Surging capital inflows, booming stock markets and a fast-appreciating currency suggest the India story is again shining after a dismal 2011.Dig a little deeper, and problems afflicting Asia's third-largest economy remain largely unabated and unaddressed. Inflationary risks remain and a political logjam continues to hem in reforms, clouding the economic outlook."Nothing has happened on the policy front to justify this mood," said Andrew Kenningham, an economist at Capital Economics in London. "Growth prospects are not looking good by historical standards."New Delhi on Tuesday cut the growth estimate for the current fiscal year that ends in March to 6.9 per cent from a revised forecast of around 7.5 per cent issued in December, sharply below the 8.4 per cent growth of the last fiscal year.Still, the benchmark stock index is up nearly 15 per cent this year while the rupee has risen about 8 per cent from its 2011 close, with both clocking the sharpest gains in more than a decade.An improved global funding environment, relatively attractive valuations of Indian equities and hopes for rate cuts by the central bank have lured foreign institutions. They are net buyers of $3.2 billion Indian equities this year after having sold $357 million last year."The rally at this stage may be more a reflection of foreign portfolio flows and an appreciation of the rupee," said Sanjay Sinha, a veteran fund manager who founded Citrus Advisors, an investment advisory firm."This in itself may be in an anticipation that the twin factors of a rate cut from April and bold economic policies may actually herald the resurgence of the economy. Therefore, data may follow but the markets may have rallied ahead of them."Slowing GrowthThe Indian economic growth is likely to fall to a three-year low of 6.9 per cent in 2011-12, mainly due to sharp slowdown in manufacturing, agriculture and mining sectors, against 8.4 per cent expansion in the last fiscal.Agriculture and allied activities are likely to grow at 2.5 per cent in 2011-12, compared to a robust growth of 7 per cent in 2010-11, according to the Advanced Estimates released on Tuesday by the Central Statistical Organisation (CSO) of India.Manufacturing growth is also expected to drop down to 3.9 per cent in this fiscal from 7.6 per cent last year.The CSO's Gross Domestic Product growth projection is a tad lower than the 7 per cent forecast made by the Reserve Bank of India in its quarterly monetary policy review last month.The latest GDP growth estimate of 6.9 per cent for the entire fiscal means that the pace of economic expansion slowed in the second half of 2011-12, given that GDP growth in the April-September, 2011, period stood at 7.3 per cent.According to the advance estimates, mining and quarrying is likely to witness a decline of 2.2 per cent, compared to a growth of 5 per cent a year ago.Growth in construction is also likely to slip to 4.8 per cent in 2011-12, against an 8 per cent in 2010-11.Furthermore, the finance, insurance, real estate and business services sectors are likely to grow by 9.1 per cent this fiscal, against 10.4 per cent last fiscal.Commenting on the GDP growth estimates, Planning Commission Deputy Chairman Montek Singh Ahluwalia said: "The 6.9 per cent is consistent with what we have been saying."We said 7 per cent for year (2011-12) as whole. (With) 7.3 per cent in the first half and 6.9 in the third quarter, 7 per cent is possible."According to the data, growth in electricity, gas and water production is, however, likely to be better this year.The segments are expected to grow up by 8.3 per cent in 2011-12, against 3 per cent in 2010-11.Valuations at the end of 2011 were 12-13 times estimated earnings for the fiscal year that ends in March 2013, compared with a 10-year average of 15, said Rakesh Arora, managing director at Macquarie Equities Research in Mumbai.The Reserve Bank of India (RBI) has signalled that it is finished raising interest rates after 13 increases between March 2010 and October 2011, to the relief of companies and banks. A rate cut is widely expected by the end of June, if not sooner.The rupee's recovery has been fuelled in part by measures the central bank took to stabilize the exchange rate."It is a feel-good rally," said Jagannadham Thunuguntla, head of research at SMC Investments and Advisors Ltd.Macroeconomic indicators are recently looking better.Industrial output has recovered from a record slump and the manufacturing and services sectors continue to pick up pace. Inflation slipped below 8 percent for the first time in two years in December and is on track to fall to the central bank's 7 percent target by the end of the fiscal year.PrematureMany India-watchers warn the euphoria is premature.Inflation is indeed down smartly, falling to a two-year low of 7.47 per cent, but that is due almost entirely to a drop in food inflation that is widely seen as unsustainable.Non-food manufactured inflation eased by just 0.2 percentage points from 7.9 percent in November to 7.7 percent in December.All of this means that the RBI may not be in a hurry to slash interest rates."We don't expect the RBI to be aggressive in easing rates as inflation worries are still not completely mitigated. We expect it to be cautious in easing interest rates," said Siddhartha Sanyal, an economist at Barclays Capital in Mumbai.Meanwhile, the policy environment in New Delhi remains muddled, with the Congress party government of Prime Minister Manmohan Singh weakened by corruption scandals and facing a tough election in Uttar Pradesh, India's most populous state.A negative outcome for Congress next month in the election could further weaken it and exacerbate political gridlock that has already stalled reforms including a goods and services tax (GST) and foreign direct investment in multi-brand retail.Before the global financial crisis of 2008, India's growth capacity was estimated at around 8.5 per cent. Sluggish capital investment since then means India can now sustain just 7 or 7.5 per cent growth without overheating, economists say."From the last quarter, there has been no push in terms of policies to help get investments moving on the ground," said M.S. Unnikrishnan, managing director at Thermax Ltd, which makes and installs heating and pollution control gear."Share market prices and the movement in the rupee are no indication of what is happening on the ground," he added.Fiscal FissuresPublic finances remain strained. RBI Governor Duvvuri Subbarao last month urged New Delhi to adopt greater fiscal discipline, saying a lack of credible fiscal consolidation would constrain it from lowering rates.The global picture remains mixed. While improving prospects in the United States have driven optimism, most recently in a better-than-expected jobs report, the ongoing euro zone debt crisis weighs on sentiment and puts pressure on India's exports, and in turn its current account deficit.Morgan Stanley wrote in a Monday note that ongoing fiscal and current account deficits will continue to pressure the rupee against the dollar over the long term."As the economy undergoes an extensive deleveraging process, we expect Indian equities and credits to underperform against their regional and emerging market peers during 2012," it said.Year To ForgetCalendar 2011 was a year policymakers would rather forget.Inflation stayed stubbornly high, prompting rate hikes that mainly served to dampen growth. As the economy lost steam, public finances weakened. New Delhi is on track to fall short of its aim to trim the fiscal deficit to 4.6 percent of GDP.Political gridlock after a wave of scandals means investment bottlenecks persist, dampening investor sentiment and eroding asset quality in the infrastructure sector as projects stall.Shares plunged, ending the year with their first annual fall in three years. A record sell-off in equity markets hammered the Indian rupee, which lost nearly 16 percent against the U.S. dollar, rendering it the worst performer in Asia."Foreign inflows are coming in on the fact that the interest rate cycle has peaked in India and economic situation has reached a trough," said Sinha of Citrus Advisors."To sustain them from here on requires action on policy reforms. If hopes of economic reforms don't materialize, there are good chances of these inflows drying up," he said.(Reuters)
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Attractive valuation has seen Maneesh Dangi, co-CIO at Birla SunLife Mutual Fund, going overweight on equity for the past 2-3 months, having invested around 65-70 per cent of his personal investable surplus in equity and the rest in short-term bond funds. Talking to Businessworld he feels the long-term refinancing operation (LTRO) in the Euro-zone has been the game changer eliminating credit risk and in turn will see equity market rallying for some more time. For the star fixed income fund manager, equity buzz is not getting any louder, however. He understands that growth (particularly EPS growth) is getting difficult for companies, but the valuation parameters still look good. In his debt funds, in the last one month, he has been moving out of government securities (G-Sec) and corporate bonds and is buying certificate of deposits (CDs) and 1 to 3 years of corporate bonds, as he sees them rallying in the coming days. Excerpts from the conversation: Was the CRR cut by RBI, a surprise and why? Were you ready for this surprise? Were you completely invested? If not, how much of a hit have you incurred since the cut and if yes, how much have you gained?It wasn't a surprise to us. We have been articulating for the past four months that RBI would be cutting cash reserve ratio (CRR) in January as inflation starts to appear lower and liquidity deficit begins to hurt growth. Interestingly, since we had a view on the CRR cut, we weren't under-invested in G-Secs in most of our flagship duration funds. CRR cut affects the G-Sec and corporate bond markets differently. Paradoxically, CRR cut is bad for G-Secs as it reduces the propensity of RBI to do open market operation (OMOs). It may be puzzling to some observers, but the ones in know of market dynamics would get it that most of the bullishness in G-Sec markets has been on account of OMOs (in which RBI buys back bonds from the markets). So as a fund house we had light positions in G-Sec and this paid off handsomely as yields moved up sharply after CRR cut. We had swapped out G-Sec positions in short term corporate bonds and that category of investment has done well for us.We think RBI would cut CRR in March again by 50 bps (There's small chance of higher cut as well). What is your outlook for the bond market?We expect RBI to cut interest rates by more than 100 bps over the next 9 -12 months which will cause a bull steepening of the curve, meaning short end rates will move down more than longer end rates. The rate cuts will benefit both corporate and government bonds. But we are more constructive on corporate bonds for two reasons. First, the uncertainty around the total pending borrowing of the government and second, because incremental CRR cuts are bad (marginally) for government bonds, as it reduces the propensity for OMOs. So we think, the current markets offer better opportunities for the corporate bonds, as easing liquidity creates better environment to own corporate bonds. Going ahead what would be the fund house strategy to invest?At the broader asset allocation level, our big view is that worst is priced in the risk assets and the time has come to add equities in the portfolios. As for fixed income, we favour medium-term corporate bonds over G-Secs and long-term corporate bonds, as liquidity is likely to ease and RBI is likely to cut rates over the next few quarters. We are investing in one-year CDs and in corporate bonds with 1 to 3 years' maturity. One year CD rates — currently trading at near 9.9 per cent — should get priced 100-125 bps lower over the second and the third quarter of 2012. While 2-3 year should get priced lower by 50-75 bps. What has been the impact on the fund house due to the new RBI guidelines on the liquid fund and liquid plus fund? How are you tackling the outflow?RBI guidelines have resulted in bank money drying from out liquid funds. MF industry has lost more than Rs 50,000 crore due to the RBI's guidelines on banks' investments in ultra short-term funds. Since the transition has happened over a long period of time, as RBI had intimated the industry about it long ago, mutual fund industry could tackle the outflow in a non disruptive manner. I remember last year you made good money for investors by keeping the money in short-dated securities. In current market condition where will you advice investors to invest? Currently where are you personally investing your own money and why?Investors will make money by investing in medium term corporate bonds as rates are likely to ease substantially over there. All my investments are split between some short term fund and equity funds. I am overweight on equity now. Today 65-70 per cent of my money is in equities, while the rest is in short-term bonds. I am not investing in gold. I see gold as insurance, investing during uncertainty and today will not like to pay heavy price to buy insurance. What is your take on the 10-year G-Sec yields and why?We are keeping away from G-Sec as the 10 year G-Sec will average at 8 per cent through the year, but it's likely to see some very low levels during the year. (This one is the most difficult to predict, but may be closer to 7.5 per cent during second and third quarter of the year, unfortunately it will not be a permanent adobe for it given the state of our profligate government). There are two levers working on G-Sec yields, one the easing rate bias that should induce lower yields and the other is very high fiscal deficit which should keep the pressure on yields. Next year will be the battle of both these forces and that should keep markets excessively volatile. I don't think G-Sec markets are going to trend in any particular direction.Will you be an investor in PTC, CD and CP in these markets and why? What are the yields you are looking at in these instruments?We are investors in all the instruments. Currently, CDs are favorable instruments as they offer very good yields and sufficient liquidity. One year CD is offering near 10 per cent yields. What is your view on the liquidity in the system? Why are bankers craving for more returns on their money — at least this comes to be seen from the auctions. What is your view and why?In my view, liquidity situation is likely to change quite dramatically in next couple of months. By April and May, RBI would have cut CRR as much to make sure that systemic liquidity is near neutral. Mostly, liquidity will remain neutral for many months after that. Financiers always crave to earn more on their money, but unless they collude, mere craving is futile. Its Mr Market, a collective force of all the participants' greed and fear, that drive the return or yields. Auctioned yields or Base rates are high because liquidity is deficient, and government seems to be crowding out private borrowing.Is the fund house seeing a flow of money in to the fund house? In the last six months how much of it is coming into fixed income and in which schemes? Over last 6 months, we have seen our duration funds garnering a lot of money. Dynamic bond fund, which has a mandate to run flexible duration of 1 to 3 years, has tripled in size.
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Killol Pandya, head of fixed income at Daiwa Asset Management and Lakshmi Iyer, Head of Product & Fixed Income – Kotak Mutual Fund, talk to Businessworld's Tanushree Pillai about the nuances of debt mutual funds – where your money is invested, what kind of returns should one expect and how long should one remain invested.What are the different kinds of debt mutual funds that are available for retail investors?Pandya: Mutual fund schemes which invest in debt instruments fulfill several investor needs. There are Liquid and ultra short term funds which are oriented at the Institutional and semi- Institutional segment and provide good returns and overnight liquidity to the investors. For investors having a slightly longer investment horizon, there are short term debt funds. For investors who have a medium to long term investment view, there are Medium term and income funds. Some investors have a pre-determined investment horizon; these investors can use the Fixed Maturity Plan (FMP) route to make meaningful investments. We also have debt oriented hybrid funds by way of MIPs etc which provide a good asset mix for investors who have a larger risk-return appetite.Iyer: The Indian mutual funds industry offers a range of investment avenues through debt funds, servicing a spectrum of investors; be it for investors with short-term horizon of as little as a day, or for long-term holdings.Consequently we have liquid funds, short-term debt funds, and long-term bond/gilt funds. Over and above that, close ended debt funds (also termed as FMPs/QIPs) are also a key retail offering.Mutual funds also offer hybrid debt funds, which are recognized as monthly income plans and balance funds. These funds primarily are mix of various asset classes which are devised to cater to specific investment needs of investors.Please elaborate each one and how different it is from the other?Pandya: Different Mutual Fund (MF) schemes provide different risk-return profiles. They also represent a different profiles in terms of investment horizons of investors. In that sense, each of the debt MF products provide value to the investors at discrete points on the Risk-Return-Investment horizon matrix.What kind of allocation (percentage wise) should retail investors go for (keeping in mind a certain age bracket) Pandya: Allocation of money in different MF products does not only depend on the age of the investor. More importantly, it is a function of where we are placed on the interest rate cycle. As things stand now, we appear to be at the end of the interest tightening cycle. We are likely to experience a period of interest rate stability before the rates begin to soften. So, we advise retail investors to stay invested in debt funds while keeping about half their money at the shorter end of the curve (liquid and ultra short term funds) and venture out towards products which are longer on the yield curve with the balance money put in a calibrated manner.Iyer: That is dependent on the investor's investment profile and objectives. It is a function of interest rate cycle. If signs of peaking are visible debt should increase towards long duration funds and vice-versa. Over and above that, the investors can also generate competitive returns by investing their excess cash balances in liquid funds.What are the benefits of debt mutual funds?Pandya: The very nature of the underlying instruments such as money market instruments, sovereign bonds and debentures indicate a pre-determined fund flow. While debt markets are exposed to interest risks, reinvestment risks and market risks, the impact of these risks can be managed in a relatively better manner. Empirical evidence suggests that debt markets are relatively less volatile than equity or forex markets. The inherent stability, relative probability of protecting capital and making some returns thereon, is the key advantage of debt funds.Iyer: A relative regularity of return and performance vis-à-vis the other asset classes is one of the key advantages of the debt mutual funds. Other than that, the risk on capital invested is far reduced (provided the fund is invested in creditworthy instruments) vis-à-vis the other asset classes. Thus the possibility of a capital loss in fixed income investment is very low. Also, if the debt investments are timed with the peaking of the interest rate cycle, the investors have the potential to make modest capital gains. Given today's high interest rate scenario, what kind of returns are debt MFs giving?Pandya: Currently, debt funds are giving one month returns ranging from 8 per cent to 20 per cent, depending on the underlying asset class and the investment period involved. These returns may be a product of investments at high yields as well as profits booked on account of the significant softening seen in Gilt market yields. When should a retail investor think of investing in debt MFs?Pandya: I do not subscribe to the policy of trying to 'time' the debt markets. I hold that debt fund investments ought to be a perennial feature of every retail portfolio. As I have already shared with you, debt funds provide a range of investment solutions and retail investors may find value in a combination of the offerings at all points in time.Iyer: An investor can invest into the debt funds in almost any kind of market or circumstance. However, the investor is advised to calibrate across the short and the long duration funds according to the interest rate environment prevalent. When the interest rates have peaked, the long duration funds, in a 1-year timeframe, tend to be relatively better performers. On the other hand, in a rising interest rate environment, money market funds are more advisable. Whereas, in a range bound market, short duration debt funds find more traction. The unique thing about debt funds is that there are products available for every business and interest rate cycle. In the past year, how have the returns of debt MFs varied and why?Pandya: Debt MF returns are always subject to market risks and more importantly to interest rate risks. As a rule of thumb, interest rates hardening leads to a drop in debt MF returns. In the past 6 to 8 quarters, we have seen about 13 hikes from the Reserve Bank of India (RBI) amounting to a total of about 375 bps. This was a natural fallout of the interest tightening regime seen by our economy during the period. In such a scenario, it is difficult for debt funds to outperform. However, funds which were oriented at the shortest end of the curve (viz. Liquid and ultra short term funds) have managed to give relatively better returns throughout the period.What type of debt instruments do debt MFs invest in?Pandya: Debt funds may invest in near cash assets such as CBLO & reverse repo, Money Market instruments such as Treasury Bills, Commercial Papers and Certificates of Deposits as well as instruments such as sovereign bonds, Debentures, Pass through certificates, Fixed Deposits and other allied structured debt obligations. In addition, debt funds may use debt derivatives such as Overnight Index Swap (OIS) to hedge their portfolios subject to SEBI guidelines. Debt oriented hybrid funds may also invest in additional asset classes such as Equities and gold subject to the profile of the offering.As a percentage of the total MF pie, how much are debt MFs?Pandya: As per the AMFI's monthly data of category-wise assets under management as on December 31, 2011, debt mutual funds which include Liquid/Money Market Funds, Income and Gilt Funds form approximate 70% the total industry AUM. What kind of returns is expected from debt MFs in the next six months?Returns given by Mutual Funds are always subject to market risks and dependent on a number of factors. The returns given by debt MFs in the coming months shall primarily depend on the interest cycle. The speed and strength of movement by the RBI in terms of reference rates shall be the primary driver behind debt fund returns. In addition, WPI inflation, rupee movements and the upcoming budget shall be watched in order to determine the expected returns. Nonetheless, it may be fair to state that 2012 (calendar) may be better for debt funds than 2011 was and debt MF returns may approach double digit returns in the current calendar.Where would you invest your money in, given the current scenario?Pandya: As I have stated earlier, we appear to be at the end of the interest tightening cycle. We are likely to experience a period of interest rate stability before the rates begin to soften. As a function of this, we advise retail investors to stay invested in debt funds while keeping about half of their monies at the shorter end of the curve (Liquid and ultra short term funds) and venture out towards products which are longer on the yield curve with the balance monies albeit in a calibrated manner. However, I hold that it may not be possible for the retail investor to keep track of the markets on his own. In such cases, I would recommend a dynamic fund. Such funds permit the Fund Manager to seamlessly move across the yield curve and alter the portfolio's duration in order to optimise returns for the investor while also keeping a check on the risks involved.Iyer: The nature and scale of investment must almost always be a function of individual's investment objective and risk-return profile. Having said that, in the current economic environment, the steep slack in the gdp growth and a rapidly declining inflation; presents the possibility of a gradual downward rate-revision over the course of next 12 months. Moreover, the renewed FII interest in India, as demonstrated by the approximstely $5 billion net inflow into the domestic capital markets, also indicates of a possible change in the equity market circumstance in the year ahead. Consequently, we would prefer the equity allocations to be in the 20-35 per cent range, with predominant allocation for large-cap funds. The allotment of these investments through the means of SIP may prove to be an additional risk mitigating factor. Moreover, the investor can look to have a skew towards short term funds & FMPs on the debt portion with some position in the long duration space, so as to position oneself for possible capital gain opportunities in the year ahead. The investor can also look to obtain around 5-15% exposure in safe-haven (traditionally) asset like gold by means of Gold ETF and/or Gold Fund of Funds.
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Of late, Gopal Agrawal, CIO at Mirae Asset Mutual Fund has been busy readjusting his portfolio — selling defensive and export-oriented stocks — and getting into high beta stocks in sector like metal, energy, capital good and engineering and construction. The reason: Risk appetite is back into equities.The year has started on a bumper note for the Indian equity market with the Bombay Stock Exchange (BSE) 30-share Sensitive Index (Sensex) gaining nearly 12 per cent to close above 17,000 in January 2012. This was on back of the $2.2-billion record inflow of money from foreign institutional investors (FIIs) into Indian equities. In the last 10 years, this is the highest ever FII inflow for the month of January. "It's a global rally and we (India) are a part of it. Risk appetite towards equities is returning and therefore markets across the globe have rallied," says Agrawal who manages equities worth Rs 400 crore.Agrawal says, the recent long-term refinancing operation (LTRO) success in the Europe has brought back the confidence among investors and that is the reason why risk premium towards equity has gone up. Concerns over China going for a land landing fading away also helped improve sentiment in the global market. Though he says the reason why Indian markets have rallied more compared to its Asian peers is, "Signs of growth are coming back. The factors that pulled the equity market in 2011 have reversed with inflation coming down, easing in interest rates and importantly improvement in liquidity." The 50 basis points (bps) cut in cash reserve ratio (CRR) by the Reserve Bank of India (RBI) and its statement on peaking out of interest rates which in turn further appreciated the Indian rupee has helped propel the market.FII flows have evidently pulled up the market, but the money has predominantly come into large-cap stocks. The BW Expert Index and the BW Dartboard Index which are more of a multi-cap index gained 9 per cent and 8 per cent, respectively, but underperformed the board-based National stock Exchange's CNX Nifty Fifty Index that gained 12 per cent. In our special ‘The Where To Invest Issue' dated 23 January 2012 we had constructed the BW Index for our readers and in this context this is the first update where we are analyzing the index that has been prepared and is maintained by Gurgaon-based Indxx Capital Management Services.The low-hanging fruits have been plucked and Indian equities have normalized from an oversold market valuation position. So the question is what next? Where are we heading and will the rally continue? Despite fears regarding Europe continuing to persist, experts feel this market has legs to sustain the rally. Says Agrawal, "Though market rally may continue, for it to be sustainable, improvement in government balance sheets and reform are keys." He feels reduction in fiscal deficit and reforms in the power and mining sector will be crucial for the Indian equity market.On the other hand, Nandan Chakraborty, managing director-institutional equity research at Enam Securities feels, "February is going to be a mine-field." He feels the market will be put to test starting from the second batch of results which may have nasty surprises. Secondly, the Iran gold-for-oil may test the Indian rupee. Indian market has been the biggest gainer among BRIC nations and among the top four gainers in the overall MSCI Index, gaining 21 per cent in the last month. Going ahead, Indian market will be put on litmus test. One thing is clear which goes up sharply, must come down and therefore some correction could be healthy for our market. Traders may tread cautiously.
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Simply put, there were no surprises in the Reserve Bank of India's (RBI) mid-quarter review of monetary policy on December 16. No rate hikes, no CRR (cash reserve ratio) cuts, no policy measures of any kind. There were no expectations of anything dramatic, of course: most analysts were sure there'd be no rate hike.Readers will recall that is the second quarter review in late October this year, RBI Governor Duvvuri Subbarao had said that if things remained the same, there would be a pause in the policy interest rate hiking cycle. He was as good as his word. In its statement on this mid-quarter review, the RBi says that if the current downward trend in inflation continues, "monetary policy actions are likely to reverse the cycle, responding to the risks to growth". Music to the sensitive (though occasionally tone deaf) ears of Indian industry.But some did hope for a cut in reserve requirements, specifically the CRR, to add liquidity in a relatively tight market. "Why should there be one, when the banks aren't using the marginal standing facility (MSF)?" asks Indranil Pan, chief economist at Kotak Mahindra Bank. "The liquidity is just where it should be under current conditions."Liquidity is tight, most market analysts will tell you; but as Devendra Kumat Pant, director at Fitch Ratings points out, liquidity conditions are always tight at this time of year (it used be called the ‘busy season', when credit growth was usually higher than in the first half of the financial year).This time round, the tone of the announcement, which has been rather ‘hawkish' until recently, is cautious. In its outlook for the rest of the financial year and beyond, the central bank has underscored the risks to growth; it also points out that sudden events could arrest the downward momentum of inflation. Of course, it could be that the RBI is covering all bases.Does this mean the RBI will review what it can do to push growth? Not really. First, the RBI is unable to do anything about global events, other than try and prepare the best possible defence. As the announcement said clearly, the risks to growth are on the ‘downside', meaning lower pace of growth is highly probable.Second, events in the domestic arena have been dominated by the failure of the government to contain spending with budgeted limits, which adds to inflationary pressures and inflation itself. The RBI cannot do anything about public finances either. As it is, the central bank is left fighting inflation with one hand tied behind its back. It's hard to focus on growth with limited maneuverability.Under the circumstances, perhaps doing nothing was the best thing to do; sometimes, that is the hardest thing to do.
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The Reserve Bank on Thursday swung into action to check slide in rupee value against dollar and speculations by imposing restrictions with immediate effect on forward trading in the local currency by FIIs and traders and capped banks exposure to the forex market.The Reserve Bank of India (RBI) has decided to withdraw the facility of re-booking forex contracts by companies and Foreign Institutional Investors (FIIs) and reduced across-the- board exposure limits of banks which are authorised to deal in the foreign currency.The central bank said these steps have been taken in view of the "developments in the foreign exchange market". The rupee today slipped to sub-54 level for the first time in its history and touched a low of 54.30 against the dollar. In the last nearly four and half months, the rupee has declined by about 20 per cent against the dollar.The forward contracts booked by resident, irrespective of the type and tenor of the underlying exposure, "once canceled cannot be re-booked", RBI said in a notification.It has also reduced the limit for hedging of foreign currency risks for importers/exporters from 75 per cent to 25 of the average actual import\export turnover in the past three years.It further said all the forward contracts booked by exporters and importers would be on "fully deliverable basis.In case of cancellations, exchange gain, if any, should be passed on to the customer". (PTI)
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Is the Reserve Bank of India going to ease the rates finally? The central bank in its mid-year policy in October had indicated that it might halt rise in interest rate if the inflationary situation does not worsen. The inflation picture, however, remains mixed. Food inflation fell to a nearly four-year low of 4.35 per cent in the week ending December 3. But manufacturing inflation rose in November from the previous month, helping keep wholesale price index inflation above 9 per cent for the 12th straight month. The best that investors can hope for from India's central bank on Friday are measures to improve market liquidity and an acknowledgement that economic conditions are worsening.A new element injected in the equation is the tumbling rupee, which hit a record low on Thursday at 54.30 before central bank intervention pulled it back. The plunging rupee is putting pressure on import prices and complicating inflation management task. The rupee is down more than 18 per cent from its July peak."Quite clearly, weaker rupee is creating its own damage on the inflation front and on growth, (which) keeps the central bank that much further away from easing rates," said Shubhada Rao, economist at Yes Bank in Mumbai.RBI is not expected to stick its neck out to defend the rupee, which hit a record low on Thursday and seem to be falling lower every day. Rate cuts appear out of the question as inflation remains above 9 per cent. But finally RBI did take steps to curb the sliding rupee on Friday. It imposed r estrictions with immediate effect on forward trading in the local currency by FIIs and traders and capped banks exposure to the forex market.RBI also decided to withdraw the facility of re-booking forex contracts by companies and Foreign Institutional Investors (FIIs) and reduced across-the- board exposure limits of banks which are authorised to deal in the foreign currency. Falling growth has been an equal if not bigger worry. "Domestically, the struggle against inflation and tightening interest rate regime has contributed to lowering of growth in demand and investment. The slowdown in industrial growth is of particular concern as it impacts employment," Finance Minister Pranab Mukherjee said in New Delhi.State Bank of India Chairman Pratip Chaudhuri had said on Wednesday that he did not expect the RBI to hike interest rate in its next policy."I don't think so because food inflation has come down significantly and steadily. RBI has said 7 per cent is the level they are targeting", he told the reporters.Chaudhuri also said he does not expect RBI to slash the Cash Reserve Ratio (CRR) as it would be contradictory to the monetary stance of targeting inflation.Hopes that a worsening growth outlook might push forward the central bank's move to begin easing monetary policy have run up against the uncertainty caused by the plunge in the rupee, which has caught policymakers off-guard.Prime Minister's Economic Advisory Council (PMEAC) on Wednesday suggested that the Reserve Bank should continue to focus on controlling the rising prices.Economic growth is important but RBI has responsibility to see that inflation comes down, PMEAC Chairman C Rangarajan said on the sidelines of Delhi Economics Conclave."According to latest (inflation) numbers, it is still above 9 per cent. Therefore, concerns regarding inflation cannot be taken away from the monetary authorities," he said.ICRA Economist Aditi Nayar and Crisil Chief Economist D K Joshi said also do not expect any rate cut on Friday. Nayar said RBI is likely to keep the rates unchanged because though food inflation has fallen, manufactured products inflation still remains at an elevated level of 7.7 per cent. Joshi said rates can expected to be reduced only in the first quarter of 2012.Industry bodies like CII and Ficci have already called upon the RBI to cut rates for ensuring industrial revival.According to Goldman Sachs, the negative growth in IIP numbers increases the probability of an early reserve requirement cut by RBI."Our current expectation remains that the RBI will continue to inject liquidity through open market operations, then cut the reserve requirement ratios of banks in January, followed by repo rate cuts in March, 2012. We continue to expect the RBI to cut policy rates by an above-consensus 150 bp in 2012," Goldman Sachs said in a report.Poor Investor SentimentThe fall in the rupee has exacerbated poor investor sentiment, with Indian stocks down nearly 23 per cent this year, and the market will be looking to RBI Governor Duvvuri Subbarao for reassurance, even if his options are limited given the need to fund a widening current account deficit.The RBI steps in to smooth volatility but is otherwise officially agnostic about the rupee's level versus the dollar."They will not, obviously, target a rupee level, but how do they manage the concerns emanating from a weaker rupee? That will be the question," Rao said.The central bank may also lay out more measures to ease tight market liquidity through open market operations (OMOs). In the past three weeks the RBI has injected more than 240 billion rupees ($4.5 billion) into the banking system through bond buybacks.Local shares have been battered this year as surging inflation and interest rates dimmed the growth outlook for the economy and corporate earnings. The global economic uncertainty has also pushed investors away from risky assets.Foreign funds are net sellers of Rs 1,629 crore of Indian shares this year until Tuesday, in sharp contrast to a record investment of more than Rs 157,470 crore in 2010.The domestic economic gloom deepened on Wednesday as figures showed a record low rupee is adding to the Indian central bank's inflation headache and an adviser to the prime minister said there was little that could be done to check the rupee's slump.Finance Minister Pranab Mukherjee said on Thursday India needed practical solutions to address its economic slowdown.These are troubled times for Asia's third-largest economy.Data showed on Monday that India's industrial output slumped more than 5 per cent in October from a year earlier, far worse than expected and the first drop in more than two years, with capital goods output down 25.5 percent.Overall economic growth slowed to 6.9 per cent in the September quarter, its weakest in two years, and some economists expect India to struggle to reach 7 percent growth in the fiscal year that ends in March 2012. The government had been targeting 9 percent earlier this year.India's central bank has been criticised for acting too late in taking the fight to inflation despite the series of rate increases since early 2010. In October, the RBI indicated its tightening may be coming to an end even though inflation remains well above its comfort zone.While inflation prevents the RBI from becoming more accommodative to stimulate growth, lower-than-targeted tax receipts and a worsening fiscal outlook curtail the government's room to maneuver to prop up growth."Options for fiscal steps as well as monetary measures are increasingly limited," Finance Minister Pranab Mukherjee said on Thursday.
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IT giant Infosys had toppled RIL from the top position three days ago on December 12, but could not retain its lead over the retail-to-energy conglomerate for long.Measured in terms of its Sensex weightage, RIL has enjoyed its position as the most influential stock for many years and the movement in its share price has been crucial for any major fall or rise in this index.Earlier on December 12, RIL had slipped to second position after Infosys in terms of its Sensex weightage, which is measured by the market value of a company's free-float or non-promoter shares that can be freely traded in the market.On that day, Infosys commanded a Sensex weightage of 10.25%, higher than RIL's 10.08%. Infosys retained its lead over RIL for three days till December 14.Similarly at the NSE's Nifty index, another barometer of the Indian stock market, Infosys was the top-ranked stock with a weightage of 9.13%, followed by RIL's 8.48% as on December 12.However, Infosys continues to retain its lead over RIL in terms of weightage on the 50-share Nifty index. At the end of today's trade, Infosys remained most influential among the Nifty stocks with a weightage of 9.08%, followed by RIL at the second position with 8.78%.The weightage of a stock on Sensex and Nifty changes daily, as per the change in the market value of their shares.According to market analysts, Reliance's fall from top position earlier this week did not come as a surprise, as the stock has been under-performing the market barometer Sensex for quite sometime.On a group-basis, RIL had slipped to third slot in June this year, in terms of a corporate group's influence in moving the stock market benchmark Sensex, after HDFC and Tata groups.HDFC and HDFC Bank continue to lead the pack on group level with a collective weightage of over 13% in the Sensex, while four Tata group firms on the index (TCS, Tata Steel, Tata Motors and Tata Power) command a weightage of close to 11%.RIL stock has crashed about 30% so far this year, which is higher than a fall of about 23% in the Sensex. The decline in Infosys shares have been much smaller in comparison.(PTI)
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