Here’s how US banking crisis will impact India; key things to know
3 min read 17 Mar 2023, 11:12 AM ISTThe US banking crisis impacts India. Here are key things to know.
PremiumMany people are concerned about the impact of the US banking crisis on India. The Silicon Valley Bank (SVB) collapse, as well as the fall of Signature Bank and Credit Suisse, have worried investors. Here are key things to know:
SVB and Signature Bank collapse
The collapse of SVB, the 16th largest bank in the US, due to poor financial management, and Signature Bank's decline, followed by a sharp decline in Credit Suisse's share price, has raised concerns about the safety of depositors' wealth globally. The shareholders of the bank have lost all value as SVB's equity has been wiped out, and the ongoing banking crisis has shaken the confidence of investors.
Global impact and Indian market
The failure of SVB and Signature Bank may have a global impact, causing panic and discomfort in the market. This has caused a sell-off of banking stocks, and in India, it has led to a decline in the National Stock Exchange's market capitalisation on March 17, indicating that investors are reducing their positions due to the US banking crisis.
Also Read: Credit Suisse is more relevant to India's financial system than SVB
The banking indices are facing selling pressure, which could lead to the depreciation of the Indian rupee and a tighter monetary policy by the Reserve Bank of India (RBI). The flight of money due to fear may lead to a reduction in capital inflow, which may have negative effects on the Indian economy.
Safety of depositors' wealth in India
While the failure of SVB and Signature Bank raises questions about the safety of depositors' wealth globally, such failures are unlikely in the Indian system. The RBI has classified State Bank of India, ICICI Bank, and HDFC Bank as Domestic Systemically Important Banks (D-SIBs), requiring them to earmark additional capital and provisions to safeguard their operations. This classification ensures that these banks are better equipped to handle any potential risks and are less likely to fail.
Impact on tech startups and IT firms
Financial experts believe that the impact of the banking collapse would be limited in India, primarily affecting tech start-ups and IT firms. These companies often rely on foreign investors and may face challenges in raising capital due to the banking crisis. However, the impact on other sectors of the Indian economy is expected to be minimal.
Contagious effects and emerging markets
While the impact of the banking collapse may be limited in India, the spread of the crisis globally could constrict capital flow in India and other emerging markets. This could potentially have a negative impact on the Indian economy, as well as on other economies that rely on capital inflows.
Impact on crude oil prices
The SVB episode has sparked fears of a financial crisis leading to a drop in crude oil prices. As India imports most of its oil requirements, a fall in crude oil rates is seen as a positive for India.
Also Read: Over $1 billion startup money exposed to SVB, here's what MoS IT is doing
While the decline in crude oil prices may have a short-term positive impact on the Indian economy, a prolonged drop in crude oil rates could have negative implications for the Indian economy, as it relies heavily on oil imports.
Impact on US Federal Reserve
The banking crisis could force the US Federal Reserve to end its rate hike cycle. While Goldman expects the Fed to keep rates on hold at its March 21-22 meeting, Nomura has gone a step further in predicting that Powell may cut the benchmark interest rate by 25 basis points and stop reducing the size of its balance sheet. This could have significant implications for the global economy, including India.
