The Economist - UK (2022-04-09)

68 Finance & economics TheEconomistApril9th 2022

much as $185bn, which would make it one

of the world’s largest banks, after JPMorgan

Chase, Bank of America and three Chinese

lenders—and  well  above  Citigroup,  hsbc

and  Standard  Chartered,  the  three  global

banks that once stood at the pinnacle of In­

dian private­sector finance.

As important as the scale of the deal is

what it says about the evolution of finance

in  India.  Both  institutions  are  among  the

most  successful  private­sector  financial

firms  in  a  country  where  state­owned

banks  still  loom  large  (local  lenders  were

nationalised by Indira Gandhi, then India’s

prime minister, in 1969). hdfc was found­

ed in 1977 to provide basic housing finance.

In the ensuing 45 years it has financed the

purchase of 9m homes.

As restrictions on private­sector enter­

prise  were  gradually  eased,  hdfc’s  chair­

man,  Deepak  Parekh,  adeptly  launched

other  financial  institutions.  Insurance

came  in  2000,  and  asset  management  in

1999.  But  none  was  as  important  as  hdfc
      Bank,  which  was  created  in  1994  when
      private banking licences began to be grant­
      ed. hdfckept a 26% stake in the new entity
      and  required  the  bank  to  work  through  it
      when providing mortgages. 
      For  years  there  were  advantages  in
      maintaining  separate  institutions.  Banks
      had  access  to  cheap  funding  through  de­
      posits,  but  paid  for  the  privilege  through
      onerous  capital  requirements  and  rules
      that  made  them  devote  40%  of  credit  to
      “priority”  areas,  such  as  farming.  Non­
      bank finance firms were easier to create—
      thousands  sprang  up—and  faced  less­
      stringent lending or capital requirements,
      but lacked cheap overnight deposits.
      It  proved  a  messy,  even  dangerous  de­
      velopment, as many went on a lending and
      borrowing binge. In 2018­19 several promi­
      nent non­banks, including il&fsand two
      housing­finance  firms,  collapsed.  There
      were  fears  of  more  failures  to  come,  and
      funding dried up for many finance compa­
      nies. That in turn led to a credit crunch. 
      Since  then,  regulatory  changes  have
      been quietly instituted, making life harder
      for the non­banks. The complex capital re­
      quirements  imposed  on  them  have  been
      raised,  for  instance,  to  bring  them  largely
      in line with banks. That has made the oper­
      ating  restraints  on  finance  companies
      somewhat  bank­like,  but  without  the
      benefits of cheap deposits. Jefferies, an in­
      vestment  bank,  estimates  hdfcpays  6%
      for  its  funding,  compared  with  3.7%  for
      hdfcBank.  The  spread  for  other  finance
      companies is probably wider. 
      With  the  merger,  that  distinction  will
      disappear,  providing  a  meaningful  cost
      saving  and  competitive  advantage.  Mean­
      while,  hdfc Bank,  which  has  a  sprawling
      network  of  6,500  branches,  ten  times  as
      many  as  its  housing­finance  cousin,  will
      be able to offer mortgages to its customers

directly—somethingthatmighthavedou­

bleditssizehaditbeenabletodosoall

along,saidSashidharJagdishan,thebank’s

chief executive, on April 4th. Investors

wereunsurprisinglygiddyattheprospect,

withthesharepricesofbothfirmsrising

sharply.ThemoodinMumbai’sstatelyTaj

Hotel,wherethemergerwasannounced,

wasequallyebullient,asthecity’sleading

dealmakersspeculatedaboutwhatother

changes might, once again, follow in

hdfc’s wake.n

Currencies

Notsosterling

S

terling wasonce theworld’s domi­

nantcurrency.AstheAmericandollar

tookitscrown,itbecamesecond­tierbut

remainedelite,andfordecadeswascon­

tent with itslot. Yetlately thepound’s

shine seems to have dulled again—so

muchso,saysKamalSharmaofBankof

America, that it has been “acting [like]

emerging­market(em) currencies”.

Itisnotthatthepoundhassuddenly

turnedintotheTurkishliraortheArgen­

tinepeso.It remainspartoftheg5 groupof

heavily traded currencies, alongside the

dollar,theeuro,theJapaneseyenandthe

Swissfranc.Yetithasproved morevulner­

abletocrisesthantheothers.

A“flashcrash”inOctober 2016 tookits

valuefrom$1.26to$1.14inlessthana mi­

nute.Ascovid­inducedpanicgrippedmar­

kets in March 2020, itdropped by12%

againstthedollarinthespaceofa fortnight

(theeurofellbyjust6%).WhenBritishpet­

rol pumps ran dry last September, it

plungedagainandtraders’expectationsof

itsfuture volatilitysoared.The Bank of

England’sdecisiontoraiseinterestrates

earlierthanmosthassinceheldit steadier,

butsomecommentatorsremainadamant

thatthepoundhasnotjustdecoupledfrom

thecurrenciesofotherdevelopedecono­

mies,butalsojoinedtheranksofemones.

Suchclaimsareusuallymadewiththe

speaker’s tongueplantedfirmly intheir

cheek.emcurrencies’delightfulattributes

include capital controls (the Chinese

yuan),hyperinflation(theArgentinepeso)

and“unorthodox”monetarypolicies(the

Turkish lira). Liquidity crunchesduring

marketroutscansubjectsterlingtoharsh

devaluations,explainingwhyit isnota ha­

venlikethedollarortheSwissfranc.Butin

normaltimes,callupa bank’sforeign­ex­

change(fx) tradingdeskaskingtosellhalf

a billionpoundsandtheywon’tstruggleto

doso. Thattheymightforanemcurrency

isthecategory’sdistinguishingfeature.

Infact,sterlingisnotablefortheoppo­

site:itplaysanoddlyoutsizeroleinfx

markets. Britainaccounts for3% ofthe

world’sgdp. Yetoverthepast 20 yearsits

currencyhasconsistentlybeeninvolvedin

overa tenthoffxtrades.

Sowhydotraderslikesterling,if it isso

brittle?Youmighttradea foreigncurrency

ifyouwanttobuygoodsorservicesfrom

thecountrythatissuesit.Oryoumightsell

somethinginexchangeforitandwantto

converttheproceedsbacktoyour curren­

cy.Neitherexplainssterling’spopularity:

in 2019 Britainaccountedfor3.8%ofglobal

goodsimportsand2.6%ofexports.Noris

itprominentincentral­bankholdings(it

makesuplessthan5%ofglobalreserves).

The dollar dominates global payments,

manygovernmentsborrowinitandsome

markets—commodities—arepricedinit.

Thepounddoesnoneofthesejobs.

Infactitisa meanstolessgrandaims:

speculationandcross­borderinvestment.

Peopletradesterlingtotakea puntonits

value,orbecausetheyarebuyingorselling

Britishassets.Inthisithasmoreincom­

mon with another rich­world currency.

Likesterling,theAustraliandollarisis­

suedbyanopen,developedeconomythat

reliesheavilyontrade. Puntersusebothto

betontrendsthatarebiggerthantheiris­

suers’ economic footprint: sterling is a

proxyforriskappetite;theAussiedollar

forcommodityprices.Andtheyloomlarg­

erinfxmarketsthaneithertheirecono­

mies’heftortradevolumeswarrant.Aus­

traliamakesuplessthan2%ofworldgdp,

yetitsdollarispresentin6.8%offxtrades.

FiveyearsaftertheBrexitvote,thereis

littlesignoftheGlobalBritainthatvoters

werepromised,anddeclaringsterlingan

emcurrencysuitsthecountry’sfondness

fordeclinism.Buttounderstandtheroleof

thepoundtoday,lookDownUnder.n

Hasthepoundbecome

emerging-marketmoney?

Quid pro quo

Currency ’s share of FX trading as a multiple of

country ’s share of global GDP, 201

Sources:BIS; World Bank

China

Brazil

Russia

India

Tu r ke y

Euro area

South Africa

Canada

Japan

United States

Britain

Australia

Switzerland

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