Last week - September 26-30 - was one in which no one knew whether it was coming or going. Yes, there was volatility ahead of the expiry date for September F&O (futures and options) contracts on Thursday. Earlier, traders had gone short following global markets uncertainties, thanks mostly to the European debt crisis, which they had to cover y Thursday. In the first four sessions of the week, the Bombay Stock Exchange (BSE) Sensitive Index (Sensex) rose nearly 3.5 per cent or 536 points. On Friday, shozrt positions were built up again, because of continuing fears of a global crisis and domestic macroeconomic concerns. On Friday the Sensex lost nearly 245 points to end the week at 16,453.76, a gain of 292 points. "A small up move is no major reason for rejoice. The small rally was akin to a relief rally and gives the opportunity for investors with long side positions to exit their long stuck up positions," says Vivek Gupta, CMD at GEPL Capital, a Mumbai-based financial services firm. "Equity investors have become jittery and there is a flight to safer assets due to global and domestic problems." The fear of a double dip recession in the US is back, while at home untamable inflation has brought the Indian economy to a slowdown, dampening market sentiment. Then the government announced an additional Rs 52,800 crore in its market borrowing program, a 13 per cent increase over the numbers announced in this year's annual budget to Rs 4,70,000 crore. That will take the fiscal deficit to 5.3-5.5 per cent from the budgeted 4.6 per cent. "In such a scenario we do not see markets advancing from here and it may test previous lows," says Gupta. There are no positive surprises from the September quarter's corporate performance either; quarterly results will start coming in from the second week of October. Nor is it likely that good news from will act as a trigger for an upward move in the market indices. Gupta, among others, expects markets to move 'sideways'. So what should investors do? "Given the current uncertainty in the markets and other asset classes I would park my fund only in fixed income funds for the time being. I would rather sit on the sidelines with 50 per cent cash and invest at the right valuations," says Gupta.
Read More
The outlook for the British economy is weakening so quickly that the Bank of England on Wednesday signalled it was ready to pump in more money, potentially as soon as October.Minutes from the bank's September meeting showed most policymakers believed the stresses of the past month had strengthened the case for an "immediate" return to the policy of quantitative easing.It also discussed reducing its already ultra-low interest rates.Action to support the economy would be welcomed by the Conservative-led coalition after figures showed higher government spending and weak tax receipts drove public sector net borrowing to a record high for a month of August.Treasury minister Danny Alexander insisted that the government was sticking to its austerity programme after reports that ministers were looking at investing an extra five billion pounds on capital projects to ward off fears the economy could fall back into recession.With interest rates at a record low of 0.5 per cent, attention is focusing on whether the Bank of England will revive its programme of asset purchases after spending 200 billion pounds in 2009-10, mainly on buying gilts, to help drive down borrowing costs for business.At the meeting, arch-dove Adam Posen remained the only one to vote for an additional 50 billion pound in asset purchases.But the minutes showed that most members of the Monetary Policy Committee thought it was increasingly likely that more asset purchases would become warranted at some point."For most members, the decision of whether to embark on further monetary easing at this meeting was finely balanced since the weakness and stresses of the past month had significantly strengthened the case for an immediate resumption of asset purchases," the minutes said."For some members, a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase programme at a subsequent meeting."Sterling fell to an eight-month low against the dollar while gilts rose after the data.The minutes said that those voting for an unchanged policy in September had seen some merit in waiting to see how actions taken by overseas authorities would develop.Autumn ActionSince the September meeting, a slew of bad news from the economy, the ongoing euro zone debt crisis and rising tensions in financial markets have stoked fears that Britain could slip into recession again.Business Secretary Vince Cable, a member of the Liberal Democrat junior coalition partner, has backed calls for more quantitative easing to help the economy.Economists said it was now a question of when, not if, the Bank would move."The minutes of the September MPC meeting are appreciably more dovish, opening the door wide to more quantitative easing by the Bank of England and very possibly sooner rather than later," said Howard Archer, of IHS Global Insight."Barring a marked improvement in the economy over the next few weeks (which is currently hard to see), we expect the MPC to approve a further 50 billion pounds in quantitative easing during the fourth quarter," he added."A move as soon as October is entirely possible, but we suspect November is more likely."The Bank will publish its latest quarterly inflation report in November and changes to policy often come in the same month as these reports are produced.On Tuesday the International Monetary Fund slashed its growth forecast for Britain to 1.1 percent for 2011 and 1.6 percent for next year.External member Martin Weale, who only dropped his call for higher rates in August, and deputy governor Charles Bean have acknowledged the worsening outlook, and the government has left little doubt that it would like to see more QE. In addition, central banks have moved into action again globally.Inflation remains a headache for the Bank. It is currently running at 4.5 percent, more than double its target, and the Bank itself says it is likely to top five percent before coming down next year.(Reuters)
Read More
The government will take steps to support the Reserve Bank's battle against stubbornly high inflation, which is likely to see further rate rises, the finance minister said, a day after the bank's surprisingly high interest rate increase."I don't think we have reached the end of tunnel," Pranab Mukherjee said on Wednesday, referring to the RBI's rate tightening cycle.The Reserve bank of India on Tuesday raised interest rates for the 11th time since March 2010, lifting its key lending rate by 50 basis points and reiterating it would continue with its anti-inflationary stance despite slowing growth in Asia's third-largest economy and uncertain global demand.Although the Reserve Bank of India has raised its repo rate by 325 basis points in 17 months, headline inflation, at 9.44 percent in June, remains well above its comfort zone of 4-4.5 percent and is expected to stay high in coming months.Analysts partially blame the government's loose fiscal policy in the aftermath of the global financial downturn for fuelling price pressures. Bottlenecks in infrastructure and agriculture have also stoked inflation."Appropriate measures will be taken," Mukherjee said, referring to government support of the central bank's policy action, without giving specifics.Costlier LoansThe RBI's decision is likely to make auto, home and corporate loans expensive and many banks have indicated that they would increasing their lending and deposit rates in response to the hike announced by the central bank.Admitting that inflation at 9.4 per cent in June was "reasonably high and unacceptable", Mukherjee said it was a global phenomenon and the whole world was reeling under the impact of rising prices of fuel and other commodities.The government and the central bank are taking steps to check price rise, he said, adding "I am optimistic that measures taken by the RBI by adjusting the crucial rate will have impact and inflation will come down". The inflation, Mukherjee said, might not come down to below 6-7 per cent by the end current financial year.Need To Rein In Fiscal DeficitEconomists say the government needs to rein in its fiscal deficit, which is under stress in the face of a mounting subsidy bill and a slowdown in net tax revenue receipts.A higher subsidy bill is expected to widen the government's fiscal deficit to over 5 percent of GDP for the current fiscal year, economists have said, from New Delhi's 4.6 percent target, forcing it to borrow more from the market.Finance ministry officials have repeatedly said the government would find ways to generate revenue to meet its fiscal gap target.Mukherjee said the government would keep its spending in check to meet its deficit target but did not give details."We are looking at ways to compress expenditure. There is revenue buoyancy and together I think they will help us in reaching fiscal deficit target," he said.Early this month India announced austerity measures, including a ban on meetings in five-star hotels and restrictions on foreign travel to help curb spending.Tuesday's aggressive rate hike and the hawkish tone of the central bank bolstered expectations for more rate increases.A Reuters snap poll after the move found six of 11 economists expect the repo rate, the central bank's key lending rate, to go up to 8.50 percent, or 50 basis points higher than in a poll last week.The repo rate is now 8.00 percent.(Agencies)
Read More
You can expect more by way of rate hikes from the Reserve Bank of India (RBI). Here's the dead giveaway. "Monetary policy will, therefore, condition and contain perceptions of inflation in the range of 4-4.5 per cent". It is serious tough talking given the central bank has also revised its end-March inflation forecast upwards by a 100 basis points (bps) to 7 per cent.It is ominous. "The policy clearly indicates that inflation is the top priority and future policy action will also be based on the inflation trajectory. While this is aimed at cooling demand in the near-term and thereby controlling inflation, we must recognise that high growth and rising incomes in recent years have created strong demand momentum in the economy", says Chanda Kochhar, Managing Director & CEO of ICICI Bank."The policy rate change of 50 bps is much more than market expectation and contrary to a growing clamour for a pause in upward movement of policy rates. The general tone is quite hawkish and the trade off in favour of inflation control, sacrificing some growth is absolutely clear", says K V S Manian, Group Head, Consumer Banking at Kotak Mahindra BankIn recent times, there's been chatter the central bank had reached the last lap of its rate-hike cycle; the just effected one is the eleventh in a row. Both bankers and borrowers have cried hoarse that successive rate hikes had started to hurt. Data shows it has. Credit growth has tapered. The year-on-year credit growth slowed to 19.5 per cent on July 1, 2011 from 21.3 per cent at end-March 2011. That is marginally higher than the central bank's May 3 Policy statement of 19 per cent.Where are we headed? If you look at the past trends from July 2010 up till January 2011, the repo rate was hiked by 100 bps to 6.25 per cent from 5.25 per cent, but there was no significant change in bank's Base Rate (the rate below which they cannot lend) -- it remained at 7.5-8 per cent levels. "However, after the repo rate increases since January, there has been a one to one correspondence between the repo rate hike and base rate hike. Therefore, we expect another 50 bps increase in the Base Rate for banks", says Madan Sabnavis, chief economist at Care Ratings. On the deposits side, banks hiked rates. This saw an increase in YoY deposit growth to 18.4 per cent in early July 2011 from 17.4 per cent YoY in early April 2011. This too, will put pressure on banks to hike interest rates.So what's the punt? It is higher rates in the economy will cool down demand for investment goods, consumer durables and mortgages. "Lower demand for these products should help to reduce pressure on supplies thus bringing down the core inflation number from the present level of 9.44 per cent", adds Sabnavis. And therefore, Kochhar's observation "we must recognise that high growth and rising incomes in recent years have created strong demand momentum in the economy", is ominous.The central banks cites the hike in the prices of petroleum products in May and June, and the increase in the minimum support prices for rice and pulses to exert upward pressure on food inflation even if the harvest is good. It also says that while early corporate results for the first quarter indicate some moderation in margins that suggests reduced pricing power, the pass-through of higher commodity prices into more generalised inflation remains significant. The big unknown is oil. The price of the Indian crude basket rose to $114 per barrel on July 21, 2011. It had dipped to $110 per barrel in May from $118 per barrel in April. "Going by the recent trend, the price of oil could remain volatile as a consequence of the pace of global recovery, liquidity conditions and, importantly, the overall oil supply situation".Keep your fingers crossed. There will be more pain.
Read More
Welcoming the Reserve Bank's decision to hike key rates by a hefty 50 basis points, Finance Minister Pranab Mukherjee on Tuesday said it will help bring down inflation to a comfortable level of 6-7 per cent by year-end."The Reserve Bank of India has sought to give a strong signal to further moderate inflation and check inflationary expectations," Mukherjee said.Inflation has remained stubbornly close to double-digit levels during the first quarter of the current fiscal.Mukherjee said the RBI rate hike was necessary to bring down inflation to an acceptable level at the earliest.Overall wholesale price-based inflation stood at 9.44 per cent in June. To tame the inflation monster, the RBI today hiked key policy rates by 50 basis points."With this policy adjustment, we will be able to get back to a more comfortable inflation situation that takes us to the year-end inflation level of 6 to 7 per cent," Mukherjee added.The RBI has hiked its policy rates 11 times since March, 2010, to curb inflation. However, the problem persists.Mukherjee said although food inflation has moderated in recent months, pressure in manufactured items has hardened.While coming out with its first quarterly policy review for the 2011-12 financial year, the RBI admitted that there has been a moderation in growth, but maintained its previous estimate of 8 per cent GDP growth for the current fiscal.Mukherjee said, "The overall GDP growth for 2011-12 so far is in line with the momentum attained in 2010-11."There have been concerns that the country's economic growth could see some moderation on the back of a deceleration in factory output growth in April-May.Industrial output growth in April-May this year averaged 5.7 per cent, compared to 10.8 per cent in the same period last year.(PTI)
Read More
Personal and corporate loans became more expensive on Tuesday with the RBI raising key interest rates sharply for the third time in the last three months, by 0.50 per cent, to arrest price rise.The central bank, in its quarterly review of the monetary policy, has also revised its fiscal-end inflation projection to 7 per cent from 6 per cent earlier. It has retained the growth project for the current fiscal at 8 per cent.With a 50 bps hike, the repo rate (at which the RBI lends to banks) would be 8 per cent and the reverse repo rate (at which it borrows from banks) to 7 per cent. However, the cash reserve ratio (CRR), the amount all banks need to park with RBI, remains unchanged at 6 per cent.The rate increase is its 11th since March 2010, making the RBI one of the most aggressive inflation fighters among central banks.All loans, including auto, home, personal and other corporate borrowings, are expected to cost more following the RBI's decision.Expectedly, industry expressed its disappointment over the sharp increase in interest rates, saying the move would harm the investment sentiment."We thought it would be 25 basis points. The RBI has seen something which industry has not... investment sentiments will be muted in the next six months," Ballarpur Industries Limited Chairman Gautam Thapar told PTI.The stock market also reacted sharply, plunging by over 300 points within minutes of the RBI's policy announcement.Still, wholesale price index inflation was 9.44 per cent in June, more than double the RBI's comfort level, and high prices are expected to persist in coming months."Considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance," RBI Governor Duvvuri Subbarao wrote in his quarterly policy review.The RBI stuck with its forecast for economic growth in the current fiscal year of around 8 perc ent. While some interest-rate sensitive sectors are showing signs of moderating growth, it said, "there is no evidence of a sharp or broad-based slowdown as yet."All 23 analysts in a Reuters poll last week had expected the RBI to raise rates by 25 basis points on Tuesday, although 9 of them expected a pause in the tightening cycle after July amid signs of slowing domestic growth and global uncertainty.Recent industrial output and manufacturing data was the worst in nine months, while sales of cars have slowed sharply and loan demand is easing, complicating the central bank's inflation-fighting task.Subbarao said Tuesday's policy actions are expected to "maintain the credibility of the commitment of monetary policy to controlling inflation."The measures are also expected to "reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required," Subbarao said in his report.January-March quarter growth was a worse-than-expected 7.8 percent, with economists expecting India to grow at 7.9 percent in the fiscal year that began in April, according to a Reuters poll, less than the 8.5 percent growth in the fiscal year that ended in March."Notwithstanding signs of moderation, inflationary pressures are clearly very strong... inflation continues to be the dominant macroeconomic concern. On the basis of this assessment, it has been decided to increase policy repo rate by 50 basis points from 7.5 to 8 per cent with immediate effect," RBI Governor D Subbarao said while unveiling the the monetary policy.Inflation, currently hovering above 9 per cent, he said, would continue to guide the policy stance in future. The RBI's next review is scheduled on September 16. (Agencies)
Read More
Outbound investments from India have increased significantly over the last few years, largely due to the government's conscious efforts to encourage Indian entrepreneurs to tread the global path. These efforts have further taken shape in the form of more recent regulatory changes made by the Reserve Bank of India (RBI) through the Foreign Exchange Management Act (FEMA). In particular, these changes are focused on providing a further boost to joint ventures and liberalise regulations that relate to outbound investments. These changes have been welcomed by corporates as they provides for far more operational flexibility when it comes to expanding operations in overseas jurisdictions. Some of the significant changes have been discussed in the following paragraphs.Performance GuaranteeCurrently Indian corporates are allowed financial exposure up to 400 per cent of their net worth in an overseas Joint Venture (JV) / Wholly Owned Subsidiary (WOS). Earlier, the issue of a performance guarantee was treated akin to a financial investment wherein the amount of the guarantee was reckoned for calculation by of the ceiling of 400 per cent of their financial commitment, overseas. As per the revised regulations, only 50 per cent of the amount of the performance guarantees will be considered for the purpose of computing a firm's financial exposure. The change is a significant move as it will endow Indian entrepreneurs with greater flexibility in enabling them to issue such guarantees to their overseas ventures/subsidiaries which are quite routinely required if the overseas venture/subsidiary was to contemplate any serious business other than acting as a marketing limb. Furthermore, having recognised that the invocation of guarantees by the parent (Indian) company should be an exception rather than the norm, the RBI has now provided that in cases where the invocation of the guarantee breaches the financial exposure ceiling of 400 per cent, the Indian corporation shall be required to seek prior approval from the RBI before remitting funds from India. Writing Off Capital And Other ReceivablesThe RBI has also provided greater operational flexibility to Indian corporates by allowing them to write off capital and other receivables, provided they have a stake of at least 51 per cent in an overseas JV/WOS. The write off is permitted up to 25 per cent of the equity investment under the automatic route for listed entities and under the approval route for unlisted companies. Indian corporates are required to comply with the reporting formalities and are also required to submit the prescribed documents to the RBI for scrutiny. Guarantees To Step Down SubsidiariesAs per the new regulations, the RBI has now permitted Indian corporates to extend corporate guarantees on behalf of the first generation step down subsidiary operating company, provided the latter is within the overall financial exposure limit irrespective of whether the direct subsidiary is an operating company or a Special Purpose Vehicle (SPV). Earlier, the benefit of providing the guarantee on behalf of the step down subsidiary was available only in case where investments were made through an SPV. Divestments Involving Write OffsDivestments involving write offs will now be allowed under the automatic route subject to conditions specified. Similarly divestment under the automatic route is now extended for listed Indian companies having net worth of less than Rs 100 crores provided the investment in JV/WOS is not more than $ 10 million. The ideology of 'going global' is not preserved for a select few corporates - indeed, it should not be as India Inc is aspirational - there is a genuine hunger to grow and to establish overseas ventures and/or subsidiaries. The latest RBI regulations are a sign that regulators are more than happy to do their bit in encouraging Indian corporates in their quest to become MNCs. N.C Hegde is a partner with Deloitte and Falguni Sheth is manager at Deloitte Haskins & Sells
Read More
The Reserve Bank of India (RBI) has affected its twelfth rate hike in a row with Friday's hike of 25 basis points (bps) in the repo rate taking it to 8.25 per cent. Yet somehow, there is a feeling that we might be at the end of the rate tightening cycle.The central bank's forward guidance says its stance will be influenced by signs of downward movement in the inflation trajectory, to which the moderation in demand is expected to contribute, and the implications of global developments. "The guidance suggests to us that the RBI has shifted from a strong anti-inflationary bias to a more wait-and-see mode, with a close eye on the inflation trajectory and global developments", says Tomo Kinoshita at Nomura Financial Advisory and Securities (India).The Tide Is ChangingSo is this the last hike by the RBI? Kinoshita thinks so. Global commodity prices have remained stable in the last few months. This is likely to reduce supply-side inflation pressures. Secondly, the effect of past monetary tightening actions will be seen in the coming months. "The key risk to our forecasts is a surge in food or commodity prices. A further deterioration in global growth constitutes a key downside risk", adds Kinoshita.Ironically, even those who criticise the central bank's latest hike actually confirm the view that we are towards the end of the rate-hike cycle. "The arguments for the hike were backward rather than forward looking. The RBI continues to believe that growth momentum is weakening, that inflation will fall in the second half of the fiscal; that global developments are a matter of serious concern", says Tushar Poddar, economist at Glodman Sachs. "We think that inertia in policy-making -- once the central bank is on a tightening cycle, it is difficult for it to stop, was probably responsible for this hike", adds Poddar.The RBI governor, Dr Duvvari Subbarao, appears to be less hawkish: "A premature change in policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions". It's a reference to the clamour in the run up to the Policy Review that the worst may well be behind us; and it is better to hold back from further tightening.Rao's words can be interpreted thus -- if the central bank were to hold its monetary policy fire, it may lull the market into believing the worst is behind us. But it also tells you that you may well be on cusp of a change -- the fight against inflation is at its last stage. The good doctor's prescription of a heavy monetary dosage will be continued lest there be a relapse. Worse still, a premature pull back at this point in time from rate hikes can also give rise to the view that policy actions so far have failed to deliver in so far as curbing inflation is concerned.After all, inflation as measured by wholesale price index rose year-on-year (YoY) to 9.8 per cent in August 2011, up by 60 bps in July; the same in manufactured products rose by 20 bps to 7.7 per cent, indicative of demand pressures. A large part of the inflation — caused by food and high crude oil prices -- are out of firing range of the central bank. It can, at best hope a tight monetary policy will reduce the consumption of certain kinds of foods or that you and me will not cut down on petrol. And, therefore, the Rs 3.14 per litre hike in petrol effective from the 16th of this month will also add 7 bps to headline inflation.More Than Just MonetaryFor the Congress-lead United Progressive Alliance (UPA), the stakes are high. It is well into its second innings; anti-incumbency has set in early. It has lived from crisis to crisis since it was returned to power in the summer of 2009. Uttar Pradesh goes to polls in the first half of 2012; it is seen as a semi-final ahead of the big showdown in 2014. Gujarat goes to the hustings later next year. It cannot afford to have inflation anywhere near its current levels or its aam aadmi bugle will croak.There's another headache. In the run up to 2014, UPA-2 will be tempted to go in for populist measures. The central bank is worried the fiscal deficit -- at 55.4 per cent of budget estimates in the first four months of the current fiscal — is significantly higher than that of 42.5 per cent during the corresponding period last year (when adjusted for the more than budgeted spectrum proceeds). The Rs one-lakh crore earned from the 3G auction and something more has been consumed. A tight interest rate regime can spoil the plot further with India Inc's earnings taking a hit (less by way of taxes); there is also less by way of receipts given the dead disinvestment programme."Fiscal policy earned a paragraph in the statement with the RBI understandably not happy about fighting a lonely battle against inflation with the fiscal stance at a risk of being looser than planned if the government does not counter the slippage on the revenue and spending side (subsidies)", says Leif Eskesen, Chief Economist (India & ASEAN) at HSBC. The impact of the RBI's past rake hikes is yet to result in lower inflation. "Even if month-on-month pressure on core inflation begins to subside hereon, overall inflation could reach only about RBI's projection of 7.0 per cent by March 2012 -- still above the comfort zone of 5.0 to 5.5 per cent", notes Ajay Srinivasan, Head-CRISIL Research.Non-food credit grew at 20.1 per cent YoY in August above the projected 18 per cent in the July policy review. But this growth is much sharper "if you are to adjust for the credit disbursement to telecom companies for the purchase of 3G spectrum", as Madan Sabnavis, chief economist at CARE Ratings points out. But if you consider it another way, the central bank's moves seem to have paid off. With a moderation in credit off-take due to higher interest rates, and a relatively higher growth in deposits, the incremental credit-deposit ratio (the amount you a bank gives out as loans out of every Rs 100 in deposits) declined to 82.7 per cent on August 26, 2011 from 97.2 per cent on March 25, 2011.The RBI knows something we don't. Points out Poddar: "The RBI would not give a dovish statement to make future action dependent on data. Though another rate hike cannot be ruled out, we think that the underlying slowdown in momentum in the economy, weakening inflationary pressures, and global headwinds make the bar for another hike high. We continue to expect 100 bps of rate cuts in fiscal 2013". Because there will be a big price to paid in 2014.
Read More
