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The government's bank capitalisation programme is positive for the economy, will lower the drag on bank credit growth and will be supportive for the rupee in the medium term, says a Goldman Sachs report.
According to the global financial services major, the banking sector recapitalisation is aimed at significantly reducing the drag on PSU banks on credit growth and will also boost investment and GDP growth.
The government yesterday unveiled a Rs 2.11-lakh crore two-year road map to strengthen NPA-hit public sector banks, which includes re-capitalisation bonds, budgetary support, and equity dilution.
"Using the leverage targeting nature of Indian banks, we estimated that every incremental Rs 100 billion of bank capital infusion by the government has the potential to increase credit and GDP growth by 1 percentage point and 0.5 percentage point, respectively," Goldman Sachs said in a research note.
The capital infusion of PSBs entails mobilisation of capital, with maximum allocation in the current year, to the tune of about Rs 2,11,000 crore over the next two years, through budgetary provisions of Rs 18,139 crore, and recapitalisation bonds to the tune of Rs 1.35 lakh crore.
"Given the sheer magnitude of this recap package and the significant implied easing in credit conditions, as credit and investment growth rebound, we would expect a re-rating of growth expectations in India in coming quarters," the report said.
Moreover, a substantial improvement in growth outlook is likely to be positive for equities and supportive of the rupee in the medium term.
On the fiscal position, the report said "the near-term risks are clearly skewed towards a deterioration in the fiscal position, medium-term fiscal fundamentals could actually improve".
According to the report, the key downside risks include any delay in actual implementation of recapitalising banks or other banking sector reforms that the government intends to announce proving less effective.