India finalised the structure of infrastructure debt funds, an instrument it wants to use to source long-term debt to finance the country's infrastructure needs, saying they could be set up as companies or trusts, according to a finance ministry statement.India plans to pour $1 trillion from next year to 2017 to expand its clogged road and rail network, build more power plants and ports, so it can overhaul its creaking infrastructure, long seen as hobbling faster growth in Asia's third-largest economy.Finance Minister Pranab Mukherjee had in his budget speech for fiscal year 2011-12 announced the setting up of infrastructure debt funds (IDFs) to source long-term debt from both foreign and domestic investors, and also eased taxation rules to make IDFs more attractive to off-shore funds.If an IDF was set up as a trust, it would issue rupee denominated units which will mature in five years and will have to invest at least 90 percent of its investible resources in debt securities of infrastructure projects, the finance ministry statement said on Friday.Such IDFs would be regulated by the capital markets regulator, the Securities and Exchange Board of India.They could also be set up as companies, in which case they would be regulated by the Indian central bank and could raise resources through rupee- or dollar-denominated bonds with a minimum maturity of five years.Non banking financial companies, infrastructure finance companies and banks can set up an IDF as a company."The structure of IDFs would be closely reviewed for its efficacy and further refinement," the statement said.Indian commercial banks face difficulties in lending to infrastructure projects that have long payback periods as the banks mostly lend short-term funds, which creates an asset liability mismatch. Most banks are also nearing the maximum limit that they can lend to the infrastructure sector, the statement added.IDFs will take over these exposures and commercial banks are then free to lend money to other infrastructure projects and deploy their funds in other productive avenues of the economy.IDFs will also help tap long-term resources through pension and insurance funds and, thereby, help create a deeper secondary market for long-term paper, which is lacking sufficient depth, it said."IDFs through innovative means of credit enhancement is expected to provide long-term low-cost debt for infrastructure projects by tapping into source of savings like insurance and pension funds which have hitherto played a comparatively limited role in financing infrastructure," the statement added.(Reuters)
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The Indian stock markets have been affected by the US market sentiments in the short term, even though the country's economy is robust and its growth story is intact, the finance minister said in a statement released after market hours on Friday.Indian shares fell nearly 2 per cent on Friday to log their fourth straight weekly loss, their longest weekly losing streak since the Lehman collapse, as fears that the US economy was heading towards another recession and that some European lenders were facing a short-term funding crunch triggered risk aversion.The main 30-share BSE index, which is down 21 per cent this year, dropped 5 per cent on the week, extending its losses to 14 per cent in four straight weeks."The effect of the market sentiments in the US and Europe has a bearing on our markets as well in the short term....In comparison to Asian markets, our performance has been better," Pranab Mukherjee said in the statement.The steep selloff in the Indian markets triggered by the economic crises in the United States and the euro zone had prompted a review of the global economic situation by top Indian policymakers including Mukherjee, RBI chief Duvvuri Subbarao and C. Rangarajan, a top adviser to the prime minister."The present crisis can, however, be expected to encourage increase in the equity exposure by foreign pension funds and other long-term institutional investors. India is well positioned to capture this flow," the statement added.Net foreign institutional investor (FII) inflows into local stocks in this calendar year stood at $912.2 million until Thursday."India's economy is robust and its growth story, intact," the statement added.The comments come on the eve of a meeting of India's powerful planning commission, which will be chaired by Prime Minister Manmohan Singh.The plan panel is expected to target an average annual growth rate of 9 percent for the five-year period starting from April 1, 2012.(Reuters)
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A. Chandra Shekhar, the CEO of a small alternative energy solutions firm at the heart of India's much-vaunted boom story, should be rolling in orders and expanding his business on the coat-tails of near double-digit economic growth.But his funding and growth prospects for the immediate future have dried up, thanks to the anti-inflationary crusade of one of the most aggressive central banks in the world."The scenario is that industries require my technology and services, but I do not have the funds to start the projects," said Shekhar, who predicts Solar India Solutions will do well to break even this fiscal year with no chance of order-book growth."While we are trying to raise money, it has become too costly to even think about it. It is impossible for me to approach a big company without financial backing."Reeling from 11 interest rate rises since March 2010, Shekhar is one of a chorus of industrialists and corporates suffering from the single-minded strategy of the Reserve Bank of India (RBI), which is increasingly presenting policymakers with a dilemma.With the government effectively paralysed by corruption scandals and protests, the RBI has been left to fight the inflationary battle without fiscal policy support, and equipped with limited tools. It seems determined to persist with its crusade against inflation for now."At the moment the biggest priority for India is inflation. Of that, there is very little doubt in my mind", said Bimal Jalan, a former governor of the RBI.India's growth rate is slowing - car sales in July contracted for the first time in nearly three years - and consumer goods demand in June slowed substantially from a year earlier. Manufacturing output also slowed substantially in the April to June period.Businessmen like Shekhar are not alone. Many small businesses in India have abandoned expansion plans or closed down units due to a dearth of affordable finance, says Chandrakant Salunkhe, president of the Small and Medium Business Development Chamber of India.In the debt-intensive real estate industry, major players have sold off land parcels to meet soaring repayments, and there are signs of a squeeze in sectors from autos to mining to fast-moving consumer goods - all at the heart of the India growth story."There is a likelihood of closing down many SMEs for want of funds ... It is therefore indispensable that the RBI should not only bring down interest rates but also introduce new lending schemes for the sector at lower interest rates," said Salunkhe.That would be doable if inflation was falling quickly. But headline inflation remains above 9 percent, much above the RBI's comfort level of 4 to 4.5 per cent, forcing the central bank to continue its hawkish monetary policy stance."A formal lowering of its GDP growth forecast of 8 percent may not happen until ... October, but it will probably signal downside risk to its growth forecast," leading brokerage house CLSA said in a note."But RBI will maintain its hawkish stance", the note added.The US ImpactIndia's stubborn inflation is due to supply bottlenecks, food prices and high oil prices, and now it faces worries that a possible new round of quantitative easing by the US Federal Reserve could see a flood of capital into emerging markets."Obviously, Ben Bernanke's upcoming speech in Jackson Hole, Wyoming, will be the joker in the pack," said a note by leading brokerage house CLSA. "Any hint of further strong quantitative easing by Bernanke could favourably affect risk appetite and commodity prices, and hence will be bad for India's inflation and interest rate outlook."With New Delhi only recently showing fiscal discipline with a long delayed 9 per cent increase in diesel prices in June, and capacity bottlenecks slow to clear as big projects and reforms stall, fighting inflation has been left to the central bank.Despite the series of policy rate increases, real interest rates in India are still in negative territory with the repo rate (the RBI's main lending rate) still lower than the headline inflation rate by about 120 basis points.Even at an 8 percent pace, India will be the second-fastest economy in Asia, but it needs to grow quickly in order to raise living standards and create jobs for a surging working-age population.There is no sign at all of a possible plunge in growth to a "hard landing", which is technically difficult to define but conceptually would mean India couldn't generate the number of new jobs needed for its young population or the revenue gains the government requires to contain its fiscal deficit.Quarterly ReviewThe anti-inflationary consensus is expected to broadly shape the contours of the September 16 mid-quarterly review of monetary policy, at which the central bank is expected to raise rates by 25 basis points and continue its hawkish tone.Despite a sign of slowing growth, the government appears on board with the RBI - for now."I think we understand and fully support RBI's stance on inflation, that is the priority," a senior finance ministry official told Reuters, indicating that the battle against inflation has been left with the central bank.But there is not such consensus among analysts. And even the central bank's policy advisory team had leaned in favour of a pause on July 26, when the RBI surprisingly raised them by half a percentage point."The sequential and year-on-year reduction in inflation numbers ... may help in soothing some concerns that the rate hiking cycle will continue", said Goldman Sachs in a report after India's inflation numbers were released on Tuesday.Citigroup say that inflation has peaked, but "persistently high inflation and RBI's hawkish tone raises the risk of a last 25 bp hike in September"The government, reeling under allegations of graft and criticism for failure to tackle rising prices, cannot afford to let growth dip and affect its long-touted approach to pulling millions out of poverty every year.Car sales in India fell almost 16 percent in July, the first drop in two and a half years. Production of consumer goods grew less than 2 percent in June, reinforcing fears that consumer demand is on the wane in the country.Growth in the January to March quarter was the slowest in 5 quarters and, barring the capital goods segment, industrial output numbers were on the slower side in June.Market participants might believe growth risks from the global economy could see the central bank loosen policy, at least going by pricing in interest rate swaps. The one-year rate is currently at 7.80 percent, below the central bank's main lending rate of 8 percent.Yet, much depends on how the situation in the United States and the eurozone plays out.Another senior official in the finance ministry said that if there is a meltdown in the United States and the eurozone, that may seriously cloud India's prospects and the central bank may then have to turn its policy around to preserving growth.That could come sooner than later. Private economists have increasingly pared growth forecasts for the fiscal year ending in March 2012 to below 8 percent, while policymakers have also scaled down projections to between 8 and 8.5 percent.Even then, the RBI will most likely pause for some time before it actually cuts rates to prop up growth."We maintain our stance of a pause in interest rate hikes by the Reserve Bank of India in FY 12 and 100 bp rate cuts in FY 13," said Goldman Sachs.(Reuters)
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Panicky investors rushing for a safe haven because of uncertain global economic growth and debt crises helped drive cash into gold trusts, underscoring record highs for spot gold prices, data from Lipper shows on Thursday.In the week ended Aug. 10, two of the largest gold trust funds which issue their shares backed by gold bullion -- SPDR Gold Trust and iShares Gold Trust -- had their fourth biggest week of net inflows, the data shows.The SPDR Gold Trust, launched in November 2004 and now with $73.9 billion in assets under management, pulled in a net $1.9 billion in fresh cash in the latest week. However, the surge in spot prices during the reporting week lifted assets under management by nearly $8 billion.The iShares Gold Trust, launched in January 2005, had net inflows of $265 million, bringing the AUM, with market price movements, up nearly $800 million to $9.4 billion."There's probably institutional people who buy into it as well, but it is probably a good measure of what your average investor is going to look at if they want to buy gold. It is the only avenue other than buying the physical itself, which is really not that feasible," said Matthew Lemieux, analyst at Lipper.The last time the weekly inflows for the SPDR Gold Trust fund reached these levels was in late February 2009, just prior to a rebound in the stock markets."People are panicking, seeing the stock market drop and volatility rise, so they go into gold as a default move. But it doesn't measure how far this downturn goes or whether it is going to turn around," Lemieux warned.Early on Thursday spot gold topped $1,800 an ounce before tumbling more than $60 on concerns over Europe's deepening credit crisis and the possibility of contagion being felt in French banks.Fear And LoveThe fear the sovereign debt crisis which slammed Greece, undermined Ireland, Italy, Portugal and Spain and could impact other nations such as France, spurred the gold buying at a time when gold prices, historically are at a seasonal bottom.However, the start of the Muslim holy month of Ramadan kicks off a seven month long string of holidays where gold buying peaks with the Chinese New Year in February."You have the fear trade and love trade showing up at the same time," said Frank Holmes, the head of San Antonio, Texas-based U.S. Global Investors, a boutique investment firm specializing in emerging markets and natural resources."The fear trade has basically taken gold mathematically over 30 percent in the last 12 months. That means gold is up two standard deviations. That means mathematically there is a high probability of a correction," said Holmes.Holmes believes there could "easily" be a 7 percent to 15 percent gold correction before rising again to reach $2,000.He reiterated his forecast of a doubling in gold prices over the next five years as the developed nations of Europe and the United States devalue their currencies while emerging markets continue to grow.Gold mining companies however have not kept up with the rise in bullion. They were caught in the waves of selling over the last three weeks that saw the U.S. stock market bounce in yo-yo fashion. The benchmark Standard & Poor's 500 stock index on an intraday basis fell as much as 18 percent since July 22 but has rebounded slightly.Companies such as Newmont Mining, which is down over 5 percent in the year-to-date period, have been sold off with the market."It has been sold down as people said they would buy bullion, not gold stocks. That shows you the degree of fear. It is a combination of retail and institutional, but we are seeing a shift, that the valuation is becoming compelling to buy dividend paying gold stocks," said Holmes.(Reporting by Daniel Bases; Editing by Diane Craft)(C) 2011 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters Sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.(Reuters)
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The United States is poised to step back from economic disaster on Tuesday when a bitterly fought deal to cut the budget deficit is expected to clear its final hurdles.Just hours before the Treasury's authority to borrow funds runs out -- risking a damaging US debt default -- the Senate and President Barack Obama are expected to approve a deal to cut a bulging deficit and lift the $14.3 trillion debt ceiling enough to last beyond the November 2012 elections.The bill cleared its biggest obstacle late on Monday when the Republican-led House of Representatives passed the measure despite noisy opposition from both conservative Tea Party members, who wanted more spending cuts, and liberal Democrats angered by potential hits to programs for the poor.The vote in the Democratic-controlled Senate, due to take place at noon EDT (1600 GMT), is expected to be less dramatic. If approved, Obama would sign the bill into law shortly afterward.That would mark the end of a fierce partisan battle that has paralysed Washington for weeks and spooked investors already nervous about a weak US economy and Europe's sovereign debt woes.But it would by no means signal an end to uncertainty over the sustainability of US tax-and-spending policies and the deep political divide that the deficit debate has exposed.Relief in financial markets over an end to the gridlock on Monday quickly turned to concern about the struggling U.S. economy and the risk that the deal is not enough to avoid a possibly damaging downgrade of the top-notch U.S. debt rating.The plan approved by the House on Monday would raise the existing $14.3 trillion borrowing limit by enough to last into 2013. It calls for $2.1 trillion in spending cuts spread over 10 years and creates a congressional committee to recommend a deficit-reduction package by late November.Two major ratings agencies have said that $4 trillion in deficit cuts would allow them to confirm America's AAA rating.A ratings cut would probably push up U.S. borrowing costs, further hampering the economy."The resolution to the debt ceiling does remove one cloud of uncertainty but it does not change the economic reality," said Greg McBride, senior financial analyst at Bankrate.com."It's going to take years to come out of this. We're sitting in the terminal waiting for the economy to take flight and instead it's just being delayed month after month after month."More Strife AheadThe compromise deal was agreed after weeks of angry debate and brinkmanship between Democrats and Republicans.With unemployment above 9 percent and the economy barely growing so far this year, Americans have become increasingly angry over the partisan attacks and refusals to compromise.They may soon face the next round of noisy sparring over ideologically fraught tax and spending policies.The new debt committee's work is likely to launch sharp political rhetoric as the November 2012 presidential and congressional elections near and arguments break out over the expiration at the end of 2012 of tax cuts pushed through by former President George W. Bush.The deal in Congress is a far cry from a $4 trillion deficit-reduction pact including revenue increases that Obama and House Speaker John Boehner, the top Republican in Congress, appeared close to clinching just over a week ago.Although all sides conceded some ground to secure a deal, the final bill represented a triumph for the Tea Party camp in the Republican Party, which dug in its heels against any tax hikes and pushed for spending cuts.Many congressional Democrats were dismayed that Obama and their party leadership did not do more to include some tax increases and provide more protection for social programs."I understand that this train is leaving the station, but it is going in the wrong direction," said Representative Jim Moran, a Democrat from Virginia.(Reuters)
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Strange as it may sound, a downgrade could resound in financial markets more with a whimper than a bang.As debate raged in Washington over raising the debt ceiling and avoiding a default, markets had plenty of time to factor in the thinking of Standard & Poor's, Moody's and Fitch on a potential downgrade."Market participants have the same information that ratings agencies do," said Michael Moran, chief economist at Daiwa Securities America in New York. "(That information) should already be reflected in interest rates."Two ratings agencies, elected by no one, said $4 trillion in deficit-cutting measures would allow them to confirm the US triple-A rating. Lawmakers, who in contrast must answer to American voters, agreed on less than $2.5 trillion in budget cuts, only some of them immediate.That means S&P could downgrade US ratings in the next few days or weeks. Moody's would likely confirm US ratings, but slap a negative outlook on them, a sign of a possible downgrade in the next 12 to 18 months.Still, historical experience suggests a downgrade would produce none of the bond-market angst some fear. Japan lost AAA status more that a decade ago and it has some of the lowest interest rates in the developed world.As it was with Japan, the big issue for markets is the weak US economy, which could slow further due to the spending cuts in the deficit-cutting deal.This fiscal restraint could curb spending, job growth and inflation -- the biggest drivers of bond yields.Also, investors see the United States in a much different situation than crisis countries such as Greece. Awash in debt though it is, the United States is still able to pay its bills while Treasury bonds remain liquid and in demand.The bond market is the ultimate arbiter of sovereign debt worries, and low U.S. yields suggest none of the anxiety that sent Greek yields soaring during that country's fiscal crisis.Benchmark 10-year yields now stand at 2.74 percent, which is just 0.7 percentage point from the all-time low and follows weeks of high-tension haggling and fears political paralysis could result in a default.Still, a US debt rating cut to AA-plus from AAA by Standard & Poor's is "the market's base case at the moment," said Krishna Memani, fixed-income director at OppenheimerFunds.While bonds have done well, stocks and the dollar suffered during the debt impasse amid fears the political conflict would make it impossible to reach a deal to avoid default.Some are skeptical of the heightened ratings rhetoric.The Obama administration has grown frustrated with Standard & Poor's during the debt limit crisis and accused the ratings agency of changing the goal posts in its downgrade warnings.Since October, S&P has accelerated its deadline three times for when it might downgrade the United States' credit rating."Based on the comments Standard & Poor's has made so far, they've backed themselves into a corner, making it very likely that we could see a downgrade," said Oliver Pursche, president at Gary Goldberg Financial Services in Suffern, New York.But a well-telegraphed US debt ratings downgrade pales in significance with evidence of flagging economic growth, including Monday's report showing US manufacturing grew at its slowest pace in two years in July.Consequently, a US debt ratings downgrade would not cause yields to skyrocket, limiting the so-called knock-on effects on other interest rates, such as those on mortgages."We will see first-hand what it means to balance the budget and from an economic standpoint, it ain't gonna be a pretty picture," said David Rosenberg, chief economist and strategist at Gluskin Sheff in Toronto.A fall in "discretionary" government spending to zero would lead to "a very deep recession," Rosenberg said.Then, whether they are rated AAA or AA+, "you will find a lot of people buying Treasuries because that's what people will want to own when we go to a negative growth rate," he said. (Reuters)
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India needs to raise interest rates to restrain inflation, said Duvvuri Subbarao, governor of the Reserve Bank of India, on Monday.Restraining inflation will ensure medium-term economic growth is sustainable, he said in a speech on India and the global financial crisis.The 10-year benchmark bond yield rose 2 basis points to 8.45 per cent after the governor's comments.Last week, the RBI had raised interest rates by 50 basis points in a bid to tame inflation amid signs of slowing economic growth. It was the 11th rate increase since March 2010.(Reuters)
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US Secretary of State Hillary Clinton today said she is "not pursuing" the top job at the World Bank after a media report that she was seeking to become the institution's next head."I'm not pursuing that position," Clinton said when asked about a report by the Reuters news agency that she was considering applying for the job after completing her term as top US diplomat next year."I am absolutely dedicated to my service as secretary of state," she added, speaking on the sidelines of African trade talks here aimed at removing barriers within the continent and between it and the United States.Reuters said Clinton was in discussions with the White House to leave her job next year and take over as head of the World Bank, replacing Robert Zoellick, should he leave at the end of his term in mid-2012.(PTI)
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The government on Thursday approved a proposal to bring a new legislation for stricter control over benami transactions amid the UPA regime facing heat over the black money issue from various quarters.The decision was taken at a Cabinet meeting chaired by Prime Minister Manmohan Singh in New Delhi.It was decided that subsequently, a new Benami transactions (Prohibition) Bill 2011 will replace the existing Benami Transactions (Prohibition) Act, 1988."The new Bill contains elaborate provisions dealing with the definition of benami transaction and benami property, prohibited benami transactions, consequences of entering into a prohibited benami transaction and the procedure for implementing the benami law," Information and Broadcasting Minister Ambika Soni told reporters here.Under the proposed new law, anyone violating the rule can be jailed for not less than six months, which may be extended to two years and also be liable to a fine.Explaining the need for a fresh legislation, the minister said: "It was found that owing to infirmities in the (existing) legislation, formulation of rules would not be possible without a comprehensive legislation by repealing the Act"."Properties held by coparcener in a Hindu undivided family and property held by a person in fiduciary capacity are excluded from the definition of benami transaction", she said.The Minister further pointed out that "properties acquired by an individual in the name of spouse, brother or sister or any other lineal ascendant or descendant are benami transactions which are not prohibited".Benami transactions are one of the notorious sources of circulation and investment of black money. The government has been facing heat on black money from the Supreme Court, civil society and Opposition for not doing enough to deal the menace. (PTI)
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India is considering setting up a sovereign wealth fund with more than $10 billion in assets to buy energy assets abroad to feed growing domestic demand, senior government officials told Reuters on Wednesday.But the sources said the plan to create the country's first sovereign wealth fund (SWF) was still at an early stage amid concerns from the central bank about setting aside part of the country's foreign exchange reserves for the scheme."There is a group which is examining this but no decision has been taken," Montek Singh Ahluwalia, deputy chairman of the powerful Planning Commission of the Indian government, told Reuters.India's foreign exchange reserves stood at more than $314 billion as on July 8."The original size of the fund was $10 billion but since commodity prices have increased in the meanwhile, we believe that the size of the fund, if approved, could be increased," said another senior government official who is part of the group examining the proposal. The official declined to be identified."The final figure will only be decided after wider consultations," he said.A senior official at the Reserve Bank of India, meanwhile, said the central bank was worried about financing a sovereign wealth fund, given the large amounts of capital the country needs to fund a massive current account deficit.That deficit was 2.6 percent of gross domestic product for the fiscal year ending in March 2011."There is no formal exchange on this," the senior official told Reuters. "We have to see the proposal. But we have already made our stance clear that we can't use dollar reserves, which is borrowed money for setting up a SWF.The proposal to set up such a fund was first mooted by the oil ministry a few years ago over concerns that India was falling behind China in acquiring energy assets abroad, particularly coal änd gas fields and mining blocks in different parts of the world, including Africa.Unconventional energy sources such as shale gas, coal-bed methane and oil sands are also attracting increasing attention from China and elsewhere as traditional oil supplies dry up.The Indian economy is expected to grow by nearly 8 percent in the current fiscal year ending in March, according to a Reuters poll released on Monday, and its hunger for energy is expected to keep pace with it."India is basically a current account deficit country and there is a good amount of demand for imports," said another senior official at the Indian central bank.We need our foreign exchange reserves for tiding over balance of payments problems and so our stance has been to not use foreign exchange reserves for other purposes."Option Of Budgetary AllocationAnother option being considered by the government is to set aside funds from its budget to seed the sovereign wealth fund."We are looking at budgetary allocations ... but first everybody has to be on board and the proposal has to be accepted before being finalised", said the government official.However, funding the SWF through budgetary allocations may be difficult for the government in a fiscally strained year, and next year the government may decide to spend more on populist schemes as it heads into elections in Gujarat and Uttar Pradesh, seen crucial to the Congress party's political fortunes.The sovereign wealth fund plan was due to have been discussed by an inter-ministerial group this month but the talks were postponed.(Reuters)
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