side.
The second side is what is it going to do with the banks and NBFCs. To a great extent, PSU banks would have got as access to SLR. They are the guys who are going to get it, not the private banks. Private banks mostly do not have access SLR in fact all of them have CD ratios in terms of 80% etc. So, here is a situation where this is going to go and hit the access SLR, depending upon the duration. I have no idea about the duration of the investment portfolio of many of these banks. The higher the duration, bigger the hit that probably these guys would have taken right now. So, there is going to be a bit of an issue for the public sector banks.
Have you worked out in some way or the other the impact that oil prices may have in terms of how businesses handled by oil market companies on domestic turf post deregulation? So far it was easy for the government to say deregulate prices but at a time like this when we are talking about the government marching down towards a very important election season with inflation picking up on the back of oil prices, what is the scenario? Will the OMCs be given the mandate to manage oil prices and pass it on to consumers or would that be in a way orchestrated?
I wish I had an easy answer to that. I think the bigger point is taxation is one of the factors which has a larger role to play in the current oil prices. If the government thinks in terms of keeping the retail prices where they are, then they will have to let go some of the taxes that they collect. The moment they let go some of the taxes that they collect, fiscal deficit is going to have a problem. If the revenue does not kick in, where do you manage that revenue gap from. So that is a question which is still not answered, number one.
The second point is I have no idea at this stage what the government or when people thought about deregulating the oil price. Obviously, they would have done some calculations in terms of probable oil prices in a year from now.
The moment it goes above $70-80, all that math goes out of the window. So your calculations in terms of how much will be the retail price in the current context of the excise duty/customs/ tax collections and what will be the end retail price goes out of the window. That math will have to be reworked. I have no clue at this stage.
So now I will only have one example to show. If I am not mistaken, it was way back in 2004 when we had the APM price decontrol and when the oil prices started rising after the crude moved above $46. If I am not mistaken, then the APM came back yet again because you could not keep increasing the prices beyond a certain stage which the government then thought probably the market cannot take. That is something which we need to figure out. I do not have any clue beyond that what will happen.
Edited excerpts:
What could be the impact of this spike on banks in the treasury portfolio because private banks have had it easy. There has been no credit growth but the profits have looked good because of the huge impact of falling bond yields?
Let us put this across two separate thought processes here. If you look at the credit growth for better part of the last nine months, you probably saw the credit growth of around 6%, closer to 7%.
Only towards December, it spiked to around 10.6%. Now, it has actually come in towards the month of December. It happened because this is an year-on-year phenomenon. You had your demonetisation in November of 2016 so that impact carried over to better part of the year and the higher base effect and as a result of it you probably saw a credit growth being very low in Q3 and Q4 of last year and that the lower base is probably catching up right now so you saw a credit growth that is number one. Now from a year on year perspective in the deposit side also, a lot of banks are have access to SLR and so any kind of incremental sale issues which keeps coming in the yields are bound to move up as the price is about to fall at that point of time.
Third is on the fiscal part they will come and say that you may reduce your borrowing to Rs 20000 crore but as the crude prices keep increasing, we have no clue from now to March 31st where the crude price is going. If the crude price increases, then you are going to see an even bigger pressure on the current account deficit on the fiscal side.
This year, it is an election budget which is coming out and I anticipate the government is probably going to be throwing caution to the winds as far as fiscal consolidation is concerned.
It is going to be more loose from that point of view because of agriculture related and the farmer related sops or whichever way benefits probably will be there in that budget. This is going to be something the market is anticipating. That is one side.
The second side is what is it going to do with the banks and NBFCs. To a great extent, PSU banks would have got as access to SLR. They are the guys who are going to get it, not the private banks. Private banks mostly do not have access SLR in fact all of them have CD ratios in terms of 80% etc. So, here is a situation where this is going to go and hit the access SLR, depending upon the duration. I have no idea about the duration of the investment portfolio of many of these banks. The higher the duration, bigger the hit that probably these guys would have taken right now. So, there is going to be a bit of an issue for the public sector banks.
Have you worked out in some way or the other the impact that oil prices may have in terms of how businesses handled by oil market companies on domestic turf post deregulation? So far it was easy for the government to say deregulate prices but at a time like this when we are talking about the government marching down towards a very important election season with inflation picking up on the back of oil prices, what is the scenario? Will the OMCs be given the mandate to manage oil prices and pass it on to consumers or would that be in a way orchestrated?
I wish I had an easy answer to that. I think the bigger point is taxation is one of the factors which has a larger role to play in the current oil prices. If the government thinks in terms of keeping the retail prices where they are, then they will have to let go some of the taxes that they collect. The moment they let go some of the taxes that they collect, fiscal deficit is going to have a problem. If the revenue does not kick in, where do you manage that revenue gap from. So that is a question which is still not answered, number one.
The second point is I have no idea at this stage what the government or when people thought about deregulating the oil price. Obviously, they would have done some calculations in terms of probable oil prices in a year from now.
The moment it goes above $70-80, all that math goes out of the window. So your calculations in terms of how much will be the retail price in the current context of the excise duty/customs/ tax collections and what will be the end retail price goes out of the window. That math will have to be reworked. I have no clue at this stage.
So now I will only have one example to show. If I am not mistaken, it was way back in 2004 when we had the APM price decontrol and when the oil prices started rising after the crude moved above $46. If I am not mistaken, then the APM came back yet again because you could not keep increasing the prices beyond a certain stage which the government then thought probably the market cannot take. That is something which we need to figure out. I do not have any clue beyond that what will happen.
