Silicon Valley Bank ‘contagion’ may leave India unscathed

If ‘contagion effects’ from SVB or higher interest rates hit more foreign banks, a flight to safety among global investors could hit capital flows into emerging markets like India and impact the rupee, officials say

A view of the Silicon Valley Bank in Santa Clara, California. File | Photo Credit: AP

The failure of the U.S.-based Silicon Valley Bank (SVB) may only hit some Indian tech startups and IT firms for now, while any broader “contagion” effects that may arise will neither reach Indian shores in a hurry nor are they likely to trigger “systemic risks”, according to top Finance Ministry officials.

However, the Central government is cognisant of the fact that the key underlying trigger for the Santa Clara-headquartered bank’s woes — rapidly rising U.S. interest rates that have rendered past government bond holdings “underwater”, or loss-making securities — could impinge on the operational health of other financial institutions as well.

Ripple effects

If these troubles spread, a resultant flight to safety among global investors could hit capital flows into emerging markets like India and impact the rupee, said a ministry official tracking the developments.

“We don’t know if it will rain, but we will keep an umbrella handy,” the official said, signalling that the government and financial sector regulators are keeping close tabs on the situation and the likely impact on the Indian economy

“At this point, it is not yet clear if there will be ripple or contagion effects on more banks in the U.S. following this bank’s woes. So we don’t expect any major effects to spill over on our economy for a while… There may only be some impact on individual start-ups and tech companies who get some funding from there,” another senior government official said.

‘No systemic issues’

The official quoted earlier also asserted that there should be no systemic issues from the bank’s troubles for India. “It may affect specific companies that have investments from SVB or IT firms that have deposited some of their US operations’ income there,” he said.

However, the official noted that the underlying issue could hit other banks too, citing veteran banker Uday Kotak’s remark on the SVB impasse that this was an accident waiting to happen. “It could happen elsewhere too as government bond holdings of past have lost value owing to the rise in yields and need to be marked to market and the losses provided for,” the official averred.

Future triggers

Officials don’t expect similar challenges for Indian banks or financial institutions as the cumulative rate hike of 250 basis points effected by the Reserve Bank of India (RBI) over the past year, have still only taken interest rates “back to pre-Covid levels, while the surge in the U.S. [rates] has been much sharper”. One basis point (bp) equals 0.01%.

“Some U.K. pension funds have also faced challenges. India can only brace itself. We know it may rain but don’t know where and when, so it is best to carry an umbrella,” he reiterated.

If the U.S. Federal Reserve — which is now increasingly expected to hike rates by another 50 bps this month — remains hawkish, and there is a whiff of trouble in any other global bank or shadow lender, this could trigger a flight to safety, translating into concerns for capital flows into Indian markets and may hurt the rupee, the official cautioned.