India imposed restrictions on foreign exchange outflows and gold imports on Wednesday, 14 August, in a new attempt to prop up the rupee, as a spike in inflation added pressure on policymakers to curb a crippling external deficit. Finance Minister P. Chidambaram also reiterated his pledge to narrow the current account deficit - the main source of the rupee's weakness - to 3.8 per cent of gross domestic product this fiscal year and said the currency would not be allowed to slide into "free fall". The Reserve Bank of India's latest steps to support the currency, which has plumbed record lows against the dollar, included cutting the amount of overseas direct investments allowed by Indians. Those investments reached $3.2 billion in July, according to central bank data. Separately, the central bank banned imports of gold coins and bars, which constituted about 36 per cent of total billion demand in India last year, and will require domestic buyers to pay cash for the yellow metal, among other measures. "This is obviously an extreme action, but these are extraordinary times and require extraordinary measures," said Sujan Hajra, chief economist of brokerage Anand Rathi in Mumbai. The steps came as data showed the headline inflation rate jumped above the central bank's target range of 4 to 5 per cent in July for the first time since March, making it even harder for the bank to refocus on supporting India's slowing economy. The Indian authorities fear continued falls in the rupee will exacerbate the current account deficit in the short term, deter investment and further curb growth in Asia's third-largest economy. Central bank action to tighten rupee liquidity in mid-July and other steps have failed to halt the slide in the currency, which set new record lows on 6 August. Chidambaram sought to address scepticism in financial markets since he first announced on Monday his target to cut the current account deficit to $70 billion, or 3.8 per cent of GDP, from a record high 4.8 per cent in the year ended in March. Proposals announced on Tuesday to raise duties on gold and silver imports in a bid to curb demand have also failed to convince investors, who believe stronger measures are needed. "I make a commitment on the current account deficit on behalf of the government. We will leave no stone unturned to contain the current account deficit at about $70 billion," Chidambaram told lawmakers on Wednesday. "We cannot allow the rupee to go into a free fall." The partially convertible rupee slipped to 61.45 per dollar on Wednesday. It is down 2.5 per cent since the RBI launched its major support effort on July 15, which included raising short-term interest rates. However, the RBI on Wednesday also sought to ease some of the liquidity constraints at banks by exempting some requirements on the types of cash and government securities lenders must keep with the central bank. Chidambaram also said that the central bank's mandate must include growth and employment, while Arvind Mayaram, economic affairs secretary, told reporters that any measures put in place would not be permanent. "As and when we believe that the speculative pressure on the rupee is easing and the rupee is finding its stable environment, then the Reserve Bank of India and the government of India will revisit these restrictions and take an appropriate decision," Mayaram said. Traders had previously criticised mixed signals from government and central bank officials, saying it raised doubt about their resolve and contributed to the rupee's weakness. Ugly InflationIndia's headline inflation rate, measured by the wholesale price index, accelerated to 5.79 per cent annually in July from 4.86 per cent in June, data showed on Wednesday. With fears growing that India is headed into a phase of slowing growth and high inflation, 10-year bond yields surged to as high as 8.55 per cent, their highest in more than a year. Analysts said the bad news on inflation, particularly on prices for imported oil prices, was due in part to the rupee losing 12 per cent against the dollar since the start of May and higher food prices. "The July print for headline inflation is very ugly," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai. "Despite an acute slowdown in domestic demand, the manufacturing prices have remained elevated due to rising input costs on account of massive depreciation of rupee." The need to bolster confidence has become more pressing. Foreign investors have sold a net $11.6 billion in debt and equities since late May, a bad omen given markets could weaken more when the US Federal Reserve rolls back its monetary stimulus. Ultimately, analysts say Prime Minister Manmohan Singh's minority government will need to implement bolder reforms to restore the economy, notably by improving the investment climate and expediting infrastructure projects. Whether they can do so remains in doubt, given the government faces political gridlock ahead of general elections due to be held by May 2014. (Reuters)
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Gold edged between gains and losses on Wednesday as investors fretted over the timing of the US Federal Reserve's stimulus tapering. The choppy trade followed a 1 per cent fall on Tuesday, 13 August, which ended a four-day winning streak. The drop was caused by strong US economic data and further import curbs in top buyer India.Uncertainty over when the Fed would begin scaling back its massive bond purchases has pushed gold down more than 20 per cent this year after 12 annual gains."What would be extremely welcome is some clarity," said analyst Dominic Schnider of UBS Wealth Management in Singapore. "And I think September would be the ideal time to provide clarity. Some market expectations are shifting towards a December tapering."The US economic performance remains too mixed for Fed policymakers to lay out a detailed path for reducing and eventually halting their asset-purchasing next month, Atlanta Fed President Dennis Lockhart said on Tuesday.But he appeared open to at least a modest pullback in monetary stimulus from its current pace of $85 billion per month."Once the taper is out, it will hit gold once more," said Schnider, though likely not to the same extent as drops earlier this year.Spot gold inched up 0.06 per cent to $1,321.42 an ounce by 0304 GMT.The next Fed meeting is scheduled for September 17-18. Until then, markets will scrutinise data to gauge the strength of economic recovery.US retail sales rose in July, data showed on Tuesday, pointing to an acceleration in consumer spending that could bolster the case for a Fed tapering.India CurbsIndia hiked the import duty on gold yet again on Tuesday to a record 10 per cent and also raised excise duty on the metal, after imports jumped in July despite attempts to strangle supply and curb demand as the government tries to rein in dollar spending.Gold prices in India are likely to rise this week, extending gains past their highest level in four months, due to the import duty hike and dollar weakness.Read Also: Import Duty Hiked On Gold, Silver To 10 Per Cent"Despite the expectations that gold imports may fall, India's appetite for bullion is anticipated to pick-up later in the year due to seasonal demand," HSBC analysts wrote in a note.Analysts say this could increase further illegal gold supply into India.(Reuters)
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Stepped up efforts by Indian Finance Ministry to check revenue leakage have resulted in a detection of evasion of over Rs 2,158 crore in direct and indirect taxes in the last quarter of 2012-13.The detection came through a unique initiative of online monitoring system of suspicious transactions, named 'Virtual Office', which was set up by the ministry earlier this year for real-time coordination among revenue intelligence agencies and dissemination of various inputs pertaining to movement of illegal funds.The Central Board of Direct Taxes (CBDT) has detected unaccounted income and assets of Rs 1,408 crore using this platform.The Directorate General of Central Excise Intelligence (DGCEI) and Directorate General of Revenue Intelligence (DGRI)--two leading agencies under the Central Board of Excise and Custom (CBEC)--have together detected indirect tax evasion of at least Rs 750 crore, according to an official document.These agencies, which are part of the Virtual Office programme, detected the evasion after following up the leads in form of Suspicious Transaction Reports (STRs) passed on to them by Financial Intelligence Unit (FIU)--an agency tasked with analysing and disseminating information relating to dubious financial exchanges.Both DGCEI and DGRI have also effected a recovery of Rs 46.71 crore, on the basis of the STRs generated by the FIU, through Virtual Office. The CBDT has seized assets worth Rs 21 crore, the document said.An STR is a transaction of Rs 10 lakh and above believed to be proceeds of crimes including drug trafficking and black money.The Virtual Office was set up in January to monitor the feedback on the STRs disseminated by FIU-Ind, which is also providing administrative support to it.(PTI)
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The rupee gained modestly on Monday, 12 August after another salvo from the Reserve Bank of India (RBI) to support it by tightening the money supply, but it is seen stuck near record lows unless there are genuine efforts to cut the current account deficit. The RBI will auction Rs 11,000 crore in cash management bills on Monday, part of its new plan to auction a total of Rs 22,000 crore of bills every week to drain funds from money markets. The idea is if the supply of rupees tightens it will create demand for the currency, which fell to a record low of 61.80 per dollar last week. That would also buy some time for the government to try to address some long-term pressures. Expectations are high that Finance Minister P. Chidambaram will announce measures to draw in foreign inflows as early as Monday, geared towards narrowing a record current account deficit that is the key source of pressure on the rupee. The steps could include raising money from Indians abroad, easing overseas borrowing rules for companies, or spurring state-run companies and lenders to raise money overseas. "It takes two to tango," said Jyotheesh Kumar, an executive vice president at HDFC Securities in a note to clients. "Both the Reserve Bank of India and the government of India are likely to act in tandem this week to shore up the ailing rupee," he added. Trade, industrial output and consumer prices data are due on 12 August as well, and are expected to reinforce concerns about growth running at its weakest in a decade at a time of high inflation. Bond Yields RiseThe partially convertible rupee rose to as much as 60.45 per dollar on Monday, 12 August compared to its close of 60.88/89 on Thursday, although it was last trading at 60.72. Financial markets were closed on Friday, 9 August for a holiday. The modest gains follow the RBI's announcement of the sales of cash management bills after the market close on Thursday (8 August) -- its third set of measures over the past month which have also included raising short-term interest rates. But investors want India to tackle longer-term fiscal and economic reforms, such as raising fuel prices, and are yet to be convinced that the central bank's strategy is sustainable, raising the prospect of higher borrowing costs in the near term. The benchmark 10-year bond yield was up 8 basis points to 8.20 per cent on Monday, and is up about 70 basis points since the RBI's first round of action on 15 July. Bringing in foreign flows will be key to stabilising market confidence in the near term, analysts said. India has traditionally restricted foreign-currency borrowings to prevent a build-up in foreign-exchange liabilities, and a more relaxed approach may trigger a dramatic spike in overseas bond offerings. (Reuters)
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An inter-ministerial panel has suggested higher taxes for non-essential imports with a view to curbing inward shipments and containing the current account deficit (CAD).The Committee has also suggested a list of non-essential items the import of which could be compressed, with a view to bridge the trade gap.These suggestions form part of the recommendations made by the Committee set up by Finance Minister P Chidambaram under the chairmanship of Rajat Bhargava, Joint Secretary (Budget Division) to suggest steps to contain the rising CAD, which had touched a record high of 4.8 per cent of GDP in the last fiscal.The committee has already submitted its report to Chidambaram and according to sources some steps are likely to be announced soon."The panel has suggested higher taxes on those non- essential items which do not add to inflationary pressures," sources said.Chidambaram had earlier said that government would be looking at "some compression in non-oil and non-gold imports, especially of non-essential goods", citing the example of coal and electronic hardware.For the April-June period this fiscal, exports were down by 1.41 per cent at $72.45 billion over the same period last year. However, imports during the period were up by 5.99 per cent at $122.6 billion.Trade gap in the first quarter stood at over $50 billion.India's exports during 2012-13 was at $300.3 billion, while imports aggregated $491.9 billion. Trade deficit stood at $191.6 billion during the period.Current Account Deficit (CAD) occurs when total imports of goods, services and transfers are higher than exports, reflecting outgo of foreign exchange.(Reuters)
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The rupee rose on Thursday, 8 August, benefitting from a global risk-on trade, but dealers said the outlook is dependant on further steps from the government and the central bank to help prop up the currency. The rupee was trading 61.19/20 to a dollar versus 61.30/31 last close. It fell to a record low on 61.80 on Tuesday (6 August). Bond yields eased, helped by a rise in U.S. government debt prices. The benchmark 10-year bond yield was down 2 basis points at 8.12 per cent. (Reuters)
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The rupee's fall to record lows has raised chances that the Reserve Bank of India will take more steps to support the currency, as a strategy built on tightening rupee money markets and raising short-term interest rates has had limited effect.The worst performing Asian currency of the year so far hit a new life low of Rs 61.80 per dollar on Tuesday, breezing past a previous low of 61.21 hit on 8 July. Central bank intervention helped the rupee recover, but by Wednesday, 7 August, it was sliding once again, to stand around 61.35 by 11 a.m.Below are the possible steps that the RBI or the government could take to support the currency.RBI ActionsFX interventionTighten liquidity further by:- Raising banks' statutory liquidity ratio of 23 per cent- Further reducing how much banks can borrow from the RBI under the daily repo auction- Reducing the amount of funds RBI provides to banks under the export refinance scheme at the repo rate- Bond sales via open market operations- Raising banks' cash reserve ratio, now at a record low 4 per centRaise the policy repo rate, currently at 7.25 per centProvide a dollar-window for oil firms to pay for importsBuy oil bonds from companies by paying dollarsAsk exporters to convert FX dollar holdings immediatelyAsk importers to delay or stagger dollar paymentsCurb speculation by cutting net open position limitsPersuade banks and financial firms to raise funds abroadGovernment MeasuresRaise foreign investment limits in debtIncrease duties on non-essential imports, like electronicsAttract money from Indian citizens abroad, or issue sovereign debtAnnounce additional fiscal, economic reforms(Reuters)
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For the past two years, the power generation business has been completely unviable,” says Ashok Khurana, director general of the Association of Power Producers (APP). He could well be speaking for the entire sector, which has been grappling with issues such as falling plant load factor, stranded capacity, low generation, critical coal stock levels and rising losses of distribution companies. The last two have seriously crippled the generation sector, say insiders. The past few weeks have seen the government taking steps to revive the sector, but it might be a case of too little too late. The Cabinet Committee on Economic Affairs (CCEA) has cleared a proposal to allow power producers to pass on the cost of imported coal used to make up for the deficiency in domestic supply. The move is expected to provide relief to power projects that have been operating at a plant load factor of 68.40 per cent this year as compared to 73.76 per cent last year.However, many fear a delay in the implementation of the proposal. “It’s too early to predict the final result, as implementation is key to issues that remain unresolved,” says Anil Sardana, managing director, Tata Power. Khurana echoes the sentiment: “Even the first step, where the coal ministry needs to pass an amendment to the National Coal Distribution Policy, has not been taken.”Moreover, industry honchos do not see the CCEA measure as a permanent solution to the fuel crisis. “We have to look at improving the production of coal in keeping with our capacity addition. In the first year of the current (Five-Year) Plan, we have already added some 18 gigawatt (GW) of fresh capacity. Is our coal production going to match that,” asks Arup Roy Choudhury, CMD of NTPC.The problem of mismatch is set to persist with the Ministry of Power targeting 80 GW of fresh capacity in the 12th Plan, of which 23 GW has already been added till June 2013. Barring plants that depend entirely on imported coal and those that are expected to be supplied with coal blocks, the power sector’s requirement will be 653 million tonne (mt) of coal per annum. Of this, only 415 mt will come from Coal India. The remainder will have to come in via imports. The government’s move is going to inflate the electricity bills of consumers. The extra burden will be in addition to the regular tariff hikes prescribed by the financial restructuring package for discoms. “We can’t make the developer responsible for something not in his control. Now, whatever is paid by the developer is passed on to the consumer. It is for the consumers to decide if they want more expensive electricity or if they will be fine with candlelight,” says a senior power ministry official.But there is scepticism about the smooth implementation of the pass-through mechanism. “The discoms will have a problem with this... Politicians will not allow regulators to increase the tariff. The discoms will end up buying electricity at a price higher than what they will sell at. Their losses will go up,” says a senior Planning Commission official.Clearly, there is pain ahead for discoms. “Theoretically, the impact of imported coal is going to get passed through, but it won’t happen quickly. There will be a time lag. The regulatory process takes time unless there is a fuel surcharge in place, which allows for quarterly reviews. Otherwise, the entire process takes more than a year,” says Salil Garg, director, corporates, at India Ratings. Given that discoms already have Rs 70,000 crore of regulatory assets (money recoverable in future from consumers with regulators’ sanction) on their balance sheets, this lag will only increase the pressure. Passing on the extra burden to the consumers will not be easy as pressure builds on state governments to moderate tariff hikes in the future. break-page-breakAccording to Crisil Research data, while 15 states hiked their tariffs in 2012-13, only 13 state electricity regulatory commissions, out of the 21 that applied for a revision this year, have allowed their respective discoms to hike tariffs. Moreover, the average hike this year has been only 5.2 per cent against 13.4 per cent in 2012-13.“In 2013-14, in the first quarter, seven states have hiked tariffs. We expect annual tariff increases of 5-7 per cent from 2013-14 to 2015-16. This, coupled with the implementation of the debt restructuring package for state-owned discoms, is estimated to eliminate the ACS-ARR (average cost supply and average revenue realised) gap by 2015-16,” says Rahul Prithiani, director, Crisil Research.Further, discoms have to contend with their AT&C (aggregate technical and commercial) losses, which stand at an average of 25 per cent, and the growing burden of agricultural subsidies — the sector contributes a measly 8 per cent to the discoms’ revenues while consuming 22 per cent of the total electricity produced. “Despite the current issues, I don’t see much of a problem with the generation sector; the challenge for the power sector lies on the distribution side,” says P. Umashankar, ex-secretary, Ministry of Power.The government’s recent decision to increase the price of domestic gas from April 2014 will make gas-based power costlier. Pre-empting this, Essar Energy has decided to convert two of its gas-based projects (a total of 1,015 MW capacity) into coal-fired ones.While the going has been tough for conventional energy sources, renewable energy has somewhat redeemed itself. It accounts for around 13 per cent of the total installed capacity, or 28 GW, as of March 2013. While technical and economic concerns around renewable energy remain, it is seen as the answer to a power-deficit India, where only 92.8 million out of the total 167.8 million households have access to power. Efforts are under way to integrate this energy into the grid. As things stand today, all the stakeholders need to get their act together: the consumers, the producers, the distributors, the regulators and the government. As the Planning Commission official aptly puts it: “The basic problem with the Indian power sector is that those involved want conflicting things... We have stopped being a fair state and there is no appetite for a fair and equitable solution.” chhavi.tyagi@abp.in;chhavityagi.bw@gmail.comtwitter@chhavityagibw(This story was published in BW | Businessworld Issue Dated 26-08-2013)
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