Credit Cards and Debit Cards have become synonymous with money in one's pocket, at least in the urban setup. Their penetration is increasing at a pace one couldn't have possibly imagined a couple of years ago. Age-old institutions like the Indian Railways are now asking travelers to pay by card, if not for anything else, but ease of use.Harsh Roongta, Chief Executive Officer at Apnapaisa.com, a comparative personal finance portal, and Suresh Sadagopan, founder of Ladder 7 Financial Advisories discuss with Tanushree Pillai the advantages and pitfalls of credit and debit cards and how to use them wisely.What are credit cards and debit cards in layman's terms?Sadagopan: One can buy things on credit up to the pre-approved limit in a credit card. Basically, you are spending money you may not have now. A debit card, on the other hand, is linked to the bank account and one can spend up only what is available in one's account. This is equivalent to buying with one's cash. One does not have a chance to spend beyond what one has.Roongta: Carrying cash can be cumbersome and dangerous at times. But, plastic cash or credit cards / debit cards make life a lot simpler. These cards can be swiped at almost any listed merchant establishment around the globe for purchasing any product or services. You can also withdraw cash from ATM on your credit / debit card. You can get a credit card from any issuer without any banking relationship with them but debit card is issued only against your bank account. Some secured credit card requires the user to have a fixed deposit with the card-issuing bank.What are the plus points for using credit/debit cards?As far as credit cards are concerned, the advantages are • Purchase products or services possible whenever and wherever you want, without ready cash and one can pay for them at a later date.• Have the option of paying only a part of the total expense. The balance amount can be carried forward, with an interest charged (though the interest rate is very high)• Enjoy a credit limit without any charges for a limited period (mostly 20 to 55 days). If you do not pay the full amount on due date, you are likely to lose free credit period• Convenient for very short duration loan where convenience not cost is the consideration• Only if one does not have the capacity to pay at the end of the cycle and goes into revolving credit, that the problems startAs far as Debit Cards are concerned the advantages are:• Purchase products or services whenever and wherever you want, without the need for carrying cash. The amount gets directly debited to your bank account.• Controls unwanted impulsive buying habits, as the user cannot buy anything above his saving account's amount.• No interest has to be paid as the amount is directly debited from the account at the time of purchase. Hence, no worries about delayed payment and being penalized.There must be a lot of disadvantages as well. Why don't you spell these out?Of course, there are a lot of disadvantages . As far as credit cards are concerned• User may become an impulsive buyer and tend to overspend because of the ease of using credit cards. Cards can encourage the purchasing of goods and services you cannot really afford.• Credit cards are a relatively expensive way of obtaining credit if you don't use them carefully, especially because of high interest rates and other costs.• Lost or stolen cards may result in some unwanted expense and inconvenience.• The use of a large number of credit cards can get you even further into debt.• Use of credit card, introduces an element of risk as the card details may fall into the wrong hands resulting in fraudulent purchases on the card. Fraudulent or unauthorized charges may take months to dispute, investigate, and resolve.• Any delays in payment results in hefty late payment charges along with high interest rate on amount due and also being reported as default in CIBIL As far as Debit Cards are concerned• No revolving credits facility. The entire amount gets debited from the bank account at one go. Hence user cannot buy now and pay later. • Lost or stolen cards may result in some unwanted expense and inconvenience.• Using a debit card, introduces an element of risk as the card details may fall into the wrong hands resulting in fraudulent purchases on the card.What are the biggest misconceptions people have about credit cards?People are completely mistaken about the concept of revolving credit. It is believed that one pays interest only on the outstanding bill amount. But the truth is whatever new purchases one make during revolving credit facility, the new purchases gets added to old dues and the interest is charged on the entire amount (i.e. old dues + new purchases) • Cash withdrawal on credit card is about the same as using a debit card at an ATM – cash withdrawal on credit card can cost the card holder minimum Rs. 300 per transaction or up to 2.5 per cent of amount withdrawn, whichever is higher.• Paying minimum amount due on your credit card each month is okay – it will save the day temporarily, but will grow into a big debt one day with a very high interest rate.• Transferring the balance of one credit card to another is an effective way to manage debt – it will certainly save the user from higher interest rates on revolving credit, but having multiple cards with higher debt will ultimately become unmanageable for most people.What's the typical payment process involving- interest rates, grace period (if any), late fees etc like?Maximum credit period usually varies from card to card between 20 and 55 days. Interest rate on revolving credit facility can go as high as 3. 5 per cent per month or 42 per cent per annum (3.93 per cent per month or 47.19 per cent per annum including service tax). Late payment fees varies between R s 100 to Rs 700 per month plus service tax.What is the right way of using credit cards?• Use debit card instead of credit card for everyday shopping like groceries, clothes, etc. • Using credit card excessively in lieu of cash can lead to debt. Always remember credit card is an alternate to money but not money, so use it wisely.• Don't get into the habit of paying minimum due as the outstanding amount will pile up into large debt and one can end up paying very high interest rate. Stay within the credit limit. Lower balances are easier to manage. • Having large credit card dues will also have a significant impact on your home loan eligibility if required in future. Lenders determine the borrowers ability to take on additional EMI burden vis-à-vis his current net income. Larger the burden, lower the loan eligibility amount.• Persistent delays or defaults can affect your credit rating. Defaulting on your credit card dues jeopardizes your ability to get loans or credit cards in future. Even a bad credit history of a co-borrower can ruin your chances of getting a loan.How does one ensure proper safety of both credit and debit cards?• Go for a photo identity credit card. When your photo is imprinted on a card it can double as an identity card as well.• Sign your card immediately after receiving it and do not write PIN on the card jacket.• Do not lend your card to anybody.• Preferably carry your card separately from your wallet• While buying a product over the phone or mail order, be sure to note all the details carefully including postal address. Note down the name of the person who spoke to you as well as exact amounts, as these will be necessary in case of a disputed billing statement.• While using your credit / debit card at an ATM, make sure nobody sees you punch in your PIN number.• If you lose your card, call and inform the card issuing authorities and make a police complaint as well.• Check your card when a merchant returns it and make sure that it is your card that he has returned.• As far as possible, try and be present when the card is swiped / the dial-up is taking place to ensure that there is no misuse of the card.• Verify the amount before signing the charge–slip.• Always verify purchases with your billing statement. Any discrepancies should be informed immediately in writing.• Notify any changes in your address / telephone number to the card issuer immediately.• Watch out for mobile alerts of spends on your cards and promptly dispute if the debt is unauthorized.• Mask the CVV number as this can be misused to transact by someone who knows one's card no. Ideally, CVV numbers should be committed to memory ideally.How does the process of balance transfer work?It is a facility where an outstanding balance on one credit card is transferred to another at a small fee or at a lesser interest rate for a pre-determined period . This is an introductory incentive offered to customers by credit card companies who want to acquire customers by weaning them away from their present credit card companies. A new credit card company may be willing to take over up to 75 per cent of the amount outstanding on the customers' old card to his new credit card account with them at a lower rate of interest. Normally the user is given a time limit of six months at a lower rate of interest to clear his transferred amount. However, user could possibly be charged a higher rate of interest for new purchases. If the user is unable to clear his balance transfer amount within six months, he will end up paying a higher rate of interest with the new credit card company also.How can one have multiple credit cards without getting trapped into a web of unending debt?Roongta: Different credit card companies have different monthly billing cycles. Therefore, if you have access to different credit cards, you are in a position to make full use of the interest-free grace period provided by the respective card companies.Whenever one applies for a credit card, the card issuer pulls his credit history from the CIBIL, which gets registered as an enquiry in his credit report. Excessive numbers of such enquiries indicates that he is "Credit Hungry" and in an urgent need of money. This makes the providers more cautious while evaluating his application for credit cards or any loans. Sadagopan: It is better to have one credit card and use it and pay off the amounts on time. Going for another credit card just to borrow to pay off a third credit card will be a dumb thing to do. It may be a better idea to take a personal loan and payoff the credit card debt as personal loans come at lesser interest rate as compared to credit card debt.
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At eighteen you get a vote. The Ahmedabad-based Madhavpura Mercantile Cooperative Bank (MMCB) got one on Thursday -- a big vote of no confidence from Mint Road. Twelve years after it was taken on a joyride by former Big Bull, Ketan Parekh, the Reserve Bank of India (RBI) blew the whistle -- its license to carry on banking activities was annulled.In the case of MMCB, it was a question of when it will be asked to down its shutters. The central bank's inspection report showed as on end-March 2011, MMCB had a negative net worth of Rs 1,316.50 crore, negative capital adequacy of 1,941.1 per cent, gross bad-loans of Rs 1,126.55 crore (at almost 99.99 per cent of gross advances) and accumulated losses of Rs 1,357.41 crore.The End GameOn March 16 this year, a show-cause notice was issued to MMCB as to why its banking license should not be revoked. Two days later, the bank replied its financial mess was due to the Rs 1,200-crore fraud perpetrated on it by share brokers (including Ketan Parekh and his associates) in collusion with the then members of its Board of Directors. The bank said a sum of Rs 803.00 crore or 72 per cent of the total amount "were unsecured due to unenforceable securities, defective documentation and hence not recoverable". It conceded that the reconstruction scheme for the bank failed due to non-fulfillment of commitment of UCBs (urban co-operative banks) to contribute as they feared for the safety of their monies.An attempt to salvage the bank with the help of a new set of investors failed to pass muster with the central bank. MMCB came up with a revival plan — a loan of Rs 1,000 crore sourced by a non-resident Indian from the World Bank and a few European banks. This unnamed NRI was to put in Rs 500 crore of his own funds for the next ten years. It was later found MMCB had no clue about the antecedents of the NRI or the source of funding. Worse the bank was also not sure if all this will help it to get back on its feet. Shakeout in UCBs on CardsMMCB is a warning to other UCBs – they have to be relevant or the game's over. Few have a strategic vision or financial products worth a name. The shakeout has started. At end-March 2011, there were 1,645 UCBs. The RBI has received 158 merger proposals for merger, no objection certificates have been issued to 95 of these proposals. Out of the 95 mergers reported so far, 59 comprised of UCBs having negative net worth. The maximum number of mergers took place in the State of Maharashtra (58), followed by Gujarat (16) and Andhra Pradesh (10).The RBI Report on the Trend and Progress of Banking in India for 2010-11 (the latest available) shows the fragmented nature of UCBs. As on end-March 2011, only six UCBs had assets of more than Rs 500 crore, but accounted for 59 per cent of the total assets of the sector. UCBs with assets between Rs 100 crore and Rs 500 crore had 27 per cent of total assets. The remaining share of 14 per cent of total assets was attributable to UCBs with smaller asset size (Rs 15 crore-100 crore), but which accounted for almost 73 per cent of total number of UCBs.
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Market regulator Sebi Friday called for accelerating policy reforms like pension bill to revive investor sentiment and faltering growth.Calling for an urgent need to revive investor sentiment to revive the faltering growth, Sebi Chairman Upendra Kumar Sinha said, "Some of the reforms, which have long been pending, and one example being pension reforms... it has been years and years that some of these reforms...are yet to come through.""And that is something all of us have to counter very seriously, that how long can we go on deferring this?"Addressing the Skoch summit here Friday morning, Sinha said the country has still time to tide over the present growth deceleration if we move ahead with some of the urgent reform measures and resolve the issues plaguing the implementation side."If we start making some progress on these things (reforms), then in spite of the forecast about our economy coming down from the higher levels of 2007-08; if these policies change ... start happening, we can again come to levels which are commendable in comparison to any part of the world. But those changes have to take place," he said.The GDP growth hit a nine-year low in FY12 at 6.5 per cent due to a number of reasons, which many cite as policy paralysis and lack clarity on policy.This has led to almost all the foreign banks and analysts such as Goldman Sachs, Morgan Stanley, Citi and HSBC, among others, to lower FY13 GDP growth to a low of 5.8-6.3 per cent.Admitting that a part of our problems are imported, Sinha, however, said, "We cannot become complacent about policy making and implementation domestically."Stating that there is no reason why even private parties are not able to implement their projects on time, he said, "I am bewildered that if an agreement has been signed between a raw material supplier and a utility, why it is not being honoured."According to a CMIE estimate, as many as Rs 5 trillion worth of projects, mostly in the power and steel sectors and running into 500 projects, were stalled in FY12 due for want of mandatory clearances, fuel, raw material linkages, etc.Listing out the reform steps that are needed urgently, he said, "We all know what happened to FDI in retail, the PFRDA Bill, and the pension reforms are yet another examples."Passing the PFRDA Bill is not an end in itself, in my view it will serve a purpose, but a limited one. The more important thing is the largest pension funds in the country, which are being managed under a Central law, are they being reformed or not? The Pfrda Bill will not reform that," he said.On Thursday, the Indian government deferred the Pension Bill, that seeks to open up the sector to foreign and private investment, as the key ruling front ally Trinamool Congress put a spanner on the Regulatory and Development Authority Bill of 2011.Noting that the EPFO has 40 million accounts amounting to a whopping Rs 2,00,000 crore in funds, Sinha said, "If a small portion of that money starts coming into the market, (it means a lot, but) that money is not coming, that reform is not happening."Regretting that the high interest rates that the EPFO offers is hurting the whole sector, he said the corporates which manage their own pension funds are not able to match the interest rate announced by the EPFO and have to fund it by themselves. On the insurance front, he said the proportion of foreign investments is not increasing.Last week the government had also decided against increasing the FDI cap in the insurance sector which is currently pegged at 26 per cent.On the tightening of the IPO listing norms, Sinha said the volatility which used to happen on the opening day has come down since the new norms were implemented."We've started this concept of call-auction in the pre- open market, (earlier there was high volatility on the listing day) after which there have been four IPOs, and our feedback is that all four of them have been free from any such managed volatility and the numbers have come down substantially," he said.Later talking to reporters on the sidelines, the Sebi Chairman said FIIs want to understand whether there is a slowdown in policy-making and growth.On the new consent order norms, he said, "We have highlighted how particular cases are to be treated under the new Consent guidelines."Last month, the Sebi had revamped the widely criticised consent mechanism, which earlier used to give a lot of leeway to corporates.(PTI)
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Global credit ratings firm Moody's on Monday downgraded the country's three largest private sector lenders -- ICICI Bank, HDFC Bank and Axis Bank -- to D+ from C- to align them with the sovereign rating.As a result, the hybrid debt ratings of these banks, except HDFC Bank, will be negatively impacted.The standalone bank financial strength rating (BFSR) of ICICI, HDFC and Axis are revised down to D+ from C-, which now maps to a baseline credit assessment (BCA) of Baa3 from Baa2 on the long-term scale, Moody's Investors Service said in a statement issued in Singapore.The agency also downgraded the hybrid ratings of Axis Bank and ICICI Bank to Ba3 from Ba2. But it said all the revised ratings carry stable outlooks.Moody's also cut its rating for state-run Life Insurance Corp of India (LIC) two weeks after it put the country's largest portfolio investor under review for a downgrade over its high exposure to sovereign debt and lack of revenue sources outside of India.The ratings agency downgraded LIC to Baa3 from Baa2 with a stable outlook, in line with its Baa3 sovereign rating for India, which is the lowest investment grade rating. Moody's in December issued a stable outlook for India.Last month Moody's had put LIC under review for a possible downgrade.The downgrade of LIC's rating reflects Moody's assessment that its creditworthiness is highly correlated with that of the Indian government's credit strength, the ratings agency said, adding that LIC generates almost all its premiums in India."There is little, if any, reason to believe that LIC would be insulated from any government debt crisis, if it were to occur," Moody's said in a statement on Monday."The rating action follows in the context of the ongoing global review affecting all banks whose standalone ratings are higher than the rating of the government where they are domiciled, and they conclude the review that was initiated on April 30, 2012," Moody's Investors Service vice-president and senior credit officer at financial institutions group, Beatrice Woo, said in the statement.The affected banks downplayed the rating action, saying this is in line with the sovereign rating and does not in any new way negatively reflect their credit standing.Moody's also said the other ratings of these banks are unaffected and have stable outlooks as detailed below."Our review indicates that there are little reasons to believe that these banks will be insulated from a government debt crisis. More particularly, we note their significant direct exposure to the government securities, equivalent to 239 per cent of tier 1 at Axis Bank, 226 per cent of tier 1 at HDFC Bank and 143 per cent of tier 1 capital at ICICI Bank (based on latest publicly available data)."In addition, these banks are primarily domestic institutions with similar macroeconomic exposures as the sovereign government. Therefore, we view the lower standalone ratings -- which are now positioned at the rating of the government -- as more appropriate to capture the credit profiles of the banks," Wood said in the statement. During the January-March quarter of the last fiscal, LIC was again forced to increase stakes in state-owned banks such as Syndicate Bank, Bank of Maharashtra and IOC among others, as the cash-starved government did not have the funds to pick stakes as part of the fund infusion into banks.Accordingly, LIC's stake in many banks is above the Irda-mandated 10 per cent, and closer to 15 per cent.Moody's said since LIC is 100 per cent owned by the government and generates almost all its premia from within the country, it reflects the corporation's concentration in one market and its high reliance on the domestic economy, apart from its exposure to an evolving operating environment."Therefore, there is little reason to believe that LIC will be insulated from any government debt crisis, if it were to occur," Moody's said."LIC has meaningful and rapidly increasing direct or indirect exposures to the government through its holdings of government securities and its equity investments in government-related entities, including banks and corporations," it said.As of December 31, 2011, the ratio of government securities to adjusted shareholders' equity in LIC was 764 per cent (excluding unit-linked invested assets), said the agency, adding therefore it considers the lower rating, which is now positioned at the rating of the government, as more appropriate to capture the credit profile of the corporation.The agency further said these rating actions derive from our updated assessment of the linkage between the credit profiles of sovereigns and other institutions domiciled within the sovereign, which is discussed in the rating implementation guidance.In addition, the government guarantees all of LIC's policy liabilities, including associated declared bonuses, as prescribed in the LIC Act. Thus, Moody's views that LIC's credit strength is very much closely linked to the sovereign, which justifies the insurer's current rating.Explaining the rationale for the downgrade, Woo said, "The action reflects that their credit worthiness are highly correlated with that of the government's credit strength taking, into account (a) the extent to which their business depend on the domestic macroeconomic and financial environment, (b) the degree of reliance on market-based, and therefore more confidence-sensitive, funding and (c) their direct or indirect exposures to domestic sovereign debt, compared with their capital bases."For all the banks, the key drivers for the rating action were relatively low level cross-border diversification of their operations; high level of balance-sheet exposure to domestic sovereign debt, compared to their capital bases; franchise resilience and intrinsic strength within the operating environment, and absence of ongoing support from foreign ownership.She further said these rating actions derive from Moody's updated assessment of the linkage between the credit profiles of sovereigns and other institutions domiciled within the sovereign.On the downward revision of Axis Bank and ICICI Bank's hybrid debt, she said, "Their adjusted BCA is in line with their respective BCA as no parental or cooperative support is imputed. Therefore, a lower BCA becomes the starting point for notching hybrid securities and results in lower hybrid ratings in both banks' cases."The starting point for rating hybrid securities is the adjusted BCA, which reflects a bank's standalone credit strength as expressed through its BCA and includes uplift from parental and/or cooperative support, if applicable, but excludes systemic support, Moody's said.As of March 2012, ICICI Bank had an asset base of Rs 4.74 trillion, HDFC Bank had Rs 3.4 trillion and Axis Bank Rs 2.85 trillion.(Agencies)
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The Finance Minister's move to postpone the implementation of the general anti-avoidance rules (GAAR) by one year had perked up the equity and the currency markets on Monday but it was a different story on Tuesday. The rupee in the afternoon session fell so much that it prompted the Reserve Bank of India to step in when the rupee touched 53.30 against the dollar. This in turn sparked a tumble in domestic stocks and fears of continued outflows. The BSE Sensex dropped 2.17 per cent after investors sought more clarity over India's suggested amendments of controversial GAAR proposals. In a strong message to multinationals campaign against taxing Vodafone, Government of India on Tuesday ruled out any rethinking on the issue making it clear that India cannot be a tax haven just to attract foreign investment. It also asserted that Parliament has the right to make amendments to law to correct Supreme Court judgement and would not allow a situation where a corporate would avoid paying tax here by operating from a tax haven.The 30-share Sensex fell 366.53 points to end at 16,546.18, while the 50-share Nifty lost 2.23 per cent to end at 4999.95 points. It appears the Finance Minister did a good turn, but did not go far enough. Investors in general and India in particular seems to have been left in an uncomfortable position.The Finance Minister had shown his sensitivity to investor unrest and has reduced the scope of the backward-looking changes by promising not to tax capital gains on deals made in countries which have a double taxation treaty with India. The last adjustment protects deals done from Mauritius from retrospective tax. But the Cayman Islands have no such treaty. That means Vodafone, which structured its purchase of Hutchison Whampoa's Indian mobile phone operations with a Cayman Islands vehicle, has to pay the retroactive tax.Lok Sabha Passes Finance BillAt Parliament, on Tuesday, Mukherjee stood his ground on deferring the implementation of GAAR and said his move was not a result of fear or apprehension. A Left motion against his move was defeated in the Lok Sabha 342 to 22, with the BJP backing the government.He also justified the retrospective tax law change which would make Vodafone liable to pay taxes worth over Rs 10,000 crore.The government accepted a BJP suggestion that it bring an amendment to give effect to Mukherjee's deferral of GAAR till 2013. But the Left, accusing the UPA of surrendering to market forces and the US, insisted that it be part of this year's Finance Bill. It then brought the motion which was easily defeated in the Lok Sabha, which passed the Finance Bill.In his reply to the debate on the Bill, the Finance Minister said, "GAAR I have agreed to defer, but not because of fear or apprehension. I am not afraid of any consequences." He also defended a retrospective tax on overseas deals involving assets in India, such as the one involving Vodafone's 2007 acquisition of Hutchison Essar.Mukherjee said such deals must be guided by the double taxation avoidance agreements or the companies must pay tax in India. "(You) cannot make money on assets made in India by not paying tax in India or somewhere else, some tax haven through a series of subsidiaries and make huge capital gains on assets based in India," he told the House."My whole argument against Vodafone was on that point. I would like to be guided by double tax avoidance agreement or tax. It cannot be that someone will make money on an asset in India and not pay tax in India or in its country of origin," Mukherjee said while debating on the Finance Bill in Lok Sabha on Tuesday.The Income Tax department had claimed that Vodafone was liable to pay $2.2 billion in capital gains because the underlying assets for the deal were based in India, but that argument was rejected by the Supreme Court. The Finance Minister countered criticism that he was challenging the ruling of the Supreme Court on the retrospective taxation issue by saying that it was solely the right of the legislature to frame laws. "I am aware of the power of legislature, it is the power of legislature to make law. Supreme Court can interpret, but legislature can make amendment to correct the flaw," he said."Law has to be framed by us. If there is conflict between intent and interpretation of judiciary, then we respectfully say that it is our right," he added.Mukherjee said that the UK had also allowed taxes to be applied retrospectively if the acquisition had taken place prior to a double tax avoidance agreement being signed and India could do the same."If they are entitled then India is surely entitled. India is not inferior to anyone. We cannot be a tax haven just to attract foreign investment," the Finance Minister said.Mukherjee said that the Supreme Court was free to interpret law but as a legislator he had the freedom to amend the laws."I will say I am fully aware of my right as legislator," he said adding that Parliament was entitled to make legislation in the country."The Supreme Court may interpret law but Parliament has ability to make amendments to law to correct Supreme Court's judgement," he said."By interpretation of law our ability of amending law is not taken away," the Finance Minister said.India has proposed to amend laws retrospectively to tax some already-completed mergers of foreign companies with Indian assets, potentially putting Vodafone back under the taxman's spotlight for more than $2 billion in taxes even after the Supreme Court ruled the tax office did not have jurisdiction over cross-border deals.Vodafone has not yet approached the government for an out of court settlement for the tax dispute, but the government is determined to tax the British telecom company over its 2007 acquisition of Hong Kong-based Hutchison Whampoa's mobile operations in India.Rupee Falters On Foreign Outflow FearsThe rupee fell on Tuesday on worries foreign investors would not be swayed by the government's move to address their concerns over taxation, sparking a tumble in domestic stocks and fears of continued outflows.The falls in the afternoon session prompted the Reserve Bank of India to step in when the rupee weakened to 53.30 against the dollar, according to four dealers, continuing a series of interventions since last week.The rupee erased the gains on Monday when the government announced it would postpone controversial tax rules for foreign investors and would shift the onus of proving evasion on tax authorities.Despite the moves, foreign investors sold a net of 10.3 billion rupees in domestic stocks on Monday and Tuesday, according to provisional data from the National Stock Exchange."The initial euphoria about the GAAR is done. The market is now looking at actual flows," said Uday Bhatt, senior manager of dealing with state-run UCO Bank.The rupee fell 0.4 percent against the dollar to 53.12/13, weakening from its Monday close of 52.9050/9150.The rupee is fast approaching a record low of around 54.30 to the dollar, weighed down by worries about India's fiscal and economic challenges, and increasingly, that foreign investors will exit from the country.(With Agencies)
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The rupee headed for a second session of gains on Friday, continuing its recovery from the record lows hit this week, after the Reserve Bank of India (RBI) stepped in to defend the currency, while exporters and custodian banks also sold dollars. Analysts at Barclays Capital said USD/INR is expected to hover around 56 and 54 to a dollar in one and three months respectively, with an upside risk, before retreating only modestly to around 52 and 51 in six and 12 months.With limited improvement expected in the macro fundamentals in the near-term, any pullback in USD/INR is likely to be largely dependent on policy initiatives or an improvement in global risk appetite, says report.Barclays expects RBI to eventually float dollar-denominated bonds through state-run banks like the State Bank of India for non-resident Indian investors which could trigger $12-15 billion inflows in a short time frame. FX intervention by the RBI would not offer the INR any meaningful or lasting support, it says.Meanwhile, rupee is still headed for an eight consecutive weekly fall, having hit seven consecutive record lows since May 16. Its latest was on Thursday when it fell to as much as 56.40.The intense risk aversion from the euro zone has severely pressured the currency, but falls have been magnified by concerns about India's fiscal and economic outlooks.A slight easing of that risk-off sentiment -- with the euro inching up from two-year lows against the dollar on Friday -- has also helped the rupee recover over the past two sessions.Meanwhile, analysts at Barclays Capital said USD/INR is expected to hover around 56 and 54 to a dollar in one and three months respectively, with an upside risk, before retreating only modestly to around 52 and 51 in six and 12 months.The RBI is likely to maintain a more neutral bias in the next one or two policy meetings after the larger-than-expected 50 bps cut in April, cut the repo rate by a further 50-75 bps by March 2013, it added.Euro Effect"The euro effect has caused the turnaround in the rupee. Some stop-losses were also triggered, and there were also inflows with custodian banks," said A. Ajith Kumar, a dealer with Federal Bank.At 3 p.m. (0930 GMT), the partially convertible rupee was at 55.45/46 per dollar, 0.4 per cent stronger than its Thursday's close. It has moved in a wide band of 55.24 to 56.09 so far in the day.The rupee has fallen for eight weeks now, its longest losing streak since the 11 weeks of falls that ended in October 2008.The RBI is believed to be looking to hold the rupee above the psychologically key level of 56 to the dollar, and has been seen intervening in the rupee forward markets, alongside its defence of the spot rupee.The central bank intervened briefly in spot markets in the morning, while later on, traders said some banks had been selling off their long dollar positions ahead of the weekend.Some selling from exporters who had missed Thursday's deadline to convert half of their foreign currency holdings into rupees was also cited by traders.A chief forex dealer at a state-run bank said the RBI had admonished exporters they faced penalties if they did not meet the central bank's mandate issued earlier this month.RBI Intervening Frequently In Rupee ForwardsRBI has been seen intervening in the rupee forward markets, alongside its defence of the spot rupee, possibly to replenish its FX reserves and to replace domestic rupee liquidity, traders said.That intervention in forwards, coupled with the heavy demand for short-term hedging by importers and foreign investors, has led to a steep inversion of the dollar/rupee forward curves, both offshore and onshore.The spread between the implied yields on the 1-month and the 1-year rupee onshore forwards has widened from a negative 69 basis points in mid-May to as high as 110 basis points.The spread in the offshore implied forward curve between the one-month and one-year non-deliverable forwards is now a negative 430 basis points, having widened from a negative 110 in mid-May."Spot dollar demand and near-end demand for hedging keeps it elevated while far-ends been depressed due to RBI intervention," one NDF trader said.The "lack of natural hedgers other than FIIs" was also keeping forwards at the longer end depressed, he said, referring to foreign institutional investors.Traders said the Reserve Bank of India had been receiving in the 6-month to ten-month dollar-rupee swaps. The latest data from the RBI shows the outstanding net forward dollar sales as at end of March was $3.2 billion, though detail on the tenors is unavailable.That receiving in forwards also helps the RBI augment its intervention firepower.It has been selling dollars aggressively in the spot market to rein in the falling rupee, but the swaps help it defer the impact of that selling on FX reserves to a later date. Reserves stood at $291.80 billion as of April.The RBI has also been easing rupee liquidity conditions via bond purchases, both through open market operations and suspected bond purchases in the secondary markets."Intervention is happening at the longer end of the forwards curve. The impact of intervention is the same across tenors but is seen more on the longer end on annualised basis," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.The spot rupee was last trading at 55.38/39 per dollar, weaker than its Thursday's close of 55.65/66. It had hit a life-low of 56.40 on Thursday.(Agencies)
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Gautam Ashra, managing partner at forex brokerage Kanji Pitamber & Co in Mumbai's old business district of Fort, is having a tough time these days. The rupee has kissed 56 to the dollar, but Ashra, the third-generation boss at the 88-year-old firm, says, "You might think that with all the mess in the forex market, our clients (read banks) flock to us. But that is not so." His gripe — the curbs to prop up the rupee. "There is no fun. No open positions, no volatility."Rajesh Duseja, managing partner at Govindram & Sons, is guarded. "If there is another regulatory crackdown (in the forwards), it will hurt. For now, I am doing well. We have a 12-strong trading desk. About three years ago, we were nine." Is there a future for Govindram, a 60-year-old family concern? Duseja is hopeful. "The nature of trades may change, but brokerages like us will still be around."Despite his optimistic spin, the fact is that old-world brokerages are on their way out. E-platforms, the entry of global biggies and consolidation are a few turns away. The conditions underfoot have changed. Ashra and Duseja appear to be resigned, but will only tell you that for now, it has do with a couple of Reserve Bank of India (RBI) moves.On 10 May, the central bank asked exporters to convert 50 per cent of the $5 billion held in their Exchange Earners' Foreign Currency (EEFC) accounts into rupees within a fortnight. In effect, it amounted to "dollar sales" of $2.5 billion in the spot market. To improve liquidity in the market, the RBI also allowed banks to run a higher intra-day open position at five times the net overnight open limits available to them. Earlier, banks could not exceed their overnight limits. The rupee rose to 52.95 against the greenback from its 9 May close of 53.82. But the respite has proved to be shortlived. The rupee now tests a new low of 56. Fresh trading curbs may be on the cards, and volumes may fall — none of these is good news.A New OrderYet, there is little in the RBI's measures to evoke the kind of responses you hear from Ashra and Duseja. It has more to do with the changed nature of their business after the Foreign Exchange Dealers' Association of India (Fedai) opened up the brokerage business in 1998, which led to the entry of electronic forex trading platforms, such as the one by Reuters (now Thomson Reuters). Apart from this, banks, too, had started to centralise their treasury operations in Mumbai. Fedai's step proved to be a watershed — there are a little over a dozen active brokerages left. "The number of active firms is 16 today from 40-plus five years back," says Ashra. Back in 1998, you had 125 of them. Now there are just a couple of brokers each left in New Delhi and Kolkata, against 25 in the past. In Kochi, Ahmedabad and Chennai, they are extinct. Forex brokerages now have to fight it out to eke out a living. Spot and forward volumes collectively top about $22 billion these days; the split is roughly 50:50. This is a huge fall from $50 billion six months ago.It all started when the rupee hit 55 for the first time and steps were taken to prop it up in mid-December last year — exporters could no longer book and cancel forward contracts to get a bigger bang for their dollars. Ditto for foreign institutional investors (FIIs). The move curbed speculation, but business for brokerages as a whole slumped.Worse, the nature of the trades has changed. In the spot market, about 80 per cent of the trades are now put through e-platforms such as IBS Forex of Financial Technologies, EBS from I-Cap and CCIL (Clearing Corporation of India). The situation is better in forwards — about 40 per cent of trades are still put through voice brokers like Govindram. "They are still relevant in the forwards; even globally," notes Ashish Parthasarthy, treasurer at HDFC Bank.The money in forwards depends on which segment one plays in. The bigger deals are in the cash-to-seven days forwards at $100 million; it tapers off in the near forwards (cash-to-2-3 months) to $10-25 million. But here too, it is a select few who get to corner the volumes — FR Ratnakar & Co, Vrajlal Thakkar & Co, AP Taraporevala & Sons along with global names such as Prebon Yamane and I-Cap. But even this closed club cannot ignore the fact that brokerage has taken a hit — you pocket about Rs 1,100 on a ‘dollar' (trade-slang for transactions worth a million dollars); and after discounts, it is a paltry Rs 600. It was at Rs 6,000-levels till Fedai changed the game in 1998.On To Bigger ThingsA shakeout is also on the cards. Fedai — a body of bankers and brokers — has mooted sweeping reforms for voice brokers. They need to have a net worth of Rs 1 crore for proprietorships and partnerships (up from Rs 10 lakh) and Rs 5 crore for private listed firms (up from Rs 25 lakh). "What happened globally will happen out here as well," says Ashra.Take Tullett & Riley, which merged with Liberty Brokerage to create Tullett Liberty in 1999. Four years later, it was acquired by Collins Stewarts to result in Collins Stewart Tullett, which had, in 2004, bought Prebon Yamane. Born in 1990, Prebon Yamane itself was a result of a three-way merger between London-based money brokers Babcock & Brown, Kirkland-Whittaker and Fulton Prebon.These consolidated brokerages now have hundreds of dealers compared to each small brokerage employing a handful earlier. Moreover, the bigger players have added money markets, bonds and gilts broking to their kitty. Many new global entrants also have an eye on a future date — a convertible rupee. It seems distant for now; and until then, domestic brokers can heave a sigh of relief. The future of traders on a brokerage's floor is secure — if the firm gets acquired, the merged entity might absorb them or they may find a place in a bank or corporate treasury. But the owners of these brokerages may not find a place under the broking sun. The children of many a forex brokerage owner are simply not interested in the business. It could be last days for small, individual brokerage houses. "If I get a good deal, I will also sell out", says Ashra.raghu(dot)mohan(at)abp(dot)in(This story was published in Businessworld Issue Dated 04-06-2012)
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The Reserve Bank of India may consider directly selling dollars to oil marketing companies in an attempt to arrest a further fall in the rupee, which has hit record lows for seven consecutive sessions."That's been an issue on the table. I am not ruling it out, I am also not saying that we will do it right now. It's an open issue, we have done it the past. At the moment we have not done it so far," the RBI governor Duvvuri Subbarao told reporters following a central bank board meeting on Thursday.After his comments, the rupee strengthened to close at 55.65/66 to the dollar, clocking a gain for the day. Earlier in the day it hit a record low of 56.40.While selling dollars directly to oil importers would ease volatility in the forex market, it would also deplete India's foreign exchange reserves given the country's large oil import bill.Another possible measure to bolster the rupee, the issuance of a sovereign bond, is not under discussion for now, Subbarao said."I cannot say in favour or out of favour. We have done it in the past and it might be done in the future. But it is not something that is being contemplated right now," Subbarao said.Some in the market have suggested that, to attract dollars, India could issue a sovereign-guaranteed bond through State Bank of India to non-resident Indians at attractive interest rates, similar to the Indian Millennium Deposits issued in 2000. Such a move would increase India's debt and interest liability.Earlier in the day, the rupee plunged to a record low as global risk aversion combined with worries about India's fiscal and current account deficits and investors shrugged off India's late-Wednesday move to raise petrol prices.Over the last month, the central bank has taken several administrative measures and has sold dollars in the market in order to prop up the rupee. Last week, it told exporters to sell half the foreign currency in their accounts and made it easier for the market to absorb large foreign exchange transactions."As we all understand, the rupee movement is a function of the external situation as well as developments in our current account, capital account and balance of payments," Subbarao said."Some structural changes are necessary for improvement in the current account," he said, adding the RBI would do whatever is needed in line with its policies. The RBI is officially agnostic about the level of the rupee but takes measures to ease volatility.The government has been widely criticised for lack of bold measures to address its twin deficits, which has further dented investor sentiment and hurt the rupee.The RBI governor said fiscal consolidation was needed to bring down headline inflation, which accelerated in April to 7.23 per cent as price pressures for food, fuel and manufactured items all picked up. (Reuters)
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