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India Doesn't Face Financial Stability Issue Like The West, Says Axis Bank's Neeraj Gambhir

There is a difference between what we witnessed in the 2008 financial crisis versus now, Gambhir says.

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The 2008 financial crisis was more about overleveraged financial institutions creating asset-side problems, while this time the rapid rise in interest rates is causing losses on the asset side of the balance sheet, according to Axis Bank's Neeraj Gambhir. As interest rates rise, the bonds held in the portfolio will suffer mark-to-market losses, he said.

"This crisis is not about the credit quality, but about the interest rate risk lying on the balance sheet of the financial institutions," the Group Executive—Treasury, Markets, and Wholesale Banking Products at Axis Bank told BQ Prime.

There is a difference between what we witnessed in the 2008 financial crisis versus now.
Neeraj Gambhir

There is a spread of contagion within the community banks, which are smaller banks in the U.S. due to the Silicon Valley Bank collapse, Gambhir said. There is ongoing stress in the sector, he said.

However, the problem in Europe is much less severe; it is restricted to one particular institution, Credit Suisse, he said. "Regulators in Switzerland decided to call it a close on the risk of contagion", Gambhir said.

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Indian Banks Are Financially Stable 

Anyone with bonds in their portfolios has been impacted by mark-to-market losses due to the rise in interest rates, according to Gambhir. On the other hand, Indian banks' exposure to bonds is limited to some extent because a large part of their portfolios consists of loans, he said.

"The impacts on bonds are there for Indian banks, but they are not as great as in the U.S.," he said. "There have been mark-to-market losses, but they are not as high as those faced by some of the U.S.," Gambhir said. "India does not have the financial stability issue that the west is facing now."

2008 Crisis Vs 2023 Crisis

During the 2008 financial crisis, the regulators took some time to understand the dynamics before they acted on them, but this time there was a rapid response from them, and this time the regulators (authorities) did not allow the problems to stay for long, Gambhir said.

There was a quick response this time, in terms of providing liquidity to the financial institutions.
Neeraj Gambhir

U.S Federal Reserve

The markets have substantially repriced the amounts of hikes that they were expecting from the Federal Reserve, Gambhir said. But now, he said, the Fed doesn't need to tighten as much as it was supposed to at first.

"We still have a high probability of the Fed going ahead with a 25 basis point hike; we have seen the ECB do it," Gambhir said.

U.S. Federal Reserve raised the key rate by 25 basis points on Wednesday.

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Reserve Bank Of India MPC Meeting

The Reserve Bank of India, at the upcoming MPC meeting in April, will maintain the inflation projection for FY24 inside the target band and maintain that the country is growing well and growth looks good for the next fiscal year, Gambhir said.

"There is a scope that MPC might continue with another 25 basis point hike in April," he said.

Watch the full conversation here: