Banks

RBS share drop accelerates on stress test flop

Stressed. Shares in Royal Bank of Scotland have accelerated their losses this morning, falling over 4.5 per cent after the state-backed lender came in bottom of the heap in the Bank of England’s latest stress tests. RBS failed the toughest ever stress tests carried out by the BoE, with results this morning showing the lender’s […]

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Capital Markets, Financial

BGC Partners eyes new platform to trade US Treasuries

BGC Partners plans to launch a new platform to trade US Treasuries early next year, in a bid to return to a market in the middle of evolution, according to people familiar with the plans.  The company, spun out of Howard Lutnick’s Cantor Fitzgerald in 2004, sold eSpeed, the second-largest interdealer platform for trading Treasuries, […]

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Financial

Sales in Rocket Internet’s portfolio companies rise 30%

Revenues at Rocket Internet rose strongly at its portfolio companies in the first nine months of the year as the German tech group said it was making strides on the “path towards profitability”. Sales at its main companies increased 30.6 per cent to €1.58bn while losses narrowed. Rocket said the adjusted margin for earnings before […]

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Currencies

Renminbi strengthens further despite gains by dollar

The renminbi on track for a fourth day of firming against the dollar on Wednesday after China’s central bank once again pushed the currency’s trading band (marginally) stronger. The onshore exchange rate (CNY) for the reniminbi was 0.28 per cent stronger at Rmb6.8855 in afternoon trade, bringing it 0.53 per cent firmer since it last […]

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Currencies

Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

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Categorized | Banks

Indian lenders forced to deposit cash deluge at central bank


Posted on November 27, 2016

Indian banks will have to deposit as cash all the extra money they have been given as a result of demonetisation with the Reserve Bank of India, the central bank announced this weekend.

The RBI made its sudden move after the country’s banks, flush with cash, went on a bond-buying spree, bringing down interest rates and triggering fears of both inflation and even a shortage of bonds.

The central bank said on Saturday evening it was putting in place the temporary restrictions on bond buying to tackle “large excess liquidity in the system”.

Since Narendra Modi, India’s prime minister, announced the withdrawal of 86 per cent of the country’s banknotes on November 8, Indians have rushed to their banks to deposit the old notes. In that time, around 6tn rupees have been put into the banks. 

In response, banks have bought up around 4.3tn rupees’ worth of government bonds with the extra money, causing prices to jump and the yield on a 10-year bond yield fall more than 50 basis points to its lowest in more than seven years. Banks have subsequently cut the interest rates they offer to their customers.

Experts said the move suggested the RBI is more worried about the chances of falling interest rates sparking inflation than the recent drop in economic activity causing long-term stagnation. Some said it suggested the RBI was less likely to cut the base rate when it next makes a decision next month.

Shaktie Shukla, founder of Kaithora Capital, told Reuters: “The liquidity sweep will definitely halt the down move in (bond) yields. It will also temper the euphoria pre-RBI policy [decision].”

The decision in the latest in a string of sudden policy changes since demonetisation was announced earlier this month.

Mr Modi had told Indians they would be able to exchange their old notes until December 31, but last week he reversed direction, immediately stopping the swapping of the now invalid currency.

Indians can still deposit the old cash, though reports in Indian newspapers over the weekend suggested the government was considering a minimum 50 per cent tax on any deposits where the customer cannot explain where the money came from.

If the customer does not declare the cash voluntarily, government officials added, a 90 per cent tax could be imposed.

Kunal Kundu, chief India economist at Société Générale, said however: “I think the banks are reacting way to soon to the accumulation of cheap deposits by cutting the various savings rate drastically. Generally the banks tend cut savings rate faster than lending rates. This will prove to be disastrous for the savers, especially the old and the retired.”

He added: “We would continue to expect a rate cut in December despite this move.”

Sonal Varma, India economist at Nomura, said: “This does not have any direct implication on rate cut chances. Although it would suggest that talks of aggressive easing by the RBI are probably unwarranted, as it does not seem to be comfortable with a sharp fall in overnight rates.”